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 For the quarterly period ended June 30, 2012
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

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: 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.



YesþNo ̈



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).



YesþNo ̈



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 ̈ |  | Accelerated filer ̈ |  | Non-accelerated filer ̈                        |  | Smaller reporting companyþ
|------------------------ |  | ------------------ |  | --------------------------------------------- |  | --------------------------
|                         |  |                    |  | (Do not check if a smaller reporting company) |  |                           



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



Yes ̈Noþ



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 August 10, 2012
|------------------- |  | ---------------------------------
|Common Stock, $.001 |  | 48,143,257                       













TABLE OF CONTENTS



|                               |                                                                                       | Page
|------------------------------ | ------------------------------------------------------------------------------------- | ----
|                               |                                                                                      
|PART I — FINANCIAL INFORMATION |                                                                                      
|                               |                                                                                       |     
|Item 1.                        | Condensed Consolidated Financial Statements                                           | 3   
|                               |                                                                                       |     
|                               | Notes to Condensed Consolidated Financial Statements                                  | 7   
|                               |                                                                                       |     
|Item 2.                        | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12  
|                               |                                                                                       |     
|Item 3.                        | Quantitative and Qualitative Disclosures about Market Risk                            | 17  
|                               |                                                                                       |     
|Item 4.                        | Controls and Procedures                                                               | 17  
|                               |                                                                                       |     
|PART II — OTHER INFORMATION    |                                                                                      
|                               |                                                                                       |     
|Item 1.                        | Legal Proceedings                                                                     | 18  
|                               |                                                                                       |     
|Item 1A.                       | Risk Factors                                                                          | 18  
|                               |                                                                                       |     
|Item 2.                        | Unregistered Sales of Equity Securities and Use of Proceeds                           | 18  
|                               |                                                                                       |     
|Item 3.                        | Defaults Upon Senior Securities                                                       | 18  
|                               |                                                                                       |     
|Item 5.                        | Other Information                                                                     | 18  
|                               |                                                                                       |     
|Item 6.                        | Exhibits                                                                              | 18  
|                               |                                                                                       |     
|SIGNATURES                     | 19                                                                                   
|EX-31.1                        |                                                                                      
|EX-31.2                        |                                                                                      
|EX-32.1                        |                                                                                      
|EX-32.2                        |                                                                                      



2









PART I — FINANCIAL INFORMATION



Item 1. Financial Statements



Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Balance Sheets
As of June 30, 2012 (unaudited) and September 30, 2011(In thousands, except dollar per share amounts)



|                                                                                                                                                                                                         |  | June 30, |        |   | September 30, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------ | - | ------------- | -
|                                                                                                                                                                                                         |  | 2012     |        |   | 2011          |  
|Assets                                                                                                                                                                                                   |  |          |        |   |               |  
|Current Assets:                                                                                                                                                                                          |  |          |        |   |               |  
|Cash                                                                                                                                                                                                     |  | $        | 2,559  |   |               | $
|Accounts receivable, net of allowances of $4,425 and $4,177, respectively                                                                                                                                |  |          | 10,041 |   |               |  
|Inventory, net of allowance for obsolete inventory of $242 and $144, respectively                                                                                                                        |  |          | 2,567  |   |               |  
|Deferred taxes, current portion                                                                                                                                                                          |  |          | 1,998  |   |               |  
|Prepaid and other current assets                                                                                                                                                                         |  |          | 674    |   |               |  
|Total Current Assets                                                                                                                                                                                     |  |          | 17,839 |   |               |  
|Property and equipment, net of accumulated depreciation of $2,725 and $2,186, respectively                                                                                                               |  |          | 1,292  |   |               |  
|Deferred advertising                                                                                                                                                                                     |  |          | 20,524 |   |               |  
|Intangible assets, net of accumulated amortization of $74 and $25, respectively                                                                                                                          |  |          | 256    |   |               |  
|Other assets                                                                                                                                                                                             |  |          | 95     |   |               |  
|Total Assets                                                                                                                                                                                             |  | $        | 40,006 |   |               | $
|                                                                                                                                                                                                         |  |          |        |   |               |  
|Liabilities and Stockholders’ Equity                                                                                                                                                                     |  |          |        |   |               |  
|Current Liabilities:                                                                                                                                                                                     |  |          |        |   |               |  
|Accounts payable                                                                                                                                                                                         |  | $        | 4,988  |   |               | $
|Accrued liabilities                                                                                                                                                                                      |  |          | 1,420  |   |               |  
|Other current liabilities                                                                                                                                                                                |  |          | 70     |   |               |  
|Total Current Liabilities                                                                                                                                                                                |  |          | 6,478  |   |               |  
|Deferred tax liability                                                                                                                                                                                   |  |          | 4,676  |   |               |  
|Credit line facility                                                                                                                                                                                     |  |          | 2,500  |   |               |  
|Other long-term liabilities                                                                                                                                                                              |  |          | 101    |   |               |  
|Total Liabilities                                                                                                                                                                                        |  |          | 13,755 |   |               |  
|                                                                                                                                                                                                         |  |          |        |   |               |  
|Stockholders’ Equity:                                                                                                                                                                                    |  |          |        |   |               |  
|Common stock, $.001 par value, 200,000 shares authorized, 48,232 and 48,135 shares issued, respectively;
    48,143 and 48,046 shares outstanding at June 30, 2012, and September 30, 2011, respectively |  |          | 48     |   |               |  
|Additional paid-in capital                                                                                                                                                                               |  |          | 34,700 |   |               |  
|Accumulated deficit                                                                                                                                                                                      |  |          | (8,447 | ) |               |  
|Treasury stock, at cost; 89 shares at June 30, 2012, and September 30,
    2011                                                                                                                          |  |          | (50    | ) |               |  
|Total Stockholders’ Equity                                                                                                                                                                               |  |          | 26,251 |   |               |  
|Total Liabilities and Stockholders’ Equity                                                                                                                                                               |  | $        | 40,006 |   |               | $



See accompanying notes to unaudited condensed
consolidated financial statements.



3







Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statements of Operations
For the three and nine months ended June 30, 2012 and 2011
(Unaudited)(in thousands, except per share amounts)



|                                               |  | Three Months Ended June
    30, |        |   | Nine Months Ended June
    30, |  
|---------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                               |  | 2012                            |        |   | 2011                           |  
|                                               |  |                                 |        |   |                                |  
|Sales                                          |  | $                               | 14,961 |   |                                | $
|                                               |  |                                 |        |   |                                |  
|Cost of Sales                                  |  |                                 | 5,836  |   |                                |  
|                                               |  |                                 |        |   |                                |  
|Gross Profit                                   |  |                                 | 9,125  |   |                                |  
|                                               |  |                                 |        |   |                                |  
|Operating Expenses                             |  |                                 |        |   |                                |  
|Payroll, taxes and benefits                    |  |                                 | 3,526  |   |                                |  
|Advertising                                    |  |                                 | 1,956  |   |                                |  
|Bad debts                                      |  |                                 | 1,028  |   |                                |  
|Depreciation and amortization                  |  |                                 | 206    |   |                                |  
|General and administrative                     |  |                                 | 1,242  |   |                                |  
|Total Operating Expenses                       |  |                                 | 7,958  |   |                                |  
|                                               |  |                                 |        |   |                                |  
|Income from Operations                         |  |                                 | 1,167  |   |                                |  
|                                               |  |                                 |        |   |                                |  
|Other Income (Expense)                         |  |                                 |        |   |                                |  
|Interest expense                               |  |                                 | (21    | ) |                                |  
|Change in fair value of derivative liabilities |  |                                 | —      |   |                                |  
|Gain on sale of assets                         |  |                                 | —      |   |                                |  
|Interest income                                |  |                                 | —      |   |                                |  
|Total Other Income (Expense)                   |  |                                 | (21    | ) |                                |  
|                                               |  |                                 |        |   |                                |  
|Income before Income Taxes                     |  |                                 | 1,146  |   |                                |  
|                                               |  |                                 |        |   |                                |  
|Provision for Income Taxes                     |  |                                 | 470    |   |                                |  
|                                               |  |                                 |        |   |                                |  
|Net Income                                     |  | $                               | 676    |   |                                | $
|                                               |  |                                 |        |   |                                |  
|Basic earnings per share:                      |  |                                 |        |   |                                |  
|Weighted average shares outstanding            |  |                                 | 48,098 |   |                                |  
|Earnings per share                             |  | $                               | 0.01   |   |                                | $
|                                               |  |                                 |        |   |                                |  
|Diluted earnings per share:                    |  |                                 |        |   |                                |  
|Weighted average shares outstanding            |  |                                 | 52,279 |   |                                |  
|Earnings per share                             |  | $                               | 0.01   |   |                                | $



See accompanying notes to unaudited condensed
consolidated financial statements.



4





Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the nine months ended June 30, 2012
(Unaudited)(in thousands)



|                                                     |  |              |        |  |         |   |    | Additional  |  |   |          |  |  |               |         |   | Total  |  
|---------------------------------------------------- |  | ------------ | ------ |  | ------- | - | -- | ----------- |  | - | -------- |  |  | ------------- | ------- | - | ------ | -
|                                                     |  | Common Stock |        |  | Paid in |   |    | Accumulated |  |   | Treasury |  |  | Stockholders’ |        
|                                                     |  | Shares       |        |  | Amount  |   |    | Capital     |  |   | Deficit  |  |  | Stock         |         |   | Equity |  
|Balance at October 1, 2011                           |  |              | 48,046 |  |         | $ | 48 |             |  | $ | 34,504   |  |  | $             | (10,247 | ) |        | $
|                                                     |  |              |        |  |         |   |    |             |  |   |          |  |  |               |         |   |        |  
|Options issued to employees and directors            |  |              | —      |  |         |   | —  |             |  |   | 115      |  |  |               | —       |   |        |  
|Common stock issued for employee stock purchase plan |  |              | 97     |  |         |   | —  |             |  |   | 81       |  |  |               | —       |   |        |  
|Net income                                           |  |              | —      |  |         |   | —  |             |  |   | —        |  |  |               | 1,800   |   |        |  
|Balance at June 30, 2012                             |  |              | 48,143 |  |         | $ | 48 |             |  | $ | 34,700   |  |  | $             | (8,477  | ) |        | $



See accompanying notes to unaudited condensed
consolidated financial statements.





5









Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the nine months ended June 30, 2012 and 2011
(Unaudited)(in thousands)



|                                                                              |  | Nine Months Ended |       
|----------------------------------------------------------------------------- |  | ----------------- | ------
|                                                                              |  | June 30,          |       
|                                                                              |  | 2012              |       
|Cash flow from operating activities:                                          |  |                   |       
|Net Income                                                                    |  | $                 | 1,800 
|Adjustments to reconcile net income to net cash used in operating activities: |  |                   |       
|Depreciation and amortization                                                 |  |                   | 6,386 
|Change in fair value of derivative liabilities                                |  |                   | —     
|Equity based compensation                                                     |  |                   | 115   
|Provision for doubtful accounts and contractual adjustments                   |  |                   | 3,039 
|Non-cash interest related to convertible notes payable                        |  |                   | —     
|Deferred income taxes                                                         |  |                   | 1,208 
|Reserve for inventory obsolescence                                            |  |                   | 98    
|Gain on sale of assets                                                        |  |                   | —     
|Changes in operating assets and liabilities:                                  |  |                   |       
|Accounts receivable                                                           |  |                   | (5,220
|Deferred advertising                                                          |  |                   | (9,104
|Inventory                                                                     |  |                   | 344   
|Other assets                                                                  |  |                   | (252  
|Accounts payable                                                              |  |                   | (20   
|Accrued liabilities                                                           |  |                   | 326   
|Other liabilities                                                             |  |                   | (78   
|Net Cash Flow Used in Operating Activities                                    |  |                   | (1,358
|                                                                              |  |                   |       
|Cash flow from investing activities:                                          |  |                   |       
|Purchase of property and equipment                                            |  |                   | (112  
|Acquisition of SGV Medical Supplies (see Note 3)                              |  |                   | —     
|Proceeds from the sale of assets                                              |  |                   | —     
|Net Cash Flow Used in Investing Activities                                    |  |                   | (112  
|                                                                              |  |                   |       
|Cash flow from financing activities:                                          |  |                   |       
|Proceeds from employee stock purchase plan                                    |  |                   | 56    
|Proceeds from credit line facility                                            |  |                   | 1,000 
|Costs associated with credit line facility                                    |  |                   | (21   
|Payments of debt and capital lease obligations                                |  |                   | (22   
|Net Cash Flow Provided by (Used in) Financing Activities                      |  |                   | 1,013 
|                                                                              |  |                   |       
|Net decrease in cash                                                          |  |                   | (457  
|                                                                              |  |                   |       
|Cash at beginning of period                                                   |  |                   | 3,016 
|Cash at end of period                                                         |  | $                 | 2,559 
|                                                                              |  |                   |       
|Supplemental disclosure of cash flow information:                             |  |                   |       
|Cash paid for interest                                                        |  | $                 | 51    
|Cash paid for income taxes                                                    |  | $                 | —     
|                                                                              |  |                   |       
|Supplemental schedule of non-cash investing and financing activities:         |  |                   |       
|Capital expenditures funded by capital lease borrowing                        |  | $                 | 120   
|Common stock issued for conversion of debt                                    |  | $                 | —     





See accompanying notes to unaudited condensed
consolidated financial statements.





6







Liberator Medical Holdings, Inc. and Subsidiaries



Notes To The Unaudited Condensed Consolidated Financial
Statements

June 30, 2012



Note 1 — Interim Financial Statements



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, 2011, that was filed
with the SEC on December 29, 2011. The results of operations for the nine months ended June 30, 2012, 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., Liberator Health and Wellness,
Inc., and Practica Medical Manufacturing, Inc., its wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.



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, 2011.



Recent Accounting Pronouncements



In July 2011, the Financial Accounting Standards Board (“FASB”)
issued accounting guidance that requires health care entities to present the provision for bad debts related to patient service
revenue as a deduction from patient service revenue in the statement of operations rather than as an operating expense. Additional
disclosures relating to a company’s sources of patient revenue and its allowance for doubtful accounts related to patient
accounts receivable will also be required. The guidance is effective for fiscal years and interim periods within those fiscal
years beginning after December 15, 2011. Upon adoption of this guidance on October 1, 2012, we will reclassify the provision for
bad debts related to prior period patient service revenue as a deduction from patient service revenue as required by this guidance.
The adoption of this guidance is not expected to have a material impact on our financial condition, overall results of operations
or cash flows.



Note 3 — Acquisition



On May 13, 2011, the Company entered into an Asset Purchase
Agreement with Kruin Medical Products, Inc., a California corporation, which had been doing business as SGV Medical Supplies ("SGV"),
and its sole shareholder. Under the Asset Purchase Agreement, the Company purchased SGV's customer list, inventory, and website
(the "Purchased Assets") used in its ostomy supply business. The purchase price for the Purchased Assets was $466,000.



With the acquisition of SGV's ostomy supply customers, the
Company was able to acquire new customers at a cost that was below the Company's advertising costs per acquired customer, which
is consistent with the Company's growth strategy.



The fair values of the customer list and the website acquired
were estimated using an income approach and incorporate significant inputs not observable in the market, which are Level 3 fair
value inputs. Key assumptions in the estimated valuation included: (1) a discount rate of 18.92%; (2) the number of SGV customers
expected to place orders with the Company; and (3) net cash flow projections over the projected life of the assets.



The following table summarizes the allocation
of the purchase price consideration paid to the fair value of the assets acquired as of the date of the acquisition (in thousands):



|Purchase Price Allocation:        |  |   |     | 
|--------------------------------- |  | - | --- | 
|Intangible assets (customer list) |  | $ | 330 | 
|Inventory                         |  |   | 33  | 
|Property and equipment (website)  |  |   | 103 | 
|                                  |  |   |     | 
|Total assets acquired             |  | $ | 466 | 



7







Disclosure of supplemental pro forma information for revenue
and earnings related to the acquired assets, assuming the acquisition was made at the beginning of the earliest period presented,
has not been disclosed since the effects of the acquisition would not have been material to the results of operations for the
periods presented.



Note 4 — Credit Line Facility



On February 11, 2011, the Company entered into a Committed
Line of Credit agreement (the “PNC Credit Line Facility”) with PNC Bank, National Association ("PNC"). Pursuant
to the PNC Credit Line Facility, PNC will provide a maximum of $8,500,000 of revolving credit secured by the Company’s personal
property, including inventory and accounts receivable. Interest is payable on any advance at LIBOR plus 2.75%. Advances under
the PNC Credit Line Facility are subject to a Borrowing Base Rider, which establishes a maximum percentage amount of the Company’s
accounts receivable and inventory that can constitute the permitted borrowing base. The PNC Credit Line Facility originally expired
in February 2013; however, in January 2012 the expiration was extended to February 2014, with all other terms and conditions remaining
the same.



The PNC Credit Line Facility requires the Company to comply
with certain financial covenants which are defined in the credit agreement. As of June 30, 2012, these financial covenants included:



| | · | The Company
                                                                                                               will maintain as
                                                                                                               of the end of each
                                                                                                               fiscal quarter,
                                                                                                               on a rolling four
                                                                                                               quarter basis,
                                                                                                               a ratio of Senior
                                                                                                               Funded Debt to
                                                                                                               EBITDA of less
                                                                                                               than 2.0 to 1;
                                                                                                               and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The Company
                                                                                                               will maintain as
                                                                                                               of the end of each
                                                                                                               fiscal quarter,
                                                                                                               on a rolling four
                                                                                                               quarter basis,
                                                                                                               a Fixed Charge
                                                                                                               Coverage Ratio
                                                                                                               of at least 1.25
                                                                                                               to 1.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As
of June 30, 2012, the Company was in compliance with all applicable financial covenants pursuant to the PNC Credit Line Facility.
As of June 30, 2012, the availability under the PNC Credit Line Facility was $4,706,000 with an outstanding balance of $2,500,000.
The outstanding balance has been classified as non-current since the due date under the credit line facility is February 2014,
and a borrowing base in excess of amounts outstanding as of June 30, 2012, will be maintained as a result of expected collateral
levels. The interest rate as of June 30, 2012, for the outstanding balance was 3.00%. For the nine months ended June 30, 2012
and 2011, the Company incurred $50,000 and $1,000, respectively, in interest expense related to the PNC Credit Line Facility.



Note 5 — Convertible Notes Payable



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 was convertible into shares of our common
stock at an initial conversion price of $0.75 per share, subject to adjustment, and matured on October 17, 2010. The note was
a senior unsecured obligation of ours and accrued interest at the rate of 3% per annum, paid semi-annually on each October 15
and April 15. The note was unconditionally guaranteed by Liberator Medical Supply and Liberator Health and Education Services,
Inc. The conversion price of the note could have been reduced if, among other things, we issued 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 Company concluded that
the adjustment feature for the conversion price of the note was not indexed to the Company’s own stock and, therefore, was
an embedded derivative financial liability that required bifurcation and separate accounting.



The warrant had a term of 3 years and was exercisable
for up to 1,166,667 shares of our common stock at an exercise price $1.25 per share. The warrant expired in October 2011.



On October 15, 2010, the $2,500,000 note was converted
into 3,333,333 shares of the Company’s common stock at a conversion price of $0.75 per share.



Interest expense related to the October 2008 convertible
note was $0 and $24,000 for the nine months ended June 30, 2012 and 2011, respectively.



Note 6 — Derivative Liabilities



The October 2008 convertible note, discussed above in Note
5, contained an embedded adjustment feature whereby the conversion price could have been adjusted if the Company had issued additional
shares of common stock or securities exercisable, exchangeable, or convertible into shares of common stock at a price per share
less than both the conversion price then in effect and $0.75. The embedded adjustment feature was not indexed to the Company’s
own stock and, therefore, was an embedded derivative financial liability (the “Embedded Derivative”) that required
bifurcation and separate accounting. Accordingly, the Company recorded a cumulative effect adjustment to the opening balance of
retained earnings on October 1, 2009. Subsequently, the Company adjusted the Embedded Derivative to fair value at each interim
period and recognized the changes in fair value as a charge or a benefit to earnings included in the Other Income (Expense) section
of the Company’s Consolidated Statement of Operations.



8







As of September 30, 2010, the fair value of the Embedded Derivative
for the October 2008 Note was $1,698,000. The fair value as of September 30, 2010 was calculated using a Monte Carlo simulation
model with the following assumptions:



|                                           |  | October 2008 Note |        
|------------------------------------------ |  | ----------------- | -------
|Risk-free interest rate:                   |  |                   | 0.14   
|Expected term:                             |  |                   | 17 days
|Expected dividend yield:                   |  |                   | 0.00   
|Expected volatility:                       |  |                   | 49.30  
|Probability of triggering reset provision: |  |                   | 0.01   
|Existing conversion price per share        |  | $                 | 0.75   
|Company’s stock price per share            |  | $                 | 1.26   



On October 15, 2010, the October 2008 convertible note
was converted into shares of our common stock at a conversion price of $0.75 per share. The fair value of the embedded derivative
on October 15, 2010, was $2,600,000, which was the intrinsic value of the conversion, based on the Company’s stock
price as of the conversion date. As a result of the increase in fair value of the embedded derivative from September 30,
2010, to the date of conversion, $902,000 was recorded as an additional non-cash charge to earnings for the nine months ended
June 30, 2011.



Note 7 — Stockholders’ Equity



Warrants



A summary of warrants issued, exercised and expired during
the nine months ended June 30, 2012, is as follows:





|                           |  |  |        |            |   | Weighted |  
|-------------------------- |  |  | ------ | ---------- | - | -------- | -
|                           |  |  |        |            |   | Avg.     |  
|                           |  |  |        |            |   | Exercise |  
|Warrants:                  |  |  | Shares |            |   | Price    |  
|Balance at October 1, 2011 |  |  |        | 6,965,667  |   |          | $
|Issued                     |  |  |        | —          |   |          |  
|Exercised                  |  |  |        | —          |   |          |  
|Expired                    |  |  |        | (1,433,334 | ) |          |  
|Balance at June 30, 2012   |  |  |        | 5,532,333  |   |          | $



Options



In connection with conversion of $1,589,000 of debt to equity
and under the terms of the reverse merger in June 2007, Mr. Libratore, the Company’s founder, principal shareholder and
President, received options to purchase 4,541,009 shares of the Company’s common stock at an exercise price of $0.0001.
As of June 30, 2012, a total of 3,921,009 options were outstanding.



Employee & Director Stock Options



The weighted-average grant date fair value of options granted
during the nine months ended June 30, 2011, was $0.40. There were no options granted during the nine months ended June 30, 2012.
There were no options exercised during the nine months ended June 30, 2012 and 2011. The fair values of stock-based awards granted
during the nine months ended June 30, 2011, were calculated with the following weighted-average assumptions:



|                         |  | 2011 |        
|------------------------ |  | ---- | -------
|Risk-free interest rate: |  |      | 1.05   
|Expected term:           |  |      | 3 years
|Expected dividend yield: |  |      | 0.00   
|Expected volatility:     |  |      | 48.91  



For the nine months ended June 30, 2012 and 2011, the Company
recorded $92,000 and $305,000, respectively, of stock-based compensation expense, which has been classified as Operating expenses,
sub-classification of Payroll, taxes and benefits, for the employees and General and administrative for the directors. As of June
30, 2012, there is $4,000 in total unrecognized compensation expense related to non-vested employee and director stock options
granted under the 2007 Stock Plan, which is expected to be recognized over 0.3 years.



9







Stock option activity for the nine months ended June 30, 2012,
is summarized as follows:



|                                                    |  |        |           |   |          |   |      | Weighted     |  |  |           | 
|--------------------------------------------------- |  | ------ | --------- | - | -------- | - | ---- | ------------ |  |  | --------- | 
|                                                    |  |        |           |   | Weighted |   |      | Average      |  |  |           | 
|                                                    |  |        |           |   | Average  |   |      | Remaining    |  |  | Aggregate | 
|                                                    |  |        |           |   | Exercise |   |      | Contractual  |  |  | Intrinsic | 
|2007 Stock Plan:                                    |  | Shares |           |   | Price    |   |      | Life (Years) |  |  | Value     | 
|Options outstanding at October 1, 2011              |  |        | 2,085,000 |   |          | $ | 0.99 |              |  |  | 2.75      | 
|Granted                                             |  |        | —         |   |          |   | —    |              |  |  |           | 
|Expired or forfeited                                |  |        | (50,000   | ) |          |   | 2.18 |              |  |  |           | 
|                                                    |  |        |           |   |          |   |      |              |  |  |           | 
|Options outstanding at June 30, 2012                |  |        | 2,035,000 |   |          | $ | 0.97 |              |  |  | 1.99      | 
|                                                    |  |        |           |   |          |   |      |              |  |  |           | 
|Options exercisable at June 30, 2012                |  |        | 1,912,500 |   |          | $ | 0.95 |              |  |  | 1.90      | 
|Options vested or expected to vest at June 30, 2012 |  |        | 2,035,000 |   |          | $ | 0.97 |              |  |  | 1.99      | 



2009 Employee Stock Purchase Plan



The Employee Stock Purchase Plan (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 and November 30 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.



As of June 30, 2012, 371,188 shares of the Company’s
common stock have been purchased through the ESPP, using $293,000 of proceeds received from employee payroll deductions. For the
nine months ended June 30, 2012 and 2011, the Company received $56,000 and $64,000, respectively, 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
nine months ended June 30, 2012 and 2011, the Company recognized $23,000 and $23,000, respectively, of compensation expense related
to the ESPP.



Note 8 — Basic and 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 and nine months ended June 30, 2012 and 2011 (in
thousands, except per share amounts):



|                                              |  | For the three months |        |  | For the nine months |  
|--------------------------------------------- |  | -------------------- | ------ |  | ------------------- | -
|                                              |  | ended June 30,       |        |  | ended June 30,      |  
|                                              |  | 2012                 |        |  | 2011                |  
|Numerator:                                    |  |                      |        |  |                     |  
|Net income — basic & diluted                  |  | $                    | 676    |  |                     | $
|                                              |  |                      |        |  |                     |  
|Denominator:                                  |  |                      |        |  |                     |  
|Weighted average shares outstanding — basic   |  |                      | 48,098 |  |                     |  
|Effect of dilutive securities:                |  |                      |        |  |                     |  
|Stock options and warrants                    |  |                      | 4,181  |  |                     |  
|Weighted average shares outstanding — diluted |  |                      | 52,279 |  |                     |  
|                                              |  |                      |        |  |                     |  
|Earnings per share — basic                    |  | $                    | 0.01   |  |                     | $
|Earnings per share — diluted                  |  | $                    | 0.01   |  |                     | $





10







The following table summarizes 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 for the three and/or nine months ended June 30, 2012 and 2011 (in thousands):



|              |  | For the three and nine months |      
|------------- |  | ----------------------------- | -----
|              |  | ended June 30,                |      
|              |  | 2012                          |      
|Stock options |  |                               | 1,150
|Warrants      |  |                               | 5,532
|Totals        |  |                               | 6,682



Note 9 — Income Taxes



The provision for income taxes was $1,231,000
for the nine months ended June 30, 2012. The effective tax rate was approximately 41% of the income before income taxes of $3,031,000,
which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s
expenses that are not deductible for tax purposes.



The provision
for income taxes was $982,000 for the nine months ended June 30, 2011.The effective tax rate was approximately 83% of
the income before income taxes of $1,179,000, which differs from the federal statutory rate of 35% due to the effect of state
income taxes and certain of the Company’s expenses that are not deductible for tax purposes, primarily consisting of $902,000
of expense related to the change in fair value of derivative liabilities recorded for the nine months ended June 30, 2011.



11







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 within
the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of
future events based on certain assumptions and include any statement that does not directly relate to any historical or current
fact. When used in this quarterly report, in future filings by the Company with the Securities and Exchange Commission, in the
Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of
an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will
continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended
to identify “forward-looking statements.” The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak as of the date made, and to advise readers that various factors, including regional
and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of manufacturing,
distributing or marketing activities, competitive and regulatory factors, and those factors set forth in the Company’s Annual
Report on Form 10-K for the year ended September 30, 2011, under the caption “Risk Factors,” could affect the Company’s
financial performance and could cause the Company’s actual results for future periods to differ materially from those anticipated
by any forward-looking statements.



The following discussion should be read in conjunction with
our unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q and the audited financial
statements of the Company included in our Annual Report on Forms 10-K for the year ended September 30, 2011, and management’s
discussion and analysis contained therein. The Company does not undertake, and specifically disclaims any obligation, to update
any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date
of such statements.



Business Overview



Liberator Medical Supply, Inc. (“LMS”), a wholly-owned
subsidiary of the Company, is a leading, federally licensed, national direct-to-consumer provider of quality medical supplies
to Medicare-eligible seniors. An Exemplary ProviderTM accredited by The Compliance Team, our Company’s unique combination
of marketing, industry expertise and customer service has demonstrated success over a broad spectrum of chronic conditions. Liberator
is recognized for offering a simple, reliable way to purchase medical supplies needed on a regular, ongoing, repeat-order basis,
with the convenience of direct billing to Medicare and private insurance. Liberator’s revenue primarily comes from supplying
urological, ostomy, and diabetic medical supplies and mastectomy fashions. Customers may purchase by phone, mail, or the Internet;
repeat orders are confirmed with the customer and shipped when needed.



We market our products directly to consumers through our direct
response advertising efforts. We target consumers with chronic conditions requiring a continuous supply of medical products that
we can provide at attractive gross margins. We also generate new customers through referrals as a result of our regular communication
with doctors’ offices, home health organizations, vendors, and existing customers. Since our inception, we have demonstrated
our ability to attract and retain customers with our unique customer service that generates an annuity-like revenue stream that
can last for periods of greater than ten years.



We receive initial contact from prospective customers in the
form of leads. A certain number of leads are then qualified and become new customers. Our qualification efforts primarily involve
verifying insurance eligibility, obtaining the required medical documentation from the customer’s physician, and explaining
our billing and collection processes, if applicable. The majority of the new customers qualified from our process typically place
their initial order within three to six months from the time of the customer’s initial contact with us. The following table
shows our revenue streams, including new and recurring orders, for the three and nine months ended June 30, 2012 and 2011, based
on the fiscal year that we received the initial lead from these customers (dollars in thousands):





|Customer leads            |  | For the three months
    ended June 30, |        |   | For the nine months ended
    June 30, |  
|------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | -
|received during           |  | 2012                                    |        |   | 2011                                   |  
|                          |  |                                         |        |   |                                        |  
|Pre-FY 2008               |  | $                                       | 635    |   |                                        | $
|FY 2008                   |  |                                         | 2,246  |   |                                        |  
|FY 2009                   |  |                                         | 3,219  |   |                                        |  
|FY 2010                   |  |                                         | 3,046  |   |                                        |  
|FY 2011                   |  |                                         | 3,368  |   |                                        |  
|FY 2012                   |  |                                         | 2,622  |   |                                        |  
|                          |  |                                         |        |   |                                        |  
|Total Revenues*           |  |                                         | 15,136 |   |                                        |  
|Other Sales & Adjustments |  |                                         | (175   | ) |                                        |  
|                          |  |                                         |        |   |                                        |  
|Net Sales                 |  | $                                       | 14,961 |   |                                        | $



*Revenues include orders from new and recurring
customers. Revenue from new customers will impact comparisons between the three and nine-month periods for fiscal year 2012 and
the corresponding periods from fiscal year 2011, especially revenue from new customers acquired during the latter portion of the
fiscal years.



12







We believe the recurring nature of our customer base helps
provide a long-term stable cash flow. We are able to adjust our advertising spend relatively quickly to respond to changing market
conditions, favorable or unfavorable, which helps control our operating cash flows. As our customer base grows and revenues increase,
we continue to focus on improving operational efficiencies to increase profitability.



Results of Operations



The following table summarizes the results of operations for
the three and nine months ended June 30, 2012 and 2011, including percentage of sales (dollars in thousands):



|                           |  | For the three months ended June
    30, |        |   | For the nine months ended June
    30, | 
|-------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | 
|                           |  | 2012                                    |        |   | 2011                                   | 
|                           |  | Amount                                  |        |   | %                                      | 
|Sales                      |  | $                                       | 14,961 |   |                                        | 
|Cost of Sales              |  |                                         | 5,836  |   |                                        | 
|Gross Profit               |  |                                         | 9,125  |   |                                        | 
|Operating Expenses         |  |                                         | 7,958  |   |                                        | 
|Income from Operations     |  |                                         | 1,167  |   |                                        | 
|Other Expense              |  |                                         | (21    | ) |                                        | 
|Income before Income Taxes |  |                                         | 1,146  |   |                                        | 
|Provision for Income Taxes |  |                                         | 470    |   |                                        | 
|Net Income                 |  | $                                       | 676    |   |                                        | 



Revenues



Sales for the three months ended June 30, 2012, increased by
$1,642,000, or 12.3%, to $14,961,000, compared with sales of $13,319,000 for the three months ended June 30, 2011. Sales for the
nine months ended June 30, 2012, increased by $6,224,000, or 16.3%, to $44,427,000, compared with sales of $38,203,000 for the
nine months ended June 30, 2011. The increase in sales was primarily due to our continued emphasis on our direct response advertising
campaign to obtain new customers and our customer service to maximize the reorder rates for our recurring customer base.



Our direct-response advertising expenditures for the nine months
ended June 30, 2012, were $9,104,000 compared with $12,765,000 for the nine months ended June 30, 2011.



Gross Profit



Gross profit for the three months ended June 30, 2012, increased
by $1,043,000, or 12.9%, to $9,125,000, compared with gross profit of $8,082,000 for the three months ended June 30, 2011. For
the nine months ended June 30, 2012, gross profit increased by $3,148,000, or 13.3%, to $26,901,000, compared with gross profit
of $23,753,000 for the nine months ended June 30, 2011. The increase was attributed to our increased sales volume for the three
and nine months ended June 30, 2012, compared with the three and nine months ended June 30, 2011.



As a percentage of sales, gross profit increased by 0.3% for
the three months ended June 30, 2012, and decreased by 1.6% for the nine months ended June 30, 2012, compared with the three and
nine months ended June 30, 2011. The decrease of 1.6% for the nine months ended June 30, 2012, was due to an increase in our ostomy
supply sales, which have lower gross margins than our other product lines, as a percentage of our total product mix compared with
the nine months ended June 30, 2011.



Operating Expenses



The following table provides a breakdown of our operating expenses
for the three and nine months ended June 30, 2012 and 2011, including percentage of sales (dollars in thousands):



|                              |  | For
    the three months ended June 30, |       |  | For
    the nine months ended June 30, | 
|----------------------------- |  | --------------------------------------- | ----- |  | -------------------------------------- | 
|                              |  | 2012                                    |       |  | 2011                                   | 
|                              |  | Amount                                  |       |  | %                                      | 
|Operating Expenses:           |  |                                         |       |  |                                        | 
|Payroll, taxes, & benefits    |  | $                                       | 3,526 |  |                                        | 
|Advertising                   |  |                                         | 1,956 |  |                                        | 
|Bad debts                     |  |                                         | 1,028 |  |                                        | 
|Depreciation and amortization |  |                                         | 206   |  |                                        | 
|General and administrative    |  |                                         | 1,242 |  |                                        | 
|                              |  |                                         |       |  |                                        | 
|Total Operating Expenses      |  | $                                       | 7,958 |  |                                        | 



13







Payroll, taxes and benefits increased by $454,000, or
14.8%, to $3,526,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. Payroll, taxes
and benefits increased by $1,724,000, or 19.5%, to $10,567,000 for the nine months ended June 30, 2012, compared with the nine
months ended June 30, 2011. The increase was due to an increase in the number of employees to support our increased sales volume.
As of June 30, 2012, we had 313 active employees, compared with 277 at June 30, 2011.



Advertising expenses decreased by $176,000, or 8.3%,
to $1,956,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. For the nine months
ended June 30, 2012, advertising expenses decreased by $156,000, or 2.6%, to $5,896,000, compared with the nine months ended June
30, 2011.



The majority of our advertising expenses are associated with
the amortization of previously capitalized direct response advertising costs. The balance of our advertising expenses is for costs
that do not qualify as direct response advertising and are expensed as incurred. The following table shows a breakdown of our
advertising expenses for the three and nine months ended June 30, 2012 and 2011 (dollars in thousands):



|                                      |  | For the three months
     ended June 30, |       |  | For the nine months
     ended June 30, |  
|------------------------------------- |  | ---------------------------------------- | ----- |  | --------------------------------------- | -
|                                      |  | 2012                                     |       |  | 2011                                    |  
|                                      |  |                                          |       |  |                                         |  
|Advertising Expenses:                 |  |                                          |       |  |                                         |  
|Amortization of direct-response costs |  | $                                        | 1,918 |  |                                         | $
|Other advertising expenses            |  |                                          | 38    |  |                                         |  
|Total Advertising Expenses            |  | $                                        | 1,956 |  |                                         | $



The amortization of direct-response advertising costs is computed
using the ratio that current period revenues for each direct-response advertising cost pool bear to the total of current and estimated
future benefits for that direct-response advertising cost pool. We have persuasive evidence that demonstrates future benefits
are realized from our direct-response advertising efforts beyond ten years. Since the reliability of accounting estimates decreases
as the length of the period for which such estimates are made increases, we estimate future benefits for each advertising cost
pool for a period of no longer than four years at each reporting period, which creates a “rolling” type amortization
period. Once a particular cost pool has been amortized to a level where the difference between amortizing the cost pool over a
“rolling” four-year period and amortizing the cost pool on a “straight-line” basis over a period shorter
than four years is de minimis, we amortize the costs over a fixed time period based on current and expected future revenues. As
a result of this policy, our direct-response advertising costs are typically amortized over a period between four and six years.



As of June 30, 2012, we had $20,524,000 of deferred advertising
costs that will be expensed over a period between four and six years based on probable future net revenues for each cost pool,
updated at each reporting period and expected to result directly from such advertising.



Similar to past direct-response advertising efforts, when we
decreased our advertising spend during the first three quarters of fiscal year 2012 our costs to acquire new customers decreased,
compared with the first three quarters of fiscal year 2011. As a result of our decreased costs to acquire new customers, our advertising
expense, as a percentage of sales, decreased by 2.9% and 2.7%, respectively, for the three and nine months ended June 30, 2012,
compared with the three and nine months ended June 30, 2011.



Bad debt expenses decreased by $70,000, or 6.4%, to
$1,028,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. For the nine months ended
June 30, 2012, bad debt expenses increased by $134,000, or 4.7%, compared with the nine months ended June 30, 2011. As a percentage
of sales, bad debt expense decreased by 1.3% and 0.7%, respectively, for the three and nine months ended June 30, 2012, as a result
of improvements in our billing and collection efforts.



Depreciation and amortization expenses increased by
$15,000, or 7.9%, to $206,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. For
the nine months ended June 30, 2012, depreciation expense increased by $87,000, or 16.5%. The increase in depreciation expense
is primarily attributed to the purchase of additional computer equipment to support the additional staff added as a result of
our sales growth. Purchases of property and equipment totaled $232,000 and $306,000 during the nine months ended June 30, 2012
and 2011, respectively.



General and administrative expenses increased by $37,000,
or 3.1%, to $1,242,000 for the three months ended June 30, 2012, compared with the three months ended June 30, 2011. For the nine
months ended June 30, 2012, general and administrative costs increased by $384,000, or 11.5%, compared with the nine months ended
June 30, 2011. The increase is due to additional costs incurred for software, answering service expenses, selling expenses and
postage to support the growth of our business. As a percentage of sales, general and administrative expenses have decreased by
0.7% and 0.4%, respectively, for the three and nine months ended June 30, 2012, compared with the three and nine months ended
June 30, 2011.



14







Income from Operations



Income from operations for the three months ended June 30,
2012, increased by $783,000, or 203.9%, to $1,167,000, compared with the three months ended June 30, 2011. For the nine months
ended June 30, 2012, income from operations increased by $975,000, or 46.2%, to $3,084,000, compared with the nine months ended
June 30, 2011. The increase in operating income is primarily attributed to increased gross profits driven by our increased sales
volumes as well as a reduction as a percentage of sales in advertising, bad debt and general and administrative expenses, partially
offset by an increase in payroll expenses.



Other Income (Expense)



The following table shows a breakdown of other income (expense) for
the three and nine months ended June 30, 2012 and 2011 (dollars in thousands):



|                                               |  | For the three months
     ended June 30, |     |   | For the nine months
     ended June 30, |  
|---------------------------------------------- |  | ---------------------------------------- | --- | - | --------------------------------------- | -
|                                               |  | 2012                                     |     |   | 2011                                    |  
|Other Income (Expense):                        |  |                                          |     |   |                                         |  
|Interest Expense                               |  | $                                        | (21 | ) |                                         | $
|Change in fair value of derivative liabilities |  |                                          | —   |   |                                         |  
|Gain on disposal of assets                     |  |                                          | —   |   |                                         |  
|Interest income                                |  |                                          | —   |   |                                         |  
|Total Other Income (Expense)                   |  | $                                        | (21 | ) |                                         | $



Other income (expense) for the three and nine months ended
June 30, 2012, was interest expense related to our outstanding balance on our credit line facility.



Other income (expense) for the nine months ended June 30, 2011,
was predominantly non-cash charges associated with the amortization of discounts on our convertible debt, recorded as interest
expense, and non-cash charges associated with the change in fair value of derivative liabilities embedded within our convertible
debt. Non-cash charges to other income (expense) for the nine months ended June 30, 2011, totaled $923,000.



Interest expense increased by $18,000 for the three months
and nine months ended June 30, 2012, compared with the three and nine months ended June 30, 2011, respectively.



We were required to adjust the embedded derivative liabilities
to fair value at each balance sheet date, or interim period, and recognize the changes in fair value as a non-cash charge or benefit
to earnings. As of September 30, 2010, the fair value of the embedded derivative liability included in the October 2008
Convertible Note was $1,698,000. On October 15, 2010, the convertible note was converted into shares of our common stock at a
conversion price of $0.75 per share. The fair value of the embedded derivative on October 15, 2010, was $2,600,000. As a result
of the increase in fair value of the embedded derivative from September 30, 2010, to the date of conversion, $902,000 was recorded
as an additional non-cash charge to earnings for the nine months ended June 30, 2011.



Income Taxes



The provision for income taxes was $1,231,000
for the nine months ended June 30, 2012. The effective tax rate was approximately 41% of the income before income taxes of $3,031,000,
which differs from the federal statutory rate of 35% due to the effect of state income taxes and certain of the Company’s
expenses that are not deductible for tax purposes.



The provision
for income taxes was $982,000 for the nine months ended June 30, 2011.The effective tax rate was approximately 83% of
the income before income taxes of $1,179,000, which differs from the federal statutory rate of 35% due to the effect of state
income taxes and certain of the Company’s expenses that are not deductible for tax purposes, primarily consisting of $902,000
of expense related to the change in fair value of derivative liabilities recorded for the nine months ended June 30, 2011.



Liquidity and Capital Resources



The following table summarizes our cash flows from operating,
investing, and financing activities for the nine months ended June 30, 2012 and 2011 (dollars in thousands):



15









|                                                    |  | For the Nine Months Ended |       
|--------------------------------------------------- |  | ------------------------- | ------
|                                                    |  | June 30,                  |       
|                                                    |  | 2012                      |       
|Cash Flows:                                         |  |                           |       
|Net cash used in operating activities               |  | $                         | (1,358
|Net cash used in investing activities               |  |                           | (112  
|Net cash provided by (used in) financing activities |  |                           | 1,013 
|Net increase (decrease) in cash                     |  |                           | (457  
|Cash at beginning of period                         |  |                           | 3,016 
|Cash at end of period                               |  | $                         | 2,559 



The Company had cash of $2,559,000 at June 30, 2012, compared
with cash of $3,016,000 at September 30, 2011, a decrease of $457,000. The decrease in cash for the nine months ended June
30, 2012, is primarily due to $1,358,000 of cash used in our operating activities for the nine months ended June 30, 2012 partially
offset by $1,000,000 of borrowings from the credit line facility.



During the three months ended June 30, 2012, we saw a significant
increase in the number of Medicare pre-payment audits for claims that were submitted to one of the four Medicare regions. The
results of these audits have not generated a significant number of denials or adjustments, and we expect to receive payment for
these claims from Medicare. However, we have experienced a delay of up to 45 to 90 days in receiving payments for these claims,
resulting in an increase of our accounts receivable and a decrease in our cash of approximately $1.0 million during the three
months ended June 30, 2012.



Operating Activities



During the nine months ended June 30, 2012, cash used by operations
was $1,358,000, as a result of net income of $1,800,000 plus non-cash charges of $10,846,000 less changes in operating assets
and liabilities of $14,004,000. The non-cash charges consist primarily of $5,770,000 for amortization of deferred advertising
costs, $3,001,000 for bad debt expenses $1,208,000 for deferred income taxes, $616,000 for depreciation and amortization, $98,000
for inventory reserve, and $115,000 for equity-based compensation associated with employee and director stock options. The changes
in operating assets and liabilities for the nine months ended June 30, 2012, consist of $9,104,000 of deferred advertising expenditures
related to our direct response advertising efforts, increases for accounts receivable of $5,220,000 as a result of our increased
sales, partially offset by decreases in inventory and accrued expenses of $344,000 and $326,000, respectively.



During the nine months ended June 30, 2011, cash used in operations
was $4,107,000, as a result of net income of $197,000 plus non-cash charges of $11,776, 000 less changes in operating assets and
liabilities of $16,080,000. The non-cash charges consist primarily of $5,929,000 for amortization of deferred advertising costs,
$2,867,000 for bad debt expense, $902,000 for the change in fair value of derivative liabilities, $982,000 for deferred income
taxes, $529,000 for depreciation, $328,000 for equity-based compensation associated with employee and director stock options,
and $192,000 for an increase in the reserve for contractual adjustments. The changes in operating assets and liabilities for the
nine months ended June 30, 2011, consist of $12,765,000 of deferred advertising expenditures related to our direct response advertising
efforts, increases for accounts receivable of $4,326,000 and inventory of $622,000 as a result of our increased sales, partially
offset by an increase in accounts payable of $1,667,000 due to increased purchases and improved vendor payment terms for our higher
volume items.



Investing Activities



During the nine months ended June 30, 2012 and June 30, 2011,
we purchased $112,000 and $306,000, respectively, of property and equipment to support our continued growth. In addition, during
the nine months ended June 30, 2011, we used $466,000 of cash for the acquisition of SGV Medical Supplies.



Financing Activities



During the nine months ended June 30, 2012, cash provided by
financing activities was $1,013,000, which included proceeds of $1,000,000 from our credit line facility and $56,000 of proceeds
from our employee stock purchase plan, partially offset by payments of $22,000 towards capital lease obligations and $21,000 for
costs associated with the renewal of our PNC Credit Line Facility.



During the nine months ended June 30, 2011, cash used in financing
activities was $100,000, which included payments of $613,000 towards our debt obligations and payment of $51,000 for costs associated
with the PNC Credit Line Facility, partially offset by $500,000 of proceeds from our credit line facility and $64,000 of proceeds
from our employee stock purchase plan.



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Outlook



As of June 30, 2012, we had $2.6 million of cash and $4.7
million available from our credit line facility to fund our operations. We believe that the existing cash and the availability
of funds through our credit line, 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.



At June 30, 2012, our current assets of $17,839,000 exceeded
our current liabilities of $6,478,000 by $11,361,000.



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 reorder rates;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Increase
                                                                                                               the number of contracted
                                                                                                               insurance plans
                                                                                                               to expand our “in
                                                                                                               network”
                                                                                                               provider list;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Continue
                                                                                                               fine-tuning our
                                                                                                               processes and systems
                                                                                                               to improve efficiencies;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Explore
                                                                                                               new inventory systems
                                                                                                               to improve our
                                                                                                               inventory management
                                                                                                               processes;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Continue
                                                                                                               to invest in the
                                                                                                               expansion of our
                                                                                                               infrastructure;
                                                                                                               and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Continue
                                                                                                               to increase our
                                                                                                               accounts receivable
                                                                                                               collection efforts.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Off-Balance Sheet Arrangements



As of June 30, 2012, we had no off-balance sheet arrangements.



Critical Accounting Policies



See “Summary of Significant Accounting Policies”
in the Notes to the unaudited condensed consolidated financial statements and our current Annual Report on Form 10-K for the year
ended September 30, 2011, for a 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. Quantitative and Qualitative Disclosures about
Market Risk



Not required for smaller reporting companies.



Item 4. Controls and Procedures.



Evaluation of Disclosure Controls and Procedures



Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange
Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, to allow
timely decisions regarding required disclosure.



We carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
June 30, 2012. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure
controls and procedures were effective as of June 30, 2012.



Change in Internal Control over Financial Reporting



There
were no changes in our internal control over financial reporting during the quarter ended June 30, 2012, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.



17







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, 2011. 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



None.



Item 3. Defaults Upon Senior Securities



None.



Item 5. Other Information



None.



Item 6. 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



18







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/ LIBERATOR MEDICAL HOLDINGS, INC.

Registrant



|/s/ Mark A. Libratore |  | President               |  | August 14, 2012
|--------------------- |  | ----------------------- |  | ---------------
|Mark A. Libratore     |  |                         |  |                
|                      |  |                         |  |                
|/s/ Robert J. Davis   |  | Chief Financial Officer |  | August 14, 2012
|Robert J. Davis       |  |                         |  |                





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