UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-Q/A

(Amendment No. 1)

(Mark One)



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

For
the quarterly period ended December 31, 2010



or



oTRANSITION
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.



YesþNoo



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).



YesoNoo



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 filero |  | Accelerated filero |  | Non-accelerated filero                        |  | 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).



YesoNoþ

APPLICABLE TO CORPORATE ISSUERS:



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



|Class               |  | Outstanding as of February 16, 2011
|------------------- |  | -----------------------------------
|Common Stock, $.001 |  | 47,995,600                         











TABLE OF CONTENTS



|                               |  |                                                                                       |  | Page
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                      
|Explanatory Note               |  | 3                                                                                    
|                               |  |                                                                                      
|PART I — FINANCIAL INFORMATION |  | 4                                                                                    
|                               |  |                                                                                       |  |     
|Item 1.                        |  | Condensed Consolidated Financial Statements                                           |  | 4   
|                               |  |                                                                                       |  |     
|                               |  | Notes to Condensed Consolidated Financial Statements                                  |  | 8   
|                               |  |                                                                                       |  |     
|Item 2.                        |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 16  
|                               |  |                                                                                       |  |     
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 22  
|                               |  |                                                                                       |  |     
|Item 4.                        |  | Controls and Procedures                                                               |  | 22  
|                               |  |                                                                                       |  |     
|PART II — OTHER INFORMATION    |  | 26                                                                                   
|                               |  |                                                                                       |  |     
|Item 1.                        |  | Legal Proceedings                                                                     |  | 26  
|                               |  |                                                                                       |  |     
|Item 1A.                       |  | Risk Factors                                                                          |  | 26  
|                               |  |                                                                                       |  |     
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 26  
|                               |  |                                                                                       |  |     
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 26  
|                               |  |                                                                                       |  |     
|Item 5.                        |  | Other Information                                                                     |  | 26  
|                               |  |                                                                                       |  |     
|Item 6.                        |  | Exhibits                                                                              |  | 26  
|                               |  |                                                                                       |  |     
|SIGNATURES                     |  | 27                                                                                   
|EX-31.1                       
|EX-31.2                       
|EX-32.1                       
|EX-32.2                       



2







Explanatory Note — Restatement of Previously
Issued Financial Statements



Liberator Medical Holdings, Inc. (the “Company”)
is filing this amendment to its Quarterly Report on Form 10-Q for the interim period ended December 31, 2010, which was originally
filed with the Securities and Exchange Commission (“SEC”) on February 22, 2011 (the “Original Filing”),
to include restated financial statements as described in Note 3 to the condensed consolidated financial statements. The Company
has restated its previously issued condensed consolidated financial statements as of and for the three months ended December 31,
2010, to correct the following errors:



| | · | The journal entries to record the cost of goods sold each month contained
errors due to unit of measure conversion issues with certain products. As a result, the Company's inventory balance was overstated
and the cost of sales was understated for the interim period; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Partially offsetting the adjustments to inventory and cost of sales,
the Company identified additional sales that were not properly submitted to insurance carriers due to the unit of measure issues
identified.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Please refer to Note 3 of the condensed consolidated financial
statements below for a detailed analysis of the effects of the restatements on our condensed consolidated financial statements
for the three months ended December 31, 2010.



This Form 10-Q/A amends the following items in the Company’s
Original Filing:



| | · | Part I — Item 1 — Condensed Consolidated
Financial Statements
| | - | -------------------------------------------------------------



| | · | Part I — Item 2 — Management’s Discussion and Analysis
of Financial Condition and Results of Operations
| | - | -------------------------------------------------------------------------------------------------------



| | · | Part I — Item 4T — and Procedures
| | - | ---------------------------------



| | · | Part II — Item 6 — Exhibits
| | - | ---------------------------



For the convenience of the reader, this Form 10-Q/A sets
forth the Quarterly Report on Form 10-Q in its entirety. Other than as described above, the Original Filing has not been amended
or updated. Forward-looking statements made in the Original Filing have not been revised to reflect events that occurred or facts
that became known to the Company after the filing of the Original Filing. This Form 10-Q/A should be read in conjunction with the
Company’s filings subsequent to the Original Filing with the SEC.



3







PART I — FINANCIAL INFORMATION



Item 1. Financial Statements



Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Balance Sheets
As of December 31, 2010 (unaudited) and September 30, 2010(In thousands, except dollar per share amounts)



|                                                                                                                                                                                                         |  | As Restated  |         |   |               |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------- | -
|                                                                                                                                                                                                         |  | December 31, |         |   | September 30, |  
|                                                                                                                                                                                                         |  | 2010         |         |   | 2010          |  
|Assets                                                                                                                                                                                                   |  |              |         |   |               |  
|Current Assets:                                                                                                                                                                                          |  |              |         |   |               |  
|Cash                                                                                                                                                                                                     |  | $            | 7,430   |   |               | $
|Accounts receivable, net of allowance of $3,748 and $3,312, respectively                                                                                                                                 |  |              | 6,424   |   |               |  
|Inventory, net of allowance for obsolete inventory of $110 and $110, respectively                                                                                                                        |  |              | 2,368   |   |               |  
|Deferred taxes, current portion                                                                                                                                                                          |  |              | 1,464   |   |               |  
|Prepaid and other current assets                                                                                                                                                                         |  |              | 436     |   |               |  
|Total Current Assets                                                                                                                                                                                     |  |              | 18,122  |   |               |  
|Property and equipment, net of accumulated depreciation of $1,648 and $1,527, respectively                                                                                                               |  |              | 1,769   |   |               |  
|Deferred advertising                                                                                                                                                                                     |  |              | 12,048  |   |               |  
|Other assets                                                                                                                                                                                             |  |              | 197     |   |               |  
|Total Assets                                                                                                                                                                                             |  | $            | 32,136  |   |               | $
|                                                                                                                                                                                                         |  |              |         |   |               |  
|Liabilities and Stockholders’ Equity                                                                                                                                                                     |  |              |         |   |               |  
|Current Liabilities:                                                                                                                                                                                     |  |              |         |   |               |  
|Accounts payable                                                                                                                                                                                         |  | $            | 5,630   |   |               | $
|Accrued liabilities                                                                                                                                                                                      |  |              | 839     |   |               |  
|Derivative liabilities                                                                                                                                                                                   |  |              | —       |   |               |  
|Stockholder loans                                                                                                                                                                                        |  |              | —       |   |               |  
|Convertible notes payable, net of unamortized discount of $21                                                                                                                                            |  |              | —       |   |               |  
|Other current liabilities                                                                                                                                                                                |  |              | 142     |   |               |  
|Total Current Liabilities                                                                                                                                                                                |  |              | 6,611   |   |               |  
|Deferred tax liability                                                                                                                                                                                   |  |              | 1,922   |   |               |  
|Other long-term liabilities                                                                                                                                                                              |  |              | 109     |   |               |  
|Total Liabilities                                                                                                                                                                                        |  |              | 8,642   |   |               |  
|                                                                                                                                                                                                         |  |              |         |   |               |  
|Stockholders’ Equity:                                                                                                                                                                                    |  |              |         |   |               |  
|Common stock, $.001 par value, 200,000 shares authorized, 48,085 and 44,707 shares issued, respectively; 47,996 and 44,617 shares outstanding at December 31, 2010, and September 30, 2010, respectively |  |              | 48      |   |               |  
|Additional paid-in capital                                                                                                                                                                               |  |              | 34,204  |   |               |  
|Accumulated deficit                                                                                                                                                                                      |  |              | (10,708 | ) |               |  
|Treasury stock, at cost; 89 shares at December 31, 2010, and September 30, 2010                                                                                                                          |  |              | (50     | ) |               |  
|Total Stockholders’ Equity                                                                                                                                                                               |  |              | 23,494  |   |               |  
|Total Liabilities and Stockholders’ Equity                                                                                                                                                               |  | $            | 32,136  |   |               | $



See accompanying notes to consolidated
financial statements.

4







Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statements of Operations
For the three months ended December 31, 2010 and 2009
(Unaudited)(in thousands, except per share amounts)



|                                               |  | Three Months Ended December 31, |       
|---------------------------------------------- |  | ------------------------------- | ------
|                                               |  | As Restated 2010                |       
|Sales                                          |  | $                               | 12,220
|                                               |  |                                 |       
|Cost of Sales                                  |  |                                 | 4,439 
|                                               |  |                                 |       
|Gross Profit                                   |  |                                 | 7,781 
|                                               |  |                                 |       
|Operating Expenses                             |  |                                 |       
|Payroll, taxes and benefits                    |  |                                 | 2,841 
|Advertising                                    |  |                                 | 1,901 
|Bad debts                                      |  |                                 | 892   
|Depreciation                                   |  |                                 | 166   
|General and administrative                     |  |                                 | 925   
|Total Operating Expenses                       |  |                                 | 6,725 
|                                               |  |                                 |       
|Income from Operations                         |  |                                 | 1,056 
|                                               |  |                                 |       
|Other Income (Expense)                         |  |                                 |       
|Interest expense                               |  |                                 | (31   
|Change in fair value of derivative liabilities |  |                                 | (902  
|Interest income                                |  |                                 | 2     
|Gain on sale of assets                         |  |                                 | 2     
|Total Other Income (Expense)                   |  |                                 | (929  
|                                               |  |                                 |       
|Income (Loss) before Income Taxes              |  |                                 | 127   
|                                               |  |                                 |       
|Provision for (Benefit from) Income Taxes      |  |                                 | 329   
|                                               |  |                                 |       
|Net Loss                                       |  | $                               | (202  
|                                               |  |                                 |       
|Basic and Diluted earnings (loss) per share:   |  |                                 |       
|Weighted average shares outstanding            |  |                                 | 47,419
|Earnings (loss) per share                      |  | $                               | (0.00 



See accompanying notes to unaudited condensed
consolidated financial statements.



5







Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the three months ended December 31, 2010 As Restated
(Unaudited)(in thousands)





|                                                     |  |        |        |  |        |   |    |         |  |   |             |  |  |          |         |   | Total         |  
|---------------------------------------------------- |  | ------ | ------ |  | ------ | - | -- | ------- |  | - | ----------- |  |  | -------- | ------- | - | ------------- | -
|                                                     |  | Common |        |  | Common |   |    | Paid in |  |   | Accumulated |  |  | Treasury |         |   | Stockholders’ |  
|                                                     |  | Shares |        |  | Stock  |   |    | Capital |  |   | Deficit     |  |  | Stock    |         |   | Equity        |  
|Balance at October 1, 2010                           |  |        | 44,617 |  |        | $ | 45 |         |  | $ | 28,927      |  |  | $        | (10,506 | ) |               | $
|                                                     |  |        |        |  |        |   |    |         |  |   |             |  |  |          |         |   |               |  
|Options issued to employees and directors            |  |        |        |  |        |   |    |         |  |   | 128         |  |  |          |         |   |               |  
|Common stock issued upon conversion of debt          |  |        | 3,333  |  |        |   | 3  |         |  |   | 5,097       |  |  |          |         |   |               |  
|Common stock issued for employee stock purchase plan |  |        | 46     |  |        |   | —  |         |  |   | 52          |  |  |          |         |   |               |  
|Net loss                                             |  |        |        |  |        |   |    |         |  |   |             |  |  |          | (202    | ) |               |  
|Balance at December 31, 2010                         |  |        | 47,996 |  |        | $ | 48 |         |  | $ | 34,204      |  |  | $        | (10,708 | ) |               | $





See accompanying notes to unaudited condensed
consolidated financial statements.



6







Liberator Medical Holdings, Inc. and
Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2010 and 2009
(Unaudited)(in thousands)



|                                                                                          |  | Three Months Ended December 31, |       
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ------
|                                                                                          |  | As Restated 2010                |       
|Cash flow from operating activities:                                                      |  |                                 |       
|Net Loss                                                                                  |  | $                               | (202  
|                                                                                          |  |                                 |       
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                 |       
|Depreciation and amortization                                                             |  |                                 | 2,011 
|Change in fair value of derivative liabilities                                            |  |                                 | 902   
|Equity based compensation                                                                 |  |                                 | 128   
|Provision for doubtful accounts and sales returns and adjustments                         |  |                                 | 980   
|Non-cash interest related to convertible notes payable                                    |  |                                 | 21    
|Deferred income taxes                                                                     |  |                                 | 328   
|Amortization of non-cash debt issuance costs                                              |  |                                 | —     
|Gain on sale of assets                                                                    |  |                                 | (2    
|Changes in operating assets and liabilities:                                              |  |                                 |       
|Accounts receivable                                                                       |  |                                 | (659  
|Deferred advertising                                                                      |  |                                 | (3,887
|Inventory                                                                                 |  |                                 | (383  
|Other assets                                                                              |  |                                 | (140  
|Accounts payable                                                                          |  |                                 | 1,804 
|Accrued expenses                                                                          |  |                                 | (283  
|Other liabilities                                                                         |  |                                 | (21   
|Net Cash Flow Provided by (Used in) Operating Activities                                  |  |                                 | 597   
|                                                                                          |  |                                 |       
|Cash flow from investing activities:                                                      |  |                                 |       
|Purchase of property and equipment                                                        |  |                                 | (75   
|Proceeds from the sale of assets                                                          |  |                                 | 3     
|Purchase of certificates of deposit                                                       |  |                                 | —     
|Net Cash Flow Used in Investing Activities                                                |  |                                 | (72   
|                                                                                          |  |                                 |       
|Cash flow from financing activities:                                                      |  |                                 |       
|Proceeds from the exercise of warrants                                                    |  |                                 | —     
|Proceeds from employee stock purchase plan                                                |  |                                 | 59    
|Proceeds from credit line facility                                                        |  |                                 | —     
|Purchase of treasury stock                                                                |  |                                 | —     
|Payments of debt and capital lease obligations                                            |  |                                 | (582  
|Net Cash Flow Provided by (Used in) Financing Activities                                  |  |                                 | (523  
|                                                                                          |  |                                 |       
|Net increase (decrease) in cash                                                           |  |                                 | 2     
|                                                                                          |  |                                 |       
|Cash at beginning of period                                                               |  |                                 | 7,428 
|Cash at end of period                                                                     |  | $                               | 7,430 
|                                                                                          |  |                                 |       
|Supplemental disclosure of cash flow information:                                         |  |                                 |       
|Cash paid for interest                                                                    |  | $                               | 47    
|Cash paid for income taxes                                                                |  | $                               | —     
|                                                                                          |  |                                 |       
|Supplemental schedule of non-cash investing and financing activities:                     |  |                                 |       
|Common stock issued for interest expense                                                  |  | $                               | —     
|Common stock issued for conversion of debt                                                |  | $                               | 5,100 



See accompanying notes to unaudited condensed
consolidated financial statements.



7







Liberator Medical Holdings, Inc. and Subsidiaries

Notes To The Unaudited Condensed Consolidated Financial
Statements

December 31, 2009



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 Forms 10-K and 10-K/A for the year ended September 30, 2010 that were
filed with the SEC on January 13, 2011, and January 28,2011, respectively. The results of operations for the three months ended
December 31, 2010 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, 2010.



Recent Accounting Pronouncements



In January 2010, the FASB issued new guidance for fair value
measurements and disclosures which requires a reporting entity to disclose separately the amounts of significant transfers in and
out of Level 1 and 2 fair value measurements and describe the reasons for the transfers. The guidance also requires a reporting
entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value
measurements using significant unobservable inputs (Level 3). The guidance was effective on January 1, 2010, except for disclosures
about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The guidance
adopted on January 1, 2010 did not have a material impact on the Company’s financial statements. Adoption of the remaining
guidance is not expected to have a material impact on the Company’s financial statements.



Note 3 — Restatement of Previously Issued Financial
Statements (Restated)



On December 1, 2011, the Company concluded that the Company's
previously issued unaudited financial statements as of and for the interim period ended December 31, 2010, contained errors in
the valuation of inventory and cost of goods sold. The Company has restated its previously issued condensed consolidated financial
statements as of and for the three months ended December 31, 2010, to correct the following errors:



| | · | During the reconciliation of the annual physical inventory count at
fiscal year-end, the Company determined that the journal entries to record the cost of goods sold each month during fiscal year
2011 contained errors as a result of unit of measure conversion issues with certain products. As a result of the unit of measure
errors, the Company's inventory balance was overstated and cost of sales was understated by $103,000 for the interim period ended
December 31, 2010; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8







| | · | Partially offsetting the adjustments to inventory and cost of sales,
the Company identified additional sales of $16,000 for the interim period ended December 31, 2010, that were not properly submitted
to insurance carriers due to the unit of measure issues identified.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following tables provide summary of amounts restated,
including tax effects of adjustments, due to the unit of measure errors as of and for the three months ended December 31, 2010
(dollars in thousands, except per share amounts):



|Balance Sheet Data:             |  | As Previously Reported |         |   | Current Period Effects |   |      | As Restated | 
|------------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ---- | ----------- | 
|Accounts receivable, net        |  | $                      | 6,408   |   |                        | $ | 16   |             | 
|Inventory, net                  |  |                        | 2,471   |   |                        |   | (103 | )           | 
|Deferred taxes, current portion |  |                        | 1,462   |   |                        |   | 2    |             | 
|Current Assets                  |  |                        | 18,207  |   |                        |   | (85  | )           | 
|Total Assets                    |  | $                      | 32,221  |   |                        | $ | (85  | )           | 
|                                |  |                        |         |   |                        |   |      |             | 
|Current Liabilities             |  | $                      | 6,611   |   |                        | $ | —    |             | 
|                                |  |                        |         |   |                        |   |      |             | 
|Deferred tax liability          |  |                        | 1,963   |   |                        |   | (41  | )           | 
|Total Liabilities               |  |                        | 8,683   |   |                        |   | (41  | )           | 
|Accumulated Deficit             |  |                        | (10,664 | ) |                        |   | (44  | )           | 
|Total Equity                    |  |                        | 23,538  |   |                        |   | (44  | )           | 
|Total Liabilities and Equity    |  | $                      | 32,221  |   |                        | $ | (85  | )           | 



|                                  |  | For the three months ended December 31, 2010 |       
|--------------------------------- |  | -------------------------------------------- | ------
|                                  |  |                                              |       
|Statement of Operations Data:     |  | As Previously Reported                       |       
|Sales                             |  | $                                            | 12,204
|Cost of Sales                     |  |                                              | 4,336 
|Gross Profit                      |  |                                              | 7,868 
|Total Operating Expenses          |  |                                              | 6,725 
|Income from Operations            |  |                                              | 1,143 
|Total Other Income (Expense)      |  |                                              | (929  
|Income before Income Taxes        |  |                                              | 214   
|Provision for Income Taxes        |  |                                              | 372   
|Net Income (Loss)                 |  | $                                            | (158  
|                                  |  |                                              |       
|Basic Earnings (Loss) per Share   |  | $                                            | (0.00 
|Diluted Earnings (Loss) per Share |  | $                                            | (0.00 



9







Note 4 — Stockholder Loans



The stockholder loans at September 30, 2010, in the amounts
of $565,000 consist of various 8% and 11% notes payable to the President and principal stockholder of the Company, Mark Libratore.
The notes payable were non-collateralized and due on demand. However, the notes were subordinated to the senior, unsecured, convertible
notes payable discussed below in Note 6. During the three months ended December 31, 2010, $565,000 of principal was repaid to Mr.
Libratore. Interest expense related to the stockholder loans for the three months ended December 31, 2010 and 2009 were $4,000,
and $31,000, respectively.



Note 5 — Credit Line Facility



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



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



In November and December 2009, the Company borrowed $750,000
from the credit line facility. In June 2010, the Company repaid the $750,000 balance under the credit line facility.



In September 2010, the Company elected not to renew the credit
line facility.



Interest expense related to the credit line facility for
the three months ended December 31, 2010 and 2009, was $0 and $2,000, respectively.



Note 6 — Convertible Notes Payable



April 2008 Convertible Notes



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



As of December 31, 2010, $711,000 of the notes has been converted
into 1,422,000 shares of the Company’s common stock and $93,000 of the notes has been redeemed for cash.



Interest expense related to the April 2008 convertible notes
was $0 and $16,000 for the three months ended December 31, 2010 and 2009, respectively.



10







May 2008 Convertible Note



On May 22, 2008, the Company closed a private placement consisting
of a convertible note and a warrant for gross proceeds of $3,500,000. The note was convertible into shares of our common stock
at an initial conversion price of $0.80 per share, subject to adjustment, and matured on May 22, 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 November 15 and May 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 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 warrants have a term of 5 years and are exercisable for up to 4,375,000 shares of our common stock at an exercise
price of $1.00 per share. The exercise price of the warrants will be reduced if, among other things, we issue shares of our common
stock or common stock equivalents at a price per share less than both the exercise price then in effect and the closing sale price
of our common stock for any of the 10 consecutive trading days immediately preceding such issuance, subject to certain exclusions.
The Company has concluded that the adjustment feature for the exercise price of the warrants is indexed to the Company’s
own stock, and, accordingly, has classified the warrants as equity instruments. In addition, we issued a warrant to the placement
agent exercisable for up to 350,000 shares of our common stock on terms substantially similar to the warrant issued in connection
with the note described above.



In May 2009, the Company entered into a Waiver Agreement
with the note holder of the May 2008 convertible notes discussed above. As part of the Waiver Agreement, the note holder agreed
to accept 104,137 shares of the Company’s common stock, with a fair market value of $68,000, in lieu of the Company’s
obligation to pay cash in the amount of $52,000 for interest payment that was due May 15, 2009 under the original terms of the
notes. As a result of this transaction, the Company incurred an additional $16,000 of interest expense that would not have been
incurred if the Company had paid the interest due in cash. The rights and obligations of the note holder and the Company with respect
to any future interest payments and the other terms of the note were in all other respects unchanged.



On May 11, 2010, the $3,500,000 note was converted into 4,375,000
shares of the Company’s common stock at a conversion price of $0.80 per share.



Interest expense related to the May 2008 convertible note
was $0 and $219,000 for the three months ended December 31, 2010 and 2009, respectively.



October 2008 Convertible Note



On October 17, 2008, the Company closed a private placement
consisting of a convertible note and a warrant for gross proceeds of $2,500,000. The note 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 warrants have a term of 3 years
and are exercisable for up to 1,166,667 shares of our common stock at an exercise price $1.25 per share. The exercise price of
the warrants will be reduced if, among other things, we issue shares of our common stock or common stock equivalents at a price
per share less than both the exercise price then in effect and the closing sale price of our common stock for any of the 10 consecutive
trading days immediately preceding such issuance, subject to certain exclusions. The Company has concluded that the adjustment
feature for the exercise price of the warrants is indexed to the Company’s own stock, and, accordingly, has classified the
warrants as equity instruments. In addition, we issued a warrant to the placement agent exercisable for up to 266,667 shares of
our common stock on terms substantially similar to the warrants issued in connection with the note described above.



11







In May 2009, the Company entered into Waiver Agreement with
the note holder of the October 2008 convertible note discussed above. As part of the Waiver Agreement, the note holder agreed to
accept 67,808 shares of the Company’s common stock, with a fair market value of $37,000, in lieu of the Company’s obligation
to pay cash in the amount of $34,000 for interest payments that were due April 15, 2009 under the original terms of the note. As
a result of this transaction, the Company incurred an additional $3,000 of interest expense that would not have been incurred if
the Company had paid the interest due in cash. The rights and obligations of the note holder and the Company with respect to any
future interest payments and the other terms of the notes were in all other respects unchanged.



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



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 $24,000 and $142,000 for the three months ended December 31, 2010 and 2009, respectively.



Short-term convertible notes payable consist of the following
as of September 30, 2010 (in thousands):



|                                                    |  | Oct’08 Note |      
|--------------------------------------------------- |  | ----------- | -----
|Notes Payable, face amount                          |  | $           | 2,500
|                                                    |  |             |      
|Discounts on Notes:                                 |  |             |      
|Initial valuation of Warrants                       |  |             | (86  
|Initial valuation of Bifurcated Embedded Derivative |  |             | (841 
|Accumulated Amortization                            |  |             | 906  
|Total Discounts                                     |  |             | (21  
|Accrued Interest                                    |  |             | 37   
|Convertible Notes Payable, net                      |  | $           | 2,516



NOTE 7 — Derivative Liabilities



The May 2008 and October 2008 convertible notes, discussed
above in Note 6, contained embedded adjustment features 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 features were not indexed
to the Company’s own stock and, therefore, were embedded derivative financial liabilities (the “Embedded Derivatives”)
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 Derivatives 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.



The fair values of the Embedded Derivatives at the transition
date, October 1, 2009, were $5,820,000, which was booked as a Derivative Liability on October 1, 2009. The fair values as of October
1, 2009, were calculated using a Monte Carlo simulation model with the following assumptions:



12







|                                           |  | May 2008 Note |            |   | October 2008 Note |  
|------------------------------------------ |  | ------------- | ---------- | - | ----------------- | -
|Risk-free interest rate:                   |  |               | 0.40       | % |                   |  
|Expected term:                             |  |               | 0.64 years |   |                   |  
|Expected dividend yield:                   |  |               | 0.00       | % |                   |  
|Expected volatility:                       |  |               | 56.03      | % |                   |  
|Probability of triggering reset provision: |  |               | 22.42      | % |                   |  
|Existing conversion price per share        |  | $             | 0.80       |   |                   | $
|Company’s stock price per share            |  | $             | 1.45       |   |                   | $



As of December 31, 2009, the fair values of the Embedded
Derivatives for the May 2008 and October 2008 Notes were $10,918,000. The increase in fair value of $5,098,000 from October 1,
2009, was recorded as non-cash charge to Other Expenses for the three months ended December 31, 2009. The fair values as of December
31, 2009, were calculated using a Monte Carlo simulation model with the following assumptions:



|                                           |  | May 2008 Note |            |   | October 2008 Note |  
|------------------------------------------ |  | ------------- | ---------- | - | ----------------- | -
|Risk-free interest rate:                   |  |               | 0.47       | % |                   |  
|Expected term:                             |  |               | 0.39 years |   |                   |  
|Expected dividend yield:                   |  |               | 0.00       | % |                   |  
|Expected volatility:                       |  |               | 51.99      | % |                   |  
|Probability of triggering reset provision: |  |               | 2.91       | % |                   |  
|Existing conversion price per share        |  | $             | 0.80       |   |                   | $
|Company’s stock price per share            |  | $             | 2.18       |   |                   | $



On May 11, 2010, the May 2008 Note for $3,500,000 was converted
into 4,375,000 shares of the Company’s common stock at a conversion price of $0.80 per share. The fair value of the Embedded
Derivative for the May 2008 Note as of the conversion date was $4,813,000 and was transferred from derivative liabilities to additional
paid-in capital.



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 $2.5 million 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 on October 15, 2010, $902,000 was recorded as an additional non-cash charge to earnings for the three months ended
December 31, 2010. As a result of the conversion, $2,600,000 was transferred into additional paid in capital.



13







Note 8 — Stockholders’ Equity



Warrants



A summary of warrants issued, exercised and expired during
the three months ended December 31, 2010, is as follows:



|                              |  |        |           |   | Weighted |  
|----------------------------- |  | ------ | --------- | - | -------- | -
|                              |  |        |           |   | Avg.     |  
|                              |  |        |           |   | Exercise |  
|Warrants:                     |  | Shares |           |   | Price    |  
|Balance at September 30, 2010 |  |        | 7,393,334 |   |          | $
|Issued                        |  |        | —         |   |          |  
|Exercised                     |  |        | —         |   |          |  
|Expired                       |  |        | (370,417  | ) |          |  
|Balance at December 31, 2010  |  |        | 7,022,917 |   |          | $



Employee and Director Stock Options



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



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



On October 21, 2010, Tyler Wick was appointed to the Board
of Directors of the Company. As part of the compensation for his services as a director, Mr. Wick was granted an option, vesting
over two years, to purchase 50,000 shares of common stock at $1.50 per share.



On December 29, 2010, the Board of Directors of the Company
approved a grant of 450,000 stock options under the 2007 Stock Plan to employees with an exercise price of $1.20 per share for
375,000 shares of the grant and an exercise price of $1.32 per share for 75,000 shares of the grant. The options vest 25% on January
1, 2011, 25% on July 1, 2011, 25% on January 1, 2012, and 25% on July 1, 2012.



The weighted-average grant date fair value of options granted
during the three months ended December 31, 2010 and 2009, was $0.40 and $1.03, respectively. There were no options exercised during
the three months ended December 31, 2010 and 2009. The fair values of stock-based awards granted during the three months ended
December 31, 2010 and 2009, were calculated with the following weighted-average assumptions:



|                         |  | 2010 |         |   | 2009 | 
|------------------------ |  | ---- | ------- | - | ---- | 
|                         |  |      |         |   |      | 
|Risk-free interest rate: |  |      | 1.05    | % |      | 
|Expected term:           |  |      | 3 years |   |      | 
|Expected dividend yield: |  |      | 0.00    | % |      | 
|Expected volatility:     |  |      | 48.91   | % |      | 



For the three months ended December 31, 2010 and 2009, the
Company recorded $118,000 and $55,000, 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 December 31, 2010, there is $343,000 in total unrecognized compensation expense related to non-vested employee stock options
granted under the 2007 Stock Plan, which is expected to be recognized over 1.8 years.



Stock option activity for the three months ended December
31, 2010, is summarized as follows:



|                                                        |  |        |           |  |          |   |      | Weighted    |  |  |           | 
|------------------------------------------------------- |  | ------ | --------- |  | -------- | - | ---- | ----------- |  |  | --------- | 
|                                                        |  |        |           |  | Weighted |   |      | Average     |  |  |           | 
|                                                        |  |        |           |  | Average  |   |      | Remaining   |  |  | Aggregate | 
|                                                        |  |        |           |  | Exercise |   |      | Contractual |  |  | Intrinsic | 
|2007 Stock Plan:                                        |  | Shares |           |  | Price    |   |      | Life (Yrs)  |  |  | Value     | 
|                                                        |  |        |           |  |          |   |      |             |  |  |           | 
|Options outstanding at September 30, 2010               |  |        | 1,655,000 |  |          | $ | 0.92 |             |  |  | 3.07      | 
|Granted                                                 |  |        | 500,000   |  |          |   | 1.25 |             |  |  |           | 
|Expired or forfeited                                    |  |        | —         |  |          |   | —    |             |  |  |           | 
|                                                        |  |        |           |  |          |   |      |             |  |  |           | 
|Options outstanding at December 31, 2010                |  |        | 2,155,000 |  |          | $ | 1.00 |             |  |  | 3.51      | 
|                                                        |  |        |           |  |          |   |      |             |  |  |           | 
|Options exercisable at December 31, 2010                |  |        | 1,143,750 |  |          | $ | 0.84 |             |  |  | 2.84      | 
|Options vested or expected to vest at December 31, 2010 |  |        | 2,155,000 |  |          | $ | 1.00 |             |  |  | 3.51      | 



14







2009 Employee Stock Purchase Plan



The 2009 Employee Stock Purchase Plan (the “ESPP”)
became effective June 10, 2009, the effective date of the registration statement filed on Form S-8 with the SEC. The ESPP provides
a means by which employees of the Company are given an opportunity to purchase common stock of the Company through payroll deductions.
The maximum number of shares to be offered under the ESPP is 500,000 shares of the Company’s common stock, subject to changes
authorized by the Board of Directors of the Company. Shares are offered through consecutive offering periods with durations of
approximately six (6) months, commencing on the first trading day on or after June 1st and November 30th
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 December 31, 2010, 237,840 shares of the Company’s
common stock have been purchased through the ESPP, using $168,000 of proceeds received from employee payroll deductions. For the
three months ended December 31, 2010 and 2009, the Company received $59,000 and $56,000, 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 three months
ended December 31, 2010 and 2009, the Company recognized $9,000 and $70,000, respectively, of compensation expense related to the
ESPP.



Note 9 — Income Taxes (Restated)



The Company had a net income tax provision for the quarter
ended December 31, 2010, of $329,000. Although the Company had net operating loss carry-forwards which completely offsets regular
taxable income, the Company incurred alternative minimum tax on its net alternative minimum taxable income of $1,000. In addition,
the Company incurred deferred tax expense of $328,000.



The Company’s effective tax rate was approximately
260% and 23% for the three months ended December 31, 2010 and 2009, respectively, which differ 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 expense related to the change in fair value of derivative liabilities. The effective tax rate for the three
months ended December 31, 2009, also reflects a $1,438,000 decrease to the valuation allowance for deferred tax assets which management
has determined will, more likely than not, be utilized.



Note 10 — Subsequent Event



On February 11, 2011, the Company entered into a Committed
Line of Credit agreement (the “Line of Credit Agreement”) with PNC Bank, National Association (the “Lender”).
Pursuant to the Line of Credit Agreement, the Lender will provide a maximum of Eight Million Five Hundred Thousand Dollars ($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 Line of Credit Agreement 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 Line of Credit Agreement expires in February 2013.



15













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, 2010, 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 consolidated financial statements and notes thereto included in this Form 10-Q/A and the audited financial statements
of the Company included in our Annual Report on Forms 10-K and 10-K/A for the year ended September 30, 2010, 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.



Overview



We are a leading national direct-to-consumer provider of
quality medical supplies to Medicare-eligible seniors. Liberator Medical Supply, Inc. (“LMS”), a wholly-owned subsidiary
of the Company, is a federally licensed, direct-to-consumer, provider of Medicare Part B Benefits. 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 products to meet the rapidly growing requirements
of general medical supplies, primarily diabetes supplies, catheters, ostomy supplies and mastectomy fashions. Customers may purchase
by phone, mail, or Internet, with repeat orders confirmed with the customer and shipped when needed.



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



Results of Operations



The following table summarizes the results of operations
for the three months ended December 31, 2010 and 2009, including percentage of sales (dollars in thousands):



|                                          |  | As Restated 2010 |        |   | 2009 | 
|----------------------------------------- |  | ---------------- | ------ | - | ---- | 
|                                          |  | Amount           |        |   | %    | 
|Sales                                     |  | $                | 12,220 |   |      | 
|Cost of Sales                             |  |                  | 4,439  |   |      | 
|Gross Profit                              |  |                  | 7,781  |   |      | 
|Operating Expenses                        |  |                  | 6,725  |   |      | 
|Income from Operations                    |  |                  | 1,056  |   |      | 
|Other Income (Expense)                    |  |                  | (929   | ) |      | 
|Income (Loss) Before Income Taxes         |  |                  | 127    |   |      | 
|Provision for (benefit from) Income Taxes |  |                  | 329    |   |      | 
|Net Loss                                  |  | $                | (202   | ) |      | 



16







Revenues:



Sales for the three months ended December 31, 2010, increased
by $3,062,000, or 33.4%, to $12,220,000, compared with sales of $9,158,000 for the three months ended December 31, 2009. The increase
in sales was primarily due to our continued emphasis on our direct response advertising campaign to obtain new customers and our
dedication to customer service to retain our recurring customer base. Our direct-response advertising expenditures for the three
months ended December 31, 2010, were $3,887,000 compared to $2,037,000 for the three months ended December 31, 2009.



Gross Profit:



Gross profit for the three months ended December 31, 2010,
increased by $1,871,000, or 31.7%, to $7,781,000, compared with gross profit of $5,910,000 for the three months ended December
31, 2009. The increase was attributed to our increased sales volume for the three months ended December 31, 2010, compared to the
three months ended December 31, 2009.



Operating Expenses:



The following table provides a breakdown of our operating
expenses for the three months ended December 31, 2010 and 2009, including percentage of sales (dollars in thousands):



|                            |  | 2010   |       |  | 2009 | 
|--------------------------- |  | ------ | ----- |  | ---- | 
|                            |  | Amount |       |  | %    | 
|Operating Expenses:         |  |        |       |  |      | 
|Payroll, taxes and benefits |  | $      | 2,841 |  |      | 
|Advertising                 |  |        | 1,901 |  |      | 
|Bad debts                   |  |        | 892   |  |      | 
|Depreciation                |  |        | 166   |  |      | 
|General and administration  |  |        | 925   |  |      | 
|Total Operating Expenses    |  | $      | 6,725 |  |      | 



Payroll, taxes and benefits increased by $672,000, or 31.0%,
to $2,841,000 for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. The increase
is primarily attributed to an increase in the number of employees to support our increased sales volume. We have chosen to invest
in recruiting, hiring, and training additional staff ahead of our advertising schedule, which helps us achieve compliance on many
fronts and maintain the quality of our customer service. As of December 31, 2010, we had 223 active employees compared to 187 at
December 31, 2009.



Advertising expenses increased by $1,095,000, or 135.9%,
to $1,901,000 for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. The majority
of our advertising expenses are associated with the amortization of previously capitalized direct response advertising costs. The
rest of our advertising expenses are 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 months ended December 31, 2010, and 2009 (dollars
in thousands):



|                                      |  | 2010 |       |  | 2009 |  
|------------------------------------- |  | ---- | ----- |  | ---- | -
|Advertising Expenses:                 |  |      |       |  |      |  
|Amortization of direct-response costs |  | $    | 1,845 |  |      | $
|Other advertising expenses            |  |      | 56    |  |      |  
|Total Advertising Expenses            |  | $    | 1,901 |  |      | $



17







As of December 31, 2010, we have $12,048,000 of deferred
advertising costs that will be expensed over a period between four and six years based on probable future net revenues updated
at each reporting period and expected to result directly from such advertising.



Bad debt expenses increased by $237,000, or 36.2%, to $892,000
for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. The increases in bad debt expenses
are due primarily to our increased sales levels.



Depreciation expense increased by $71,000, or 74.7%, to $166,000
for the three months ended December 31, 2010, compared to the three months ended December 31, 2009. The increase in depreciation
expense is primarily attributed to the build out of an additional 24,000 square foot facility during the first six months of fiscal
year 2010 to house our expanding workforce and provide the capacity necessary to support our future sales growth. Purchases of
property and equipment totaled $75,000 and $780,000 during the three months ended December 31, 2010 and 2009, respectively.



General and administrative expenses decreased by $100,000,
or 9.8%, to $925,000 for the three months ended December 31, 2010 compared to the three months ended December 31, 2009. The decreases
are due to the reduction of amortization costs associated with debt issuance costs, professional fees, and office expense; partially
offset by increases in software costs, equipment lease payments, and compensation for the board of directors. As a percentage of
sales, general and administrative expenses have decreased from 11.2% for the three months ended December 31, 2009, to 7.6% for
the three months ended December 31, 2010.



Income from Operations:



Income from operations for the three months ended December
31, 2010, decreased by $104,000 to $1,056,000, compared to the three months ended December 31, 2009. The decrease in operating
income is attributed to our increased investments in payroll, facilities, and advertising costs, partially offset by a reduction
in general and administrative costs.



Other Income (Expense):



The following table shows a breakdown of other income (expense)
for the three months ended December 31, 2010 and 2009 (dollars in thousands):



|                                               |  | 2010 |      |   | 2009 |  
|---------------------------------------------- |  | ---- | ---- | - | ---- | -
|Other Income (Expense):                        |  |      |      |   |      |  
|Interest Expense                               |  | $    | (31  | ) |      | $
|Change in fair value of derivative liabilities |  |      | (902 | ) |      |  
|Gain on sale of assets                         |  |      | 2    |   |      |  
|Interest income                                |  |      | 2    |   |      |  
|Total Other Income (Expense)                   |  | $    | (929 | ) |      | $



Other income (expense) is 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 three months ended December 31, 2010 and 2009, respectively, totaled $923,000 and $5,406,000.



Interest expense decreased by $384,000 to $31,000 for the
three months ended December 31, 2010, compared to the three months ended December 31, 2009. The decrease in interest expense was
due to reduced levels of debt during the three months ended December 31, 2010, as a result of the conversion of $6,452,000 of notes
into shares of our common stock and $1,315,000 of principal payments towards shareholder loans since December 31, 2009.

18







We are 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. The changes in fair value of the derivative liabilities at each interim period are very sensitive to changes in the
market price for our common stock. When the market price of our common stock increases, the fair value of the embedded derivatives
increases, resulting in additional non-cash charges to our earnings. Conversely, when the market price for our common stock declines,
the fair value of the embedded derivatives decreases, resulting in non-cash benefits to our earnings. The following table illustrates
the changes in the market price of our common stock and the changes in fair value of the derivative liabilities recorded in fiscal
year 2010 and the three months ended December 31, 2010 (dollars in thousands, except per share amounts):



|                                                                    |  |          |      |  | Change in     |  
|------------------------------------------------------------------- |  | -------- | ---- |  | ------------- | -
|                                                                    |  | Closing  |      |  | Fair Value of |  
|                                                                    |  | Market   |      |  | Derivative    |  
|                                                                    |  | Price of |      |  | Liabilities   |  
|                                                                    |  | Common   |      |  | Income /      |  
|                                                                    |  | Stock    |      |  | (Expense)     |  
|Interim period ended:                                               |  |          |      |  |               |  
|September 30, 2009, Q4 FY 2009                                      |  | $        | 1.45 |  |               | $
|December 31, 2009, Q1 FY 2010                                       |  |          | 2.18 |  |               |  
|March 31, 2010, Q2 FY 2010                                          |  |          | 2.20 |  |               |  
|June 30, 2010, Q3 FY 2010                                           |  |          | 1.49 |  |               |  
|September 30, 2010, Q4 FY 2010                                      |  |          | 1.26 |  |               |  
|October 15, 2010, Q1 FY 2011 (Conversion Date of $2.5 million note) |  |          | 1.53 |  |               |  
|Total change in fair value of derivative liabilities                |  |          |      |  |               | $



As a result of the increase in fair value of the embedded
derivatives from October 1, 2009, to December 31, 2009, $5,098,000 was recorded as a non-cash charge to earnings for the three
months ended December 31, 2009.

On May 11, 2010, the $3.5 million convertible note issued
in May 2008 was converted into shares of our common stock at a conversion price of $0.80 per share. As of September 30, 2010, derivatives
liabilities had a remaining balance of $1,698,000, which is related to the embedded derivative contained in the $2.5 million convertible
note due October 17, 2010.



On October 15, 2010, the $2.5 million 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 on October 15, 2010, $902,000 was recorded as an additional non-cash charge to earnings for the three
months ended December 31, 2010. As a result of the conversion, $5.1 million, which is the balance of the derivative liabilities
plus the face value of the convertible note, was transferred into additional paid in capital, eliminating any additional exposure
to changes in fair value of the derivative liabilities associated with the convertible debt issued in May and October 2008 since
the notes have been converted into shares of our common stock.



Income Taxes:



The provision for income taxes was $329,000 for the three
months ended December 31, 2010. The effective tax rate was approximately 260% of the income before income taxes of $127,000, 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 three months ended December 31, 2010.



The benefit for income taxes was $1,006,000 for the three
months ended December 31, 2009. The effective tax rate was approximately 23% of the loss before income taxes of $4,351,000, which
differs from the federal statutory rate of 35% due to the effect of state income taxes, a $1,438,000 decrease to the valuation
allowance for deferred tax assets that management has determined will, more likely than not, be utilized, and certain of the Company’s
expenses that are not deductible for income tax purposes, primarily consisting of $5,098,000 of expense for the change in fair
value of derivative liabilities.

19







Liquidity and Capital Resources



The following table summarizes our cash flows from operating,
investing, and financing activities for the three months ended December 31, 2010 and 2009 (dollars in thousands):



|                                                    |  | For the Three Months Ended |      
|--------------------------------------------------- |  | -------------------------- | -----
|                                                    |  | December 31,               |      
|                                                    |  | 2010                       |      
|Cash Flows:                                         |  |                            |      
|Net cash provided by (used in) operating activities |  | $                          | 597  
|Net cash used in investing activities               |  |                            | (72  
|Net cash provided by (used in) financing activities |  |                            | (523 
|Net increase (decrease) in cash                     |  |                            | 2    
|Cash at beginning of period                         |  |                            | 7,428
|Cash at end of period                               |  | $                          | 7,430



The Company had cash of $7,430,000 at December 31, 2010,
compared to cash of $7,428,000 at September 30, 2010, an increase of $2,000. The increase in cash for the three months ended December
31, 2010, is primarily due to $597,000 of cash generated from operating activities and $59,000 of proceeds from the employee stock
purchase plan, partially offset by payments of $582,000 on our debt obligations and $75,000 for purchases of property and equipment.



Operating Activities



During the three months ended December 31, 2010, cash provided
by operations was $597,000, which was the result of a net loss of $202,000 plus non-cash charges of $4,368,000 less changes in
operating assets and liabilities of $3,569,000. The non-cash charges consist primarily of $1,845,000 for amortization of deferred
advertising costs, $902,000 for the change in fair value of derivative liabilities, $892,000 for bad debt expense, $328,000 for
deferred income taxes, $166,000 for depreciation, $128,000 for equity based compensation associated with employee and director
stock options, and $87,000 for increase in reserve for returns and adjustments. The changes in operating assets and liabilities
for the three months ended December 31, 2010 consist of $3,887,000 of deferred advertising expenditures related to our direct response
advertising efforts, increases for accounts receivable of $659,000 and inventory of $383,000 as a result of our increased sales,
and a decrease of $283,000 for accrued expenses primarily related to the payment of management incentives in October 2010, partially
offset by an increase in accounts payable of $1,804,000 due to increased purchases and improved vendor payment terms for our higher
volume items.



During the three months ended December 31, 2009, cash used
in operations was $324,000, which was the result of a net loss of $3,345,000 plus non-cash charges of $6,252,000 less changes in
operating assets and liabilities of $3,231,000. The non-cash charges consist primarily of $5,098,000 for the change in fair value
of derivative liabilities, $809,000 for amortization of deferred advertising costs, $655,000 for bad debt expense, $353,000 for
non-cash interest expense related to convertible notes payable, $133,000 for equity based compensation associated with employee
and director stock options, $107,000 for increase in the reserve for returns and adjustments, and $95,000 for depreciation; less,
$1,009,000 for deferred income taxes. The changes in operating assets and liabilities for the three months ended December 31, 2009,
consist of $2,037,000 of deferred advertising expenditures related to our direct response advertising efforts, increases for accounts
receivable of $1,576,000 and inventory of $31,000 as a result of our increased sales, and a decrease of $179,000 for accrued expenses
primarily related to the payment of management incentives in October 2009, partially offset by an increase in accounts payable
of $744,000 due to increased purchases.



Investing Activities



During the three months ended December 31, 2010, we purchased
$75,000 of property and equipment to support our continued growth.



During the three months ended December 31, 2009, we purchased
$780,000 of property and equipment primarily related to the build out of our new 24,000 square foot facility, into which we moved
in January 2010. In addition, we purchased a $550,000 certificate of deposit as additional security for a $1,000,000 credit line
facility discussed above in Note 5 of the unaudited condensed consolidated financial statements.



20







Financing Activities



During the three months ended December 31, 2010, cash used
in financing activities was $523,000, which included payments of $582,000 towards our debt obligations, partially offset by $59,000
of proceeds from our employee stock purchase plan.



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



Outlook



The Company has experienced substantial growth over the past
three fiscal years despite the downturn in the U.S. economy. We have increased sales for eleven consecutive quarters. Our growth
has been driven by our direct response marketing campaign, primarily through television ads at remnant (discounted) rates. Based
on information from our media buying agents, we believe that demand for television time slots within the direct response advertising
market has increased over the last fiscal year, creating a more competitive environment within this medium. Although customer acquisition
costs remain at acceptable levels, during fiscal year 2010 and the first three months of fiscal year 2011, we increased our spending
in alternative media channels and plan to continue those efforts during the remainder of fiscal year 2011. In addition, we have
invested heavily in our infrastructure by adding both personnel and facilities, so that we continue to remain capable of supporting
a much higher sales volume. We currently have approximately 50% of each of our facilities available for future growth. We have
chosen to build our infrastructure ahead of our advertising spend, which helps us achieve compliance on many fronts and maintain
the quality of our customer service. Our cost structure continues to remain flexible enough to adapt to changing market conditions.
We can pulse our advertising spend and the expansion of our workforce relatively quickly based on the results of our marketing
programs. We believe we are well positioned to continue to grow our sales and improve profitability over the long term.



We plan to continue our advertising efforts over the next
twelve months to attract new customers and expand our operations to service our new and existing customers. The outlook for demand
for our products and services is favorable, as there should be an increase in newly-diagnosed patients requiring the medical supplies
that we provide. We expect our revenues to continue to grow over the next three quarters of fiscal year 2011 due to our advertising
and marketing programs. The Company does not anticipate any major changes affecting the Company in Medicare reimbursement in 2011,
nor in any other reimbursement programs available from other third-party payers.



Due to our emphasis on sales growth through our direct-response
advertising efforts, we may be required to raise additional cash, preferably through debt facilities versus the sale of additional
equity, in order to maintain our current growth rates. As of December 31, 2010, we had $7.4 million of cash available to fund our
operations. We believe that existing cash and cash equivalents, together with cash generated from the collection of accounts receivable,
and the sale of products will be sufficient to meet our cash requirements during the next twelve months.



At December 31, 2010, our current assets of $18,122,000 exceeded
our current liabilities of $6,611,000 by $11,511,000.



Our plan for the next twelve months includes the following:



| | • | Continue our advertising and marketing efforts;
| | - | -----------------------------------------------



| | • | Increase our customer base;
| | - | ---------------------------



| | • | Continue to service our current customer base and increase the retention rate;
| | - | ------------------------------------------------------------------------------



21







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



| | • | Increase our accounts receivable collection efforts.
| | - | ----------------------------------------------------



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



| | • | Identified and presented to many large funding sources, soliciting terms for long-term capital in the form of debt, equity
or a combination of both;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Expanded our Board of Directors to include five directors, four of whom are non-employee directors, and formed an Audit Committee,
a Compensation Committee, and a Governance and Nominating Committee;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Identified products and related target customers through extensive market research;
| | - | -----------------------------------------------------------------------------------



| | • | Established efficient and cost-effective methods to reach qualified customers;
| | - | ------------------------------------------------------------------------------



| | • | Established an infrastructure of management and knowledgeable staff to support substantial growth in sales with a minimal amount
of additional staff members, maximizing our revenue per employee;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Leased an additional 24,000 square foot facility to house our expanding workforce and support our continued growth. We completed
the build out of this facility to house our call center and other administrative functions and moved into the new facility in January,
2010.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Created a HIPAA compliant IT infrastructure and staff to accommodate additional growth in sales;
| | - | ------------------------------------------------------------------------------------------------



| | • | Established a marketing plan that can be monitored for effectiveness and is flexible enough to adapt to changing market conditions;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| | • | Established methods of testing our current and new advertising methods to meet changing market conditions.
| | - | ----------------------------------------------------------------------------------------------------------



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



Off-Balance Sheet Arrangements



As of December 31, 2010, 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/A for the
year ended September 30, 2010, for discussion of significant accounting policies, recent accounting pronouncements and their effect,
if any, on the Company.



Effect of Inflation



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



Item 3. Qualitative and Quantitative Disclosure about
Market Risk



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



22







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 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
December 31, 2010. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure
controls and procedures were not effective due to material weaknesses identified in the Company’s internal control over financial
reporting described below.



Management’s Report on Internal Control Over Financial
Reporting



A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.



Under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our internal control over financial reporting
as of December 31, 2010, as required by Securities Exchange Act Rule 13a-15(c). In making our assessment, we have utilized the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control —Integrated
Framework. We concluded that based on our evaluation, our internal control over financial reporting was not effective as of December
31, 2010 due to material weaknesses identified as follows:



| | · | Assess and Identify the Impact of Recently Issued
Accounting Pronouncements:The Company’s procedures to assess and identify the impact of Recently Issued Accounting Pronouncements
were not sufficient, as evidenced by the Company’s failure to timely identify the impact of ASC 815-40-15, “Derivatives
and Hedging — Contracts in Entity’s Own Equity (Scope and Scope Exceptions),” which became effective for the
Company on October 1, 2009. The Company did not become aware of the new guidance until June 2010, and the impacts of the accounting
guidance were not properly identified by the Company until December 2010. As a result, the Company determined that the previously
issued interim financial statements for fiscal year 2010 should no longer be relied upon, which resulted in the restatement of
the interim financial statements for the interim period ending December 31, 2009. The Company plans to file restated interim financial
statements for the interim periods ending March 31, 2010, and June 30, 2010.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Documentation of Accounting Review and Approval Process:In connection with the audit of our consolidated financial statements for the fiscal year ended September 30, 2010, our independent
registered accounting firm reported to our Board of Directors that they observed inadequate documented review and approval of certain
aspects of the accounting process including the documented review of accounting reconciliations and journal entries that they considered
to be a material weakness in internal control. After a review of our current review and approval of certain aspects of the accounting
process, management concluded that the inadequate documented review and approval process represented a material weakness.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Inventory Controls: Management has identified a material weakness
related to the Company’s procedures to account for inventory. During the reconciliation of the annual physical inventory
count at fiscal year-end, the Company determined that the journal entries to record the cost of goods sold each month contained
errors as a result of unit of measure conversion issues with certain products that were sold in each month of fiscal year 2011.
As a result, the Company has amended its Report on Form 10-Q for the first quarter of fiscal year 2011 and will amend its Reports
on Form 10-Q for the second and third quarters of fiscal year 2011.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23







Change in Internal Control over Financial Reporting



During the three months ended December 31, 2010, the Company
remediated the following material weaknesses previously disclosed in the Company’s Annual Report for fiscal year 2010 filed
with the SEC on Form 10-K:



| | · | Accounting for Derivative Financial Instruments:Management has identified a material weakness related to accounting for embedded derivatives included in certain convertible
notes payable that were outstanding when ASC 815-40-15 became effective for the Company on October 1, 2009. When the Company first
assessed the impacts of ASC 815-40-15, management erred in its conclusion that certain embedded derivatives met the scope exceptions
of ASC 815-40-15 and did not require adjustments to its accounting. The Company lacked a technical review process which might have
enabled the Company to identify the error and prevent a misstatement of the Company’s interim financial statements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Remediation:The Company engaged an independent
third party valuation expert to calculate the fair values of the embedded derivative liabilities and correctly accounted for the
embedded derivatives contained in certain convertible notes payable. The Company has restated the interim financial statements
for the interim period ending December 31, 2009. The Company plans to file restated interim financial statements for the interim
periods ending March 31, 2010, and June 30, 2010.



| | · | Accounting for Deferred Direct-Response Advertising Costs:Management
has identified a material weakness related to the classification and measurement of our capitalized direct-response advertising
costs due to the following:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | The Company had not previously defined what constituted a “separate stand-alone cost pool” as defined by ASC 340-20-35-1.
| | - | -------------------------------------------------------------------------------------------------------------------------



| | - | The amortization of capitalized direct-response advertising costs was not calculated by taking the
ratio of current period revenues over the total period revenues associated with each cost pool as required by ASC 340-20-35-3.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Prior to September 30, 2010, the Company had reflected both a current and long term portion of the
assets on the consolidated balance sheet. In accordance with an SEC interpretation (SPCH.T.1995.22.Glynn), the SEC would object
to the classification of any unamortized cost of advertising as a current asset. This resulted in the Company reclassifying the
fiscal year 2009 comparative balance to conform to the current fiscal year classification.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Remediation:During the first quarter of
fiscal year 2011 and before we filed our Annual Report for fiscal year 2010 with the SEC on Form 10-K, management completed the
above analysis as required, including defining separate stand-alone cost pools. In addition, management determined that no restatements
of prior period financial statements were required as a result of the above analysis.



Remediation of Material Weaknesses in Internal Control
over Financial Reporting



In order to remediate the material weaknesses in internal
control over financial reporting, the Company is in the process of finalizing a remediation plan, under the direction of the Company’s
Audit Committee, and intends to implement improvements during fiscal year 2011 as follows:



| | · | Subscribe to an outside service that provides the Company’s
Chief Financial Officer and Controller with timely guidance on Recently Issued Accounting Pronouncements. In addition, the Company
intends to supplement its current interim and annual financial reporting processes with documentation of the Controller’s
and Chief Financial Officer’s review and assessment of the timing and impacts, if any, that the new accounting pronouncements
will have on the Company’s financial statements; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Document all significant accounting policies and ensure
that the accounting policies are in accordance with accounting principles generally accepted in the United States and that internal
controls are designed effectively to ensure that the financial information is properly reported. Management will engage independent
accounting specialists to ensure that there is an independent verification of the accounting positions taken.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24







| | · | In connection with the reported inadequate documented
review and approval of certain aspects of the accounting process, management has plans to review the current review and approval
processes and implement changes to ensure that all accounting reconciliations and journal entries are reviewed and approved on
a timely basis and that this review is documented by a member of management separate from the preparer.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The Company plans on evaluating new inventory systems during fiscal
year 2012. Until a new perpetual inventory system is implemented and the appropriate controls are put in place, the Company will
conduct quarterly physical inventories for each future reporting period. During the first quarter of fiscal year 2012, additional
analytical procedures will be implemented for the Company's monthly cost of goods sold journal entries and additional testing of
cut-off controls will be performed at each interim period.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25







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/A for the fiscal year ended September 30, 2010. 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



During the three months ended December 31, 2010, the Company
issued 3,333,333 shares of common stock upon the conversion of convertible notes payable. The securities were issued in reliance
upon the exemptions from registration provided by Regulation D, Rule 506, and Section 4(2) of the Securities Act of 1933, as amended.



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



26







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               | February 13, 2012
|--------------------- | ----------------------- | -----------------
|Mark A. Libratore     |                         |                  
|                      |                         |                  
|/s/ Robert J. Davis   | Chief Financial Officer | February 13, 2012
|Robert J. Davis       |                         |                  





27