UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549


FORM 10-K


(Mark One)


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


For
the fiscal year ended September 30, 2009


o
            
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
    1934


For the transition period fromto


Commission
file number 1-13602


The Female Health
Company


(Name of
registrant as specified in its charter)


Wisconsin
            
            39-1144397(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)515 N. State Street, Suite
      2225, Chicago, Illinois
            
            60654(Address
      of principal executive offices)
            
            (Zip
      Code)


Registrant’s
telephone number, including area code (312) 595-9123


Securities
registered under Section 12(b) of the Act:


Title
      of each class
            
            Name
      of each exchange on which registeredCommon stock, $.01 par
      value
            
            NASDAQ
      Stock Market


Securities
registered under Section 12(g) of the Act:


None


(Title of
Class)


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




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ




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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
proceeding 12 months (or for such shorter period that the registrant was
required to submit and post such files).  Yes o No o




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





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
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large accelerated
      filer   o
            Accelerated
      filer   oNon-accelerated
      file   o
              (Do not
      check if a smaller reporting company)
            Smaller reporting
      company   þ




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





The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 31, 2009, was approximately $68.6 million based on
the per share closing price as of March 31, 2009 quoted on the NYSE Amex for the
registrant’s common stock, which was $3.69.





There
were 26,569,461 shares of the registrant’s common stock, $0.01 par value per
share outstanding at December 10, 2009.




DOCUMENTS
INCORPORATED BY REFERENCE:








2





THE FEMALE HEALTH COMPANY





FORM
10-K





SEPTEMBER
30, 2009





TABLE
OF CONTENTS





PART
      I
            PageItem
      1.
            Business
            
            5Item
      2.
            Properties
            
            14Item
      3.
            Legal
      Proceedings
            
            14Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            14PART
      IIItem
      5.
            Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            
            15Item
      6.
            Selected
      Financial Data
            
            18Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            18Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            25Item
      8.
            Financial
      Statements and Supplementary Data
            
            26Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            
            26Item
      9A(T).
            Controls
      and Procedures
            
            26Item
      9B.
            Other
      Information
            
            27PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            
            28Item
      11.
            Executive
      Compensation
            
            33Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            38Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            
            41Item
      14.
            Principal
      Accounting Fees and Services
            
            42PART
      IVItem
      15.
            Exhibits,
      Financial Statement Schedules
            
            43Signatures
            
            47










3








FORWARD-LOOKING
STATEMENTS





Certain
statements included in this Annual Report on Form 10-K which are not statements
of historical fact are intended to be, and are hereby identified as,
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: the Company's inability to secure adequate capital
to fund operations, working capital requirements, advertising and promotional
expenditures and principal and interest payments on debt obligations; factors
related to increased competition from existing and new competitors including new
product introduction, price reduction and increased spending on marketing;
limitations on the Company's opportunities to enter into and/or renew agreements
with international partners, the failure of the Company or its partners to
successfully market, sell, and deliver its product in international markets, and
risks inherent in doing business on an international level, such as laws
governing medical devices that differ from those in the U.S., unexpected changes
in the regulatory requirements, political risks, export restrictions, tariffs,
and other trade barriers, and fluctuations in currency exchange rates; the
disruption of production at the Company's manufacturing facilities due to raw
material shortages, labor shortages, and/or physical damage to the Company's
facilities; the Company's inability to manage its growth and to adapt its
administrative, operational and financial control systems to the needs of the
expanded entity and the failure of management to anticipate, respond to and
manage changing business conditions; the loss of the services of executive
officers and other key employees and the Company's continued ability to attract
and retain highly-skilled and qualified personnel; the costs and other effects
of litigation, governmental investigations, legal and administrative cases and
proceedings, settlements and investigations; and developments or assertions by
or against the Company relating to intellectual property rights.








4





PART
I





Item 1.
Business





General





The
Female Health Company ("FHC" or the "Company") manufactures markets and sells
the FC2 female condom, the only currently available product under a woman's
control that is approved by the U.S. Food and Drug Administration (FDA). FC2
provides dual protection against unintended pregnancy and sexually transmitted
infections ("STIs"), including HIV/AIDS. In October 2009, the Company completed
the transition from its first generation product, FC1, to its second generation
product, FC2, and production of FC1 ceased.  Although FC1 production
has ceased, the Company retains its ownership of certain world-wide rights to
FC1, as well as various patents, regulatory approvals and other intellectual
property related to FC1.





In 2005,
the Company announced it had developed a second-generation product,
FC2.  The Company had four reasons for developing a second-generation
product:





1.
            Increase
      women’s access to prevention that they could initiate through a lower
      public sector price


2.
            Increase
      HIV/AIDS prevention


3.
            Lower
      health care costs


4.
            Increase
      gross margins





FC2 was
first marketed internationally in March 2007 and in the U.S. in August
2009.





Certain
studies have shown that the design and method of use of FC2 is similar to FC1
and that FC2 performs in a comparable manner to FC1 in terms of safety, failure
rates and acceptability.  FC2 is currently available in approximately
105 countries.  It is sold directly to consumers in 8
countries.





On March
10, 2009, FC2 received FDA approval as a Class III medical
device.  FC2 became available in the United States in
August 2009. FDA approval also enabled the United States Agency for
International Development (USAID) to procure FC2 for distribution for global
HIV/AIDS prevention programs.  In addition to FDA approval, the FC2
female condom has been approved by other regulatory agencies, including the
European Union, India and Brazil.  In addition, based on a rigorous
scientific review in 2006, the World Health Organization (WHO) agreed that FC2
does perform in the same manner as FC1 and cleared FC2 for purchase by UN
agencies.  From introduction through September 30, 2009, nearly
40 million FC2 female condoms have been distributed in 105 countries. The FDA
approval permitted the Company to transition from FC1 to FC2.  The
last shipments of FC1 were produced in October 2009.





In June
2009, the Company transferred the listing of its common stock from the NYSE Amex
to the NASDAQ Capital Market and the Company's common stock began trading on the
NASDAQ Capital Market on June 9, 2009, under the symbol “FHCO”.








5





In June
2009, the Company was added to the Russell 2000 index.  The Russell
2000 Index measures the performance of the small-cap segment of the U.S. equity
universe.  The Russell 2000 Index is a subset of the Russell 3000
Index representing approximately 8% of the total market capitalization of that
index.





In July
2009, Fortune Small Business ranked the Company No. 8 on its list of America’s
100 Fastest Growing Small Public Companies.  The companies, with
revenues of less than $200 million and with a stock price of at least $1, are
ranked by their three year annualized rates of revenue growth and total return
to investors.  For the first time, the rankings excluded companies
with losses in any of the four quarters ended on or before December 31, 2008, so
every company included this year managed to stay profitable through the
recession.





On August
5, 2009, the Company announced to its UK employees that the Company was
evaluating the future of its UK facility upon the decision of two of
its  largest customers to switch their purchases from the first
generation product, FC1, manufactured in the UK facility, to the second
generation product, FC2, which is manufactured in Malaysia. As is required by
British labor law, the Company went through an evaluation process, working in
tandem with employee representatives, in which various manufacturing
alternatives were considered.  As the Company was unable to identify a
satisfactory alternative, the facility’s manufacturing operations ceased in
October 2009.  In fiscal 2009, the Company incurred a one-time charge
of approximately $1.5 million for restructuring costs, including redundancy
payments to terminated employees and associated expenses, related to the
cessation of FC1 manufacturing at its UK facility. The evaluation process, which
began on August 5, 2009, concluded late in November 2009, when employees
received their redundancy payments. The cash portion of the restructuring costs
was funded internally.





Company
History





The
female condom was invented by a Danish physician who obtained a U.S. patent for
the product in 1988. The physician subsequently sold certain rights to the
condom to Chartex Resources Limited. In the years that followed, Chartex, with
resources provided by a Danish entrepreneur and a nonprofit Danish foundation,
developed the manufacturing processes and completed other activities associated
with bringing the female condom to market in certain non-U.S. countries. The
Company, known as Wisconsin Pharmacal Company, Inc. (the Company's predecessor),
owned certain rights to the female condom in the U.S., Canada and Mexico,
pursued the pre-clinical and clinical studies and overall development of the
product for worldwide use and U.S. FDA approval of the product.





The
Female Health Company is the successor to Wisconsin Pharmacal Company, Inc., a
company which previously manufactured and marketed a wide variety of disparate
specialty chemical and branded consumer products in addition to owning certain
rights to the female condom described above. The Company was originally
incorporated in Wisconsin in 1971.





In fiscal
1995, the Company's Board of Directors approved a plan to complete a series of
actions designed, in part, to maximize the potential of the female condom.
First, the Company re-structured and transferred all of the assets and
liabilities of the Company other than those related primarily to the female
condom to a newly formed, wholly-owned subsidiary of the Company, WPC Holdings,
Inc. ("Holdings"). In January 1996, the Company sold Holdings to an unrelated
third party. Then, in February 1996, the Company acquired Chartex (renamed The
Female Health Company - UK in 1997), the manufacturer and owner of certain
worldwide rights to, and the Company's sole supplier of, the female condom. As a
result of the sale of Holdings and the acquisition of Chartex, The Female Health
Company evolved to its current state with its sole business consisting of the
manufacture, marketing and sale of the female condoms.





6





The FDA
approved FC1 for distribution in the U.S. in 1993 and approved the Company's UK
FC1 manufacturing facility in 1994. In March 2009, the FDA approved FC2 for
distribution.  Since the first FDA approval in 1993, the Company has
sold about 214 million FC female condoms (FC1 and FC2) around the
world.





Strategy





The
Company’s strategy is to more fully develop the market for the FC2 female
condoms on a global basis. Since the introduction of its first generation
product, FC1, the Company has developed contacts and relationships with global
public health sector organizations such as WHO, the United Nations Population
Fund (UNFPA), the Joint United Nations Joint Programme on HIV/AIDS
(UNAIDS),  the U.S. Agency for International Development (USAID),
country-specific health ministries and non-governmental organizations (NGOs),
and commercial partners in various countries. To provide its customers with
prevention programs and technical product support, the Company has placed
representatives in the major regions of the world: Asia, Africa, Europe, North
America and Latin America. The Company manufactured the first generation
product, FC1, in London, England.  To accelerate market penetration
and increase volume, the Company developed FC2, a nitrile polymer product less
costly to produce which is available at a lower price than the price at which
FC1 had been available.  FC2 is currently being produced at the
Company’s facility in Selangor D.E., Malaysia and in Kochi, India, in
conjunction with FHC’s business partner, Hindustan Lifecare Limited (“HLL”). The
Company made its first substantial sales of FC2 in the second quarter of fiscal
2007. In fiscal 2009, FC2 comprised 51% of the units sold compared to 40% in
fiscal 2008.





With the
product’s primary market currently being the public sector, the Company incurs
minimal sales and marketing expense.  Thus, as the demand for the
female condom continues to grow in the public sector, the Company’s operating
expenses are likely to grow at a much lower rate than that of
volume.





Products





Currently,
there are only three FDA approved products marketed that prevent the
transmission of HIV/AIDS through sexual intercourse: the male latex condom, the
male polyurethane condom, and the FC2 female condom made of a nitrile polymer.
The FC2 female condom is currently the only FDA approved and marketed product
controlled by women that prevents sexually transmitted infections including
HIV/AIDS. Used consistently and correctly, it provides women dual protection
against STI’s (including HIV/AIDS) and unintended pregnancy.  The FC2
female condom does not compete with the male condom, but is an alternative to
either unprotected sex or to male condom usage.





7





Numerous
clinical and behavioral studies have been conducted regarding use of the female
condom. Studies show that the female condom is found acceptable by women and
their partners in many cultures. Importantly, studies also show that when the
female condom is made available with male condoms there is a significant
increase in protected sex acts. The increase in protected sex acts varies
by country and averages between 10% and 35%.





In
September 2005, FHC completed development of FC2, its second generation female
condom. FC2 has basically the same physical design, specifications, safety
and efficacy profile as FC1. Manufactured from a nitrile polymer, FC2 can be
produced more economically than the first generation product made from
polyurethane, a more costly raw material. FC2 consists of a soft, loose
fitting sheath and two flexible O rings. One of the rings is used to insert the
device and helps to hold it in place. The other ring remains outside the vagina
after insertion. FC2 lines the vagina, preventing skin-to-skin contact during
intercourse.





On March
10, 2009, FC2 received FDA approval as a Class III medical device. FC2
became available in the United States in August 2009. FC2’s FDA approval
also enabled the United States Agency for International Development (USAID) to
procure it for distribution for global HIV/AIDS prevention programs. In
addition to FDA approval, the FC2 female condom has been approved by other
regulatory agencies, including the European Union, India and
Brazil.  In 2006, based on a rigorous scientific review, the World
Health Organization (WHO) agreed that FC2 does perform in the same manner as FC1
and cleared FC2 for purchase by UN agencies.





The raw
material of which FC2 is manufactured offer a number of benefits over latex, the
material that is most commonly used in male condoms.  Its nitrile
polymer is stronger than latex, reducing the probability that the female condom
sheath will tear during use. Unlike latex, FC2’s nitrile polymer quickly
transfers heat, so the FC2 female condom immediately warms to body temperature
when it is inserted, which may enhance pleasure and sensation during use. Unlike
the male condom, FC2 may be inserted in advance of arousal, eliminating
disruption during sexual intimacy. FC2 offers an alternative to latex sensitive
users (7% to 20% of the population) who are unable to use male condoms without
irritation. To the Company's knowledge, to date there is no reported allergy to
the nitrile polymer.




FC2 is
pre-lubricated and disposable and is recommended for use during a single sex
act.  FC2 is not reusable.





Cost
Effectiveness of the Female Condom




A study
entitled "Cost-effectiveness of the female condom in preventing HIV and STDs in
commercial sex workers in South Africa" was reported in the Journal
of Social Science and Medicine in 2001. This study shows that making FC1
available was highly cost effective in reducing public health costs in
developing countries as well as in the U.S.





8





In
October 2006, a study regarding FC2 entitled “Country-wide distribution of the
nitrile female condom (FC2) in Brazil and South Africa: a cost effectiveness
analysis” was published in AIDS.  The study
concludes that expanded distribution of FC2 in Brazil and South Africa may avert
hundreds to thousands of HIV infections annually at an incremental cost to
government or donors that is less than that of antiretroviral
therapy.  The study also found that if only 16.6 million female
condoms were distributed in South Africa, almost 10,000 HIV infections would be
prevented.  If 53.7 million female condoms were distributed, 32,000
HIV infections would be prevented.  Comparing the dollar value of
health care costs averted with the cost of distributing the female condoms, the
total cost savings would be between $5.3 million and $35.7
million.  Similarly, if 26.2 million condoms were distributed in
Brazil, 600 HIV infections would be averted.  If 84.8 million condoms
were distributed, 2,000 new HIV infections would be prevented.  In
total, the savings in Brazil alone could range from $1.1 million to $27
million.





Global
Market Potential





The only
means of preventing sexual transmission of HIV/AIDS, besides abstinence, is
condoms, male and female.  In recent years, scientists have sought to
develop alternative means of preventing HIV/AIDS.  Unfortunately, the
development attempts have not been successful to date:  four
microbicides have failed in clinical trials and the most promising HIV/AIDS
vaccine under development has also failed.  Thus, HIV/AIDS prevention
is focused on condoms, male and female.  The Company’s female condom
is the only product, when used consistently and correctly, that gives a woman
control over her sexual health by providing dual protection against sexually
transmitted infections (including HIV/AIDS), and unintended
pregnancy.





The first
clinical evidence of AIDS was noted more than twenty-five years
ago.  Since then, HIV/AIDS has become the most devastating pandemic
facing humankind in recorded history. On November 9, 2009, WHO released
statistics indicating that on a world-wide basis, HIV/AIDS is now the leading
cause of death women 15 to 44 years old. In the United States, the Centers for
Disease Control and Prevention (CDC) reported in 2006 that the HIV/AIDS epidemic
is taking an increasing toll on women and girls. Women of color, particularly
Black women, have been especially hard hit and represent the majority of new HIV
and AIDS cases among women, and the majority of women living with the
disease.  Data from the 2005 census show that together, African
American and Hispanic women represent 24% of all U.S. women.  However,
women in these two groups accounted for 82% of the estimated total of AIDS
diagnoses for women in 2005.





For the
most recent year in which data are available (2004), the CDC reported that HIV
infection was:





●
            the
      leading cause of death for African American women aged 25-34
      years;


●
            the
      3rd
      leading cause of death for African American women aged 35-44 years;
      and


●
            the
      4th
      leading cause of death for African American women aged 45-54 years;
      and


●
            the
      4th
      leading cause of death for Hispanic women aged
  35-44.





Most
HIV/AIDS diagnoses among women are due to high-risk heterosexual contact (80% in
2005).  The rate of AIDS diagnosis for black women was approximately
23 times the rate for white women, while the prevalence rate among Hispanic
women was more than four times that of white women.





9





In March
2008, the CDC announced that a recent study indicated that 26% of female
adolescents in the United States have at least one of the most common sexually
transmitted infections (STI’s).  Led by the CDC’s Sara Forhan, the
study is the first to examine the combined national prevalence of common STI’s
among adolescent women in the United States.





In
addition to overall STI prevalence, the study found that by race, African
American teenage girls had the highest prevalence, with an overall prevalence of
48 percent compared to 20 percent among both whites and Mexican
Americans.  Overall, approximately half of all the teens in the study
reported ever having sex.  Among these girls, the STI prevalence was
40 percent.





The
Condom Market





The
global male condom market (public and private sector) is estimated to be $3
billion annually.  The global public sector market for male condoms is
estimated to be greater than 10 billion units annually. Given the rapid spread
of HIV/AIDS in India and China, UNAIDS estimates that the annual public sector
demand for condoms, both male and female, will reach 19 billion units within the
next ten years.





Government
Regulation





FC2
received PMA as a Class III Medical Device from the FDA in March of
2009.  FC2 received the CE Mark which allows it to be marketed
throughout the European Union.  FC2 has also been approved by
Brazil’s, India’s and other regulatory authorities.





The
Company believes that FC2’s PMA and FDA classification as Class III Medical
Devices create a significant barrier to entry in the U.S. market. The Company
estimates that it would take a minimum of four to six years to implement,
execute and receive FDA approval of a PMA to market another type of female
condom.





In the
U.S., FC2 is regulated by the FDA. Pursuant to section 515(a)(3) of the Safe
Medical Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend
approval and initiate withdrawal of the PMA if the FDA finds that FC2 is unsafe
or ineffective, or on the basis of new information with respect to the device,
which, when evaluated together with information available at the time of
approval, indicates a lack of reasonable assurance that the device is safe or
effective under the conditions of use prescribed, recommended or suggested in
the labeling. Failure to comply with the conditions of FDA approval invalidates
the approval order. Commercial distribution of a device that is not in
compliance with these conditions is a violation of the SMA
Act.





Significant
Customers





While FC2
provides dual protection against sexually transmitted infections, (including
HIV/AIDS), and unintended pregnancy, its most common usage is prevention of
sexually-transmitted infections and is an integral part of many HIV/AIDS
prevention programs throughout the world.  These prevention programs
are typically supplied by global public sector buyers who purchase products for
distribution, at low cost or no cost, to those who need but cannot afford to buy
such products themselves.  Within the global public sector are large
international agencies such as UNFPA (UN Population Fund), USAID (United States
Agency for International Development), PSI (Population Services International)
and other social marketing groups,  various Ministries of Health,
state and local health agencies and NGO’s (non-governmental agencies) such as
Population Services International.  The Company’s most significant
customers are either global public sector agencies or those who facilitate their
purchases and/or distribution.  In fiscal year 2009, significant
customers were John Snow, Inc., facilitator of USAID I DELIVER project (34% of
unit sales) and UNFPA (25% of unit sales).





10





Commercial
Markets – Direct to Consumers




The
Company has distribution agreements and other arrangements with commercial
partners which market directly to consumers in 15 countries, including the
United States, Brazil, Canada, Mexico, Spain, France, Japan and India. These
agreements are generally exclusive for a single country. Under these agreements,
the Company manufactures and sells the FC2 female condom to the distributor
partners, who, in turn market and distribute the product to consumers in the
established territory.  FC2 is being marketed to consumers eight
countries, including India, France and Brazil.





Relationships
and Agreements with Public Sector Organizations





In May
2006, the National AIDS Control Organization (NACO) of the Ministry of Health
& Family Welfare, Government of India placed an order, through UNFPA, for
the Company to supply female condoms for NACO’s year-long program effectiveness
study.  Because the pilot project was highly successful showing
consistent use of female condoms, NACO scaled up the program under which women
are trained on how to use the female condom. In June 2008, the Company and HLL
were successful in winning an order from NACO for 1.5 million FC2 female
condoms.  In April 2009, a second NACO order for 1.5 million FC2
female condoms was received.  Both the 2008 and 2009 NACO orders were
produced in HLL’s manufacturing facility in Kochi, India, and are being used in
the scaled-up prevention program.





The
Company sells FC2 in the United States to city and state public health clinics
as well as not-for-profit organizations such as Planned
Parenthood.  FC2 is currently available in 286 locations in New York
City, including both community based organizations and the N.Y.C. Department of
Health and Mental Hygiene units.  FC2 is now being distributed as part
of New York City’s Female Condom Education and Distribution Project being
conducted by the Bureau of HIV/AIDS Prevention and Control.





With the
completion of the transition from FC1 to FC2, the Company's agreement with
UNAIDS to supply FC1 to developing countries will not be renewed.  The
Company has elected not to enter into long-term agreements to supply FC2 to
global agencies, and instead intends to provide uniform, volume-based pricing to
such agencies.





11





Employees





As of
December 10, 2009, the Company had 55 full-time employees, including 9 located
in U.S., 26 in UK and 20 in Malaysia, and no part-time employees. None of the
Company’s employees are represented by a labor union. The Company believes that
its employee relations are good.   In Malaysia, direct labor is
supplied primarily by a contracted work force.





Research
and Development





In
September 2005, the Company announced that development of its second generation
product, FC2, was complete.  Throughout fiscal 2006, the Company
developed and scaled-up the FC2 manufacturing process, which was completed by
approximately March 31, 2007.  During the remainder of fiscal 2007 and
throughout fiscal 2008, the Company conducted various activities in preparation
and support of a PMA to secure FDA approval for FC2.  The Company
incurred research and development costs of approximately $105,916 in fiscal 2009
and $284,216 in fiscal 2008. The Company’s research and development expenditure
in fiscal 2009 was related to (1) preparation and costs of the December 2009 FDA
OB/GYN FC2 Advisory Panel meeting, and (2) the costs of developing packaging and
labeling subsequent to the March 2009 FDA approval of FC2.





Environmental
Regulation





The
Company believes there are no material issues or material costs associated with
the Company's compliance with environmental laws related to the manufacture and
distribution of FC2.  The Company has incurred no expenses in either
fiscal 2009 or 2008, nor does it anticipate the need for any environmental
expenditure in the foreseeable future.





Raw
Materials





The
principal raw material used to produce FC2 is a nitrile polymer. While general
nitrile formulations are available from a number of suppliers, the Company has
chosen to work closely with the technical market leader in synthetic polymers to
develop a grade ideally suited to the bio-compatibility and functional needs of
a female condom.  The supplier has agreed that the Company is the sole
and exclusive owner of the unique polymer formulation that was developed for
FC2.





Manufacturing
Facilities





The
Company leases 16,000 sq. ft. of production space in Selangor D.E., Malaysia for
the production of FC2.  In fiscal 2009, after the FDA approved FC2 for
distribution, capacity was expanded to the current level of approximately 75-80
million units annually.









12





FHC’s
total FC2 production capacity is approximately 80-85 million units
annually.  The Company intends to expand its capacity at existing
locations and/or manufacture at additional locations as the demand for FC2
develops.





The
Company had manufactured FC1 in a 40,000 square-foot leased facility in London,
England.  Manufacturing in this facility ceased in October 2009
upon completion and shipment of the final FC1 orders.





Competition





The
Company's FC2 female condom participates in the same market as male condoms but
is not seen as directly competing with male condoms. Rather, the Company
believes that providing FC2 is additive in terms of prevention and choice. Male
condoms cost less and have brand names that are more widely recognized than FC2.
In addition, male condoms are generally manufactured and marketed by companies
with significantly greater financial resources than the Company.





Medtech
Products Ltd. ("MP"), a male latex condom company with a manufacturing facility
in Chennai, India, has developed a natural latex female condom. MP's female
condom has been marketed under various names including V-Amour, VA Feminine
Condom and L’Amour.  MP product’s manufacturing process has a CE mark
for distribution in Europe and may be available in other countries. MP received
the Indian Drug Controller approval in January 2003.  PATH, an
international, nonprofit organization based in the United States, has a female
condom product in early stage development.  The National Institute of
Child Health and Human Development (NICHD) has provided a grant of $608,000 to
initiate a 2 1⁄2 year pregnancy study on the PATH product.  Neither the
MP female condom nor the PATH woman’s condom have received FDA approval or been
listed as essential products for procurement by WHO.





It is
possible that other parties may develop a female condom. These competing
products could be manufactured, marketed and sold by companies with
significantly greater financial resources than those of the
Company.





Patents
and Trademarks





FC2
patents have been issued in Europe, Canada, Australia, South Africa and the
People’s Republic of China.  Patent applications for FC2 are pending
in the U.S. and in other countries around the world through the Patent
Cooperation Treaty. The applications cover the key aspects of the second
generation female condom, including its overall design and manufacturing
process.  Although there can be no assurance, these patents may
provide the Company with protection against copycat products entering the U.S.
market during the pendency of the patents.





The
Company has the registered trademark “FC2 Female Condom” in the United
States. The Company has also secured, or applied for, 12 trademarks in 22
countries to protect the various names and symbols used in marketing the product
around the world. These include "femidom" and "femy," “Reality” and others. In
addition, the experience that has been gained through years of manufacturing the
FC female condoms (FC1 and FC2) has allowed the Company to develop trade secrets
and know-how, including certain proprietary production technologies that further
protects its competitive position.





13





Backlog





At
December 10, 2009, product orders totaled $5,831,775 for
FC2.   At December 10, 2008, product orders totaled $10,087,176
for FC1 and $730,843 for FC2, or a total of $10,818,019.  Unfilled
orders materially fluctuate from quarter to quarter, and include orders with
requested delivery dates later in fiscal 2010. The Company expects current
unfilled orders to be filled during fiscal 2010.





Item 2.
Properties





The
Company leases approximately 5,100 square feet of office space at 515 North
State Street, Suite 2225, Chicago, IL 60654.  The lease expires
October 31, 2011. The Company utilizes warehouse space and sales fulfillment
services of an independent public warehouse located in Wood Dale, IL for storage
and distribution of the female condom. The Company had manufactured the FC1
female condom in a 40,000 square foot leased facility located in London, England
under a lease which had an expiration date in 2016.  In November 2009,
the Company entered an agreement with the new property owner in which the
previous lease was surrendered in exchange for a lease surrender fee and a short
term lease.  The new lease expires on the earlier of (1)at least three
months after the Landlord provides a notice of termination, but in any event,
not before May 2, 2010 and (2) November 2, 2010.  The Companymanufactures and
warehouses FC2 within a leased facility with 16,000 sq. ft. of production space,
in Selangor D.E., Malaysia.  The FDA-approved manufacturing process is
subject to periodic inspections by the FDA as well as the UK based “notified
body”, which is responsible for CE and ISO accreditation. The lease, which began
on September 1, 2007, has a three year term and is renewable for two additional
three year terms. The Company’s Malaysian production capacity is approximately
75-80 million units annually.





Item 3.
Legal Proceedings.





The
Company is not currently involved in any pending legal proceedings.





Item 4.
Submission of Matters To A Vote Of Security Holders.




No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended September 30, 2009.





14





PART
II





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





Shares of
the Company's common stock have traded on the NASDAQ Capital Market under the
symbol "FHCO" since June 9, 2009.   From July 9, 2007 to
June 8, 2009, the Company’s common stock traded on the NYSE Amex under the
symbol “FHC”. The approximate number of record holders of the Company's common
stock at December 10, 2009 was 374.  To date, the Company has not paid
cash dividends on its common stock.  The Company's credit facility
with Heartland Bank contains a provision restricting the Company's ability to
pay common stock dividends and distributions.  The Company would need
to obtain an amendment to this provision in order to begin paying dividends to
the holders of its common stock. Information regarding the Company's high and
low reported closing prices for its common stock for the quarters indicated is
set forth in the table below.




QuartersFIRST
              
              
              SECOND
              
              
              THIRD
              
              
              FOURTH2009
      Fiscal YearPrice
      per common share – High
              
              $
              3.72
              
              
              $
              4.35
              
              
              $
              4.82
              
              
              $
              7.65Price
      per common share – Low
              
              $
              1.95
              
              
              $
              2.87
              
              
              $
              3.51
              
              
              $
              4.482008
      Fiscal YearPrice
      per common share – High
              
              $
              3.60
              
              
              $
              2.84
              
              
              $
              2.87
              
              
              $
              3.15Price
      per common share – Low
              
              $
              2.20
              
              
              $
              2.17
              
              
              $
              2.30
              
              
              $
              2.15


Stock
Repurchase Program





On
January 17, 2007, the Company announced a Stock Repurchase Program under the
terms of which up to a million shares of its common stock could be purchased
during the subsequent twelve months. In late March 2008, repurchase program was
expanded up to a total of 2,000,000 shares to be acquired through December 31,
2009.  In February 2009, the Board further expanded the repurchase
program to a maximum of 3,000,000 shares to be acquired through December 31,
2010.  From the program’s onset through September 30, 2009, the total
number of shares repurchased by the Company is 1,843,805.





The Stock
Repurchase Program authorizes purchases in privately negotiated transactions as
well as in the open market, and in October 2008 the Company's board of
directors authorized repurchases in private transactions under the Stock
Repurchase Program of shares issued under the Company's equity compensation
plans to directors, employees and other service providers at the market price on
the effective date of the repurchase request.  The maximum repurchase
for the remainder of calendar 2008 was a total of 62,500 shares or 6,250 shares
per individual.  No shares were repurchased under the amendment in
calendar year 2008.  Thereafter, total repurchases under this
amendment are limited to an aggregate of 250,000 shares per calendar year and to
a maximum of 25,000 shares annually per individual.  Year-to-date
purchases under this amendment for calendar 2009, as of September 30, 2009, were
152,644 shares.




15
  Issuer
      Purchases of Equity Securities:
              
              Details
      of Treasury Stock Purchases to date through September 30,
    2009Period:
              
              Total
                Number
                of
      Shares
                Purchased
              
              
              Average
                Price
      Paid
                Per
                Share
              Total
                Number
                of
      Shares
                Purchased
                As
      Part of
                Publicly
                Announced
                Program
              Maximum
                Number
                of
      Shares that
                May
                Yet
      be Purchased
                Under
      the
                ProgramJanuary
      1, 2007 –  June 30, 2009
              
              1,756,161
              
              
              $
              3.07
              
              
              1,756,161
              
              
              1,243,839July
      1, 2009 –  July 31, 2009
              
              -
              
              
              $
              -
              
              
              1,756.161
              
              
              1,243,839August
      1, 2009 – August 31, 2009
              
              62,644
              
              
              $
              7.23
              
              
              1,818,805
              
              
              1,181,195September
      1, 2009 – September  30, 2009
              
              25,000
              
              
              $
              5.53
              
              
              1,843,805
              
              
              1,156,195Quarterly
      Subtotal
              
              87,644
              
              
              $
              6.60
              
              
              87,644Total
              
              1,843,805
              (1)
              
              $
              3.25
              
              
              1,843,805
              
              
              1,156,195
 
 (1)
              Includes
      152,644 shares repurchased pursuant to the authorization to repurchase
      shares issued to directors, employees and other service providers under
      the Company's equity incentive plans.  The other shares were
      purchased in the open market pursuant to the Share Repurchase
      Program.




Redemption
of Class A Convertible Preferred Stock - Series 1





In May
2008, the Company elected to exercise its right to redeem all of the 56,000
outstanding shares of its Class A Convertible Preferred Stock - Series
1 (the "Series 1 Preferred Stock"), subject to the right of the holders to
elect to convert their shares of Series 1 Preferred Stock into Common Stock
in lieu of redemption.  On the redemption dates in
June 2008, 42,000 of the outstanding shares of Series 1 Preferred
Stock were acquired by the Company pursuant to the redemption and
cancelled and the remaining 14,000 outstanding shares of Series 1 Preferred
Stock were converted into 14,000 shares of Common Stock and cancelled.  The
Series 1 Preferred Stock was subject to an 8% dividend, paid
annually.  The Company paid a redemption price per share equal to the
liquidation value per share (which was $2.50 per share plus accrued and unpaid
dividends) for the 42,000 shares that were redeemed. Shareholders who
elected to convert received one common share for each share of Series 1
Preferred Stock plus accumulated dividends.  The final unpaid
dividends of $2,100 for the converted 14,000 shares of Series 1 Preferred Stock
were paid in July 2008.





16





Repurchase
and Redemption of Class A Convertible Preferred Stock - Series
3





The
Company issued 473,377 shares of Class A Convertible Preferred Stock -
Series 3 (the "Series 3 Preferred Stock") to 11 investors during February
2004 and received $1,500,602 in proceeds. Each share of Series 3 Preferred Stock
is convertible at any time into one share of the Company’s common stock. Holders
of shares of the Series 3 Preferred Stock are entitled to cumulative dividends
in preference to any dividend on the Company’s common stock at the rate of 10
percent of the original issuance price ($3.17 per share) per annum, payable
quarterly at the Company’s option in cash or shares of the Company’s common
stock. If dividends are paid in shares of common stock, the dividend rate will
be equal to 95 percent of the average of the closing sales prices of the common
stock on the five trading days preceding the dividend reference date. The
dividend reference date means January 1, April 1, July 1, October 1 of each
year. In the event of a liquidation or dissolution of the Company, the Series 3
Preferred Stock would have had priority over the Company’s common stock and
holders of any other series of preferred stock of the Company. The Company could
redeem any share of Series 3 Preferred Stock at any time that is after the
second anniversary of the date of issuance of the share, provided that the
redemption may not occur until the first day on or after the second anniversary
of the date of issuance of such share in which the market value of the Company’s
common stock is at least 150 percent of the original issue price of $3.17
per share.  The liquidation preference on the Series 3 Preferred Stock
is $3.17 per share plus accrued and unpaid dividends.





In April
2008, the Company repurchased 150,000 shares of Series 3 Preferred Stock. The
shares were repurchased at $3.17 per share for a total of approximately
$475,000.  In July 2008, the Company repurchased an additional 15,773
shares of Series 3 Preferred Stock for a total of approximately
$50,000.  All of the shares were purchased at the same per share price
at which they were sold to the shareholder, $3.17 per share.  The
repurchased preferred shares were retired.





In
February 2009, 31,546 shares of Series 3 Preferred Stock were converted to
31,546 shares of common stock.





On July
14, 2009, in accordance with the terms of the Series 3 Preferred Stock, the
Company notified all of the holders of the 276,058 outstanding shares of Series
3 Preferred Stock that it was exercising its right to redeem all of the
outstanding shares of Series 3 Preferred Stock on August 13,
2009.  The Company had the right to redeem the Series 3 Preferred
Stock because as of the close of the market on July 10, 2009, the Company’s
Common Stock had a closing price on the NASDAQ Capital Market of at least 150%
of the $3.17 Face Amount of the Series 3 Preferred Stock for five consecutive
days.  Holders of outstanding shares of Series 3 Preferred Stock had
the right to elect to convert all or part of their Series 3 Preferred Stock into
shares of the Company’s common stock by providing written notice of conversion
to the Company on or before the redemption date.   All of the
holders exercised their conversion rights and were issued common stock in
exchange for the preferred shares.  As of September 30, 2009, all
shares of Series 3 Preferred Stock have been retired.








17





Item 6.
Selected Financial Data





Not
applicable to a smaller reporting company.





Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations





Overview





The
Female Health Company ("FHC" or the "Company") manufactures, markets and sells
the FC2 female condom, the only currently available product under a woman's
control that is approved by the U.S. Food and Drug Administration (FDA). FC2
provides dual protection against unintended pregnancy and sexually transmitted
infections ("STIs"), including HIV/AIDS. In October 2009, the Company completed
the transition from its first generation product, FC1, to its second generation
product, FC2, and production of FC1 ceased.  Although FC1 production
has ceased, the Company retains its ownership of certain world-wide rights to
FC1, as well as various patents, regulatory approvals and other intellectual
property related to FC1.





During
2003, the Company began development of its second generation female condom, FC2,
which was completed in 2005.  In August, 2006, after a stringent
technical review, the World Health Organization cleared FC2 for purchase by UN
agencies.  The first substantial sales of FC2 occurred in the second
quarter of fiscal 2007.  On March 10, 2009, FC2 received FDA approval
as a Class III medical device.  FC2 became available in the United
States in August 2009. FDA approval also enabled the United States Agency
for International Development (USAID) to procure FC2 for distribution for global
HIV/AIDS prevention programs.  In addition to FDA approval, the FC2
female condom has been approved by other regulatory agencies, including the
European Union, India, and Brazil.  From its introduction through
September 30, 2009, nearly 40 million FC2 female condoms have been distributed
in 105 countries.  The FDA approval permitted the Company to
transition from FC1 to FC2.  The last shipment of FC1 was produced in
October 2009.  All current and future orders will be for
FC2.





Revenues.  Most of
the Company's revenues have been derived from sales of the FC female condoms
(FC1 and FC2), and are recognized upon shipment of the product to its customers.
Beginning in fiscal 2008, revenue is also being derived from licensing its
intellectual property to its business partner in India, Hindustan Lifecare
Limited.  Such revenue appears as royalties on the Audited
Consolidated Statements of Income for the years ended September 30, 2008 and
2009.





The
Company's strategy is to develop a global market and distribution network for
its product by maintaining relationships with public sector groups and
completing partnership arrangements with companies with the necessary marketing
and financial resources and local market expertise.  The Company's
customers include the following:





●
            The
      Company sold the FC1 female condom to the global public sector under the
      umbrella of its agreement with UNAIDS.  This agreement
      facilitated the availability and distribution of the female condom at a
      reduced price based on the Company's cost of production.  The
      most recent price per unit ranged between £0.42 and £0.445 (British pounds
      sterling), or approximately $0.76 to $0.81, depending on contractual
      volumes.  With the completion of the transition from FC1 to FC2,
      the Company's agreement with UNAIDS to supply FC1 to developing countries
      will not be renewed.  The Company has elected not to enter into
      long-term agreements to supply FC2 to global agencies, and instead intends
      to provide uniform, volume-based pricing to such
      agencies.





18







●
            During
      fiscal 2009 and fiscal 2008, the Company sold FC1 female condoms to the
      U.S. Agency for International Development (USAID) for use in USAID
      prevention programs in developing countries.  In the fourth
      quarter of fiscal 2009, USAID transitioned to FC2 and, through its
      procurement agent, John Snow, Inc, placed its first FC2 order for 12
      million units.





●
            The
      Company has sold the FC female condoms (FC1 and FC2) in the United States
      to city and state public health clinics as well as not-for-profit
      organizations such as Planned
Parenthood.





Occasionally,
significant quarter to quarter variations may occur due to the timing and
shipment of large orders, not from any fundamental change in the Company's
business. Because the Company manufactured FC1 in a leased facility located
in London, England and FC2 in a leased facility located in Malaysia, a portion
of the Company's operating costs are denominated in foreign currencies. While a
material portion of the Company's future sales are likely to be in foreign
markets, all sales are denominated in either British pounds sterling or United
States dollars. Manufacturing costs and sales to foreign markets are subject to
normal currency risks associated with fluctuations in the exchange rate of the
Malaysian ringgit (MYR) relative to British pounds sterling, and British pounds
sterling relative to the United States dollar. In July 2009, the Company
contributed capital to a subsidiary to reduce its exposure to future currency
gains or losses between the entities.  Management continues to
evaluate the Company’s commercial transactions and to evaluate whether employing
currency hedging strategies are appropriate.





While our
second generation product, FC2, generally is sold at a lower price per unit than
FC1 was, FC2 is produced at a lower cost than FC1 was, and sales of FC2
generally have a higher gross margin than FC1 had.  As a result,
changes in the sales mix of FC2 as compared to FC1 affect our net revenues and
gross profit.





Expenses.  The
Company manufactured FC1 at its facility located in the United Kingdom and
manufactures FC2 at its facility located in Selangor D.E.,
Malaysia.  The Company's cost of goods sold consists primarily of
direct material costs, direct labor costs and indirect production and
distribution costs.  Direct material costs include raw materials used
to make the female condom, principally polyurethane for FC1 and a nitrile
polymer for FC2.  Indirect product costs include logistics, quality
control and maintenance expenses, as well as costs for helium, nitrogen,
electricity and other utilities. All of the key
components for the manufacture of the female condom are essentially available
from either multiple sources or multiple locations within a source.








19





The
Company has experienced increased costs of products, supplies, salaries and
benefits, and increased general and administrative expenses.  In both
fiscal 2008 and fiscal 2009, the Company has increased selling prices wherever
possible to offset such cost increases.





As noted
above, the Company's manufacturing costs are subject to currency risks
associated with changes in the exchange rate of the Malaysian ringgit (MYR)
relative to British pounds sterling and British pounds sterling relative to the
United States dollar.  To date, the Company's management has not
deemed it appropriate to utilize currency hedging strategies to manage its
currency risks.





On August
5, 2009, the Company announced to its UK employees that the Company would
evaluate the future of its UK facility following the decision of two of its
largest customers to switch their purchases from the first generation product,
FC1, manufactured in the UK facility, to the second generation product, FC2,
which is manufactured in Malaysia. As is required by British labor law, the
Company went through an evaluation process, working in tandem with employee
representatives, in which various manufacturing alternatives were
considered.  As the process failed to identify a satisfactory
alternative, the facility’s manufacturing operations ceased in October 2009,
when the final FC1 orders were shipped.  The evaluation process
concluded in late November 2009, when employees received their termination
payments.  In fiscal 2009, the Company incurred a one-time charge of
$1,496,624 for restructuring costs related to the cessation of FC1 manufacturing
at its UK facility.





All of
the Company’s other UK operations will continue without
interruption.  The functions include, but are not limited to, global
sales and marketing of the Company’s female condom, management and direction of
Global Manufacturing Operations, management and direction of the Global
Technical Support Team, and product development.





Subsequent
to the end of fiscal 2009, the Company received an offer from the new owner of
the property to surrender its existing UK facility lease, which would have
expired in December 2016, in exchange for a surrender fee and a new short-term
lease.  On November 2, 2009, the Company entered into the new
lease and related agreements. The rent under the new lease remains approximately
$488,100 annually and the Company deposited the amount of one year's rent upon
execution of the new agreement.  In connection with the new lease, the
Company made an initial lease surrender payment of approximately
$986,940.  An additional lease surrender payment of approximately
$493,470 will be due on or before February 2, 2010.  From a cash flow
perspective, replacing the previous lease at this time eliminates future
payments of approximately $4.3 million (for rent and related expenses) over the
remaining term of the previous lease, producing a positive net impact of $2.8
million (after deducting the lease surrender payments).  The new lease
expires on the earlier of (1) at least three months after the landlord provides
a notice of termination, but in any event not before May 2, 2010 and (2)
November 2, 2010.   The lease buyout and related expenses
resulted in a one-time charge of approximately $1.7 million, net of the
recognition of deferred gain on the sale of the facility of $658,000, that is
being recognized as incurred in fiscal 2010.








20





Operating
Highlights.  The Company's net revenues have increased steadily
in recent periods.  The Company had net revenues of $27,543,341 in the
fiscal year ended September 30, 2009 as compared to net revenues of $25,634,126
in the fiscal year ended September 30, 2008. The Company’s fiscal 2009 unit
sales and net revenues were limited by FC1 capacity constraints and increased
demand by customers who had not transitioned to FC2.  The Company
elected not to invest in the expansion of FC1 production capacity in view of the
probable cessation of FC1 production given FDA approval of FC2.  In
fiscal 2009, FC2 comprised 51% of the units sold compared to 40% in fiscal
2008.  All current and future orders will be for FC2.





The
Company generated cash flow from operations of $5,747,114 for the fiscal year
ended September 30, 2009 and $4,244,398 for the fiscal year ended September
30, 2008.





The
Company had net income attributable to common stockholders of $6,455,662 or
$0.24 per diluted share in fiscal 2009.  In fiscal 2008, the Company
had net income attributable to common stockholders of $4,829,262 or $0.18 per
diluted share.





Results
of Operations





Fiscal
Year Ended September 30, 2009 (“2009”) Compared to Fiscal Year Ended September
30, 2008 (“2008”)





The
Company had net revenues of $27,543,341 and net income attributable to common
stockholders of $6,455,662 or $0.24 per diluted share in 2009 compared to net
revenues of $25,634,126 and net income attributable to common stockholders of
$4,829,262 or $0.18 per diluted share in 2008.





Net
revenues increased $1,909,215, or 7%, in 2009 over the prior year, demonstrating
growth in demand for female condoms. In 2009 and 2008, net revenue included
royalties of $160,176 and $105,876, respectively, earned from licensing
intellectual property to the Company’s business partner in India, Hindustan
Lifecare Limited.





Gross
profit increased $2,788,017, or 26%, to $13,517,818 for 2009 from $10,729,801
for 2008. The increase was attributable to an increase in unit sales as well as
the product mix, with a higher percentage of the more profitable second
generation product, FC2.





Cost of
sales decreased $878,802, or 6%, to $14,025,523 for 2009 from $14,904,325 for
2008. The decrease is due to an increase of lower cost FC2 in the product
mix.





Advertising
and promotional expenses decreased $32,647 to $191,153 for 2009 from $223,800
for 2008. The decrease is due to the absence in 2009 of International AIDS
Conference expenses, as the meeting is held biannually.  In 2008, the
expenditures included the International AIDS Conference held in Mexico City in
August 2008.





Selling,
general and administrative expenses decreased $31,949 to $7,006,111 in
2009 from $7,038,060 in 2008. The decrease is due to lower investor
relations and Sarbanes-Oxley-related consulting fees, somewhat offset by higher
costs of stock-based incentive programs.





21








Research
and development costs decreased $178,300 to $105,916 in 2009 from $284,216 in
2008. The costs in 2008 were related to the preparation and support of the PMA
for FC2, while 2009 costs are related to final packaging design following FDA
approval.





In fiscal
2009, the Company incurred a one-time charge of $1,496,624 for restructuring
costs related to the cessation of FC1 manufacturing at its UK
facility.  The total includes mandatory payments to individuals whose
jobs were made redundant, costs of legal and human relations consulting, loss of
production efficiency during the evaluation period and a write-down for obsolete
FC1 inventory components.





Total
operating expenses increased $1,253,728 to $8,799,804 in 2009 from $7,546,076 in
2008 as a result of the one-time restructuring costs.





The
Company's operating income increased $1,534,289 to $4,718,014 in 2009 from
$3,183,725 in 2008 due to the improved gross profit partially offset by an
increase in operating expenses, primarily the one-time restructuring costs of
$1,496,624.  Exclusive of the one-time restructuring costs, operating
income increased 95% in fiscal 2009 to $6,214,638, from $3,183,725 in fiscal
2008.  Operating income exclusive of the one-time restructuring costs
constitutes non-GAAP financial information.  See discussion of
"Non-GAAP Financial Information" below.





Following
is a reconciliation of the Non-GAAP financial measure of operating income
exclusive of restructuring charge to the nearest GAAP financial measure of
operating income for the years ended September 30, 2009 and 2008.




For
      the Years Ended
              September
      302009
            
            
            2008Operating
      income exclusive of restructuring charge
            
            $
            6,214,638
            
            
            $
            3,183,725Less:
      Restructuring charge
            
            $
            1,496,624
            
            
            
            -Operating
      income
            
            $
            4,718,014
            
            
            $
            3,183,725





The
Company recorded non-operating income of $332,097 in 2009 compared to
non-operating income of $1,020,181 in 2008.  This was primarily
attributable to a significant gain on foreign currency of $966,736 in 2008,
compared to a comparatively modest gain of $276,113 in fiscal
2009.  The financial statements of the Company’s international
subsidiaries are translated into U.S. dollars using the exchange rate at each
balance sheet date for assets and liabilities, the historical exchange rate for
stockholders’ equity and a weighted average exchange rate for each period for
revenues, expenses and gains and losses.  Translation adjustments on
intercompany trade accounts are recorded in earnings as the local currency is
the functional currency.  Assets located outside the United States
totaled approximately $8,700,000 and $7,500,000 at September 30, 2009 and 2008,
respectively.








22





An entity
is able to recognize a tax benefit for current or past losses when it can
demonstrate that the tax loss carry forward will be utilized before
expiration.  Management believes that the Company’s recent and
projected future growth and profitability has made it more likely than not that
the Company will utilize a portion of its net operating carryforwards in the
future.  The Company has recorded a tax benefit in the amount of
$1,600,000 (gross tax benefit) during the year ended September 30, 2009 compared
to $775,000 for the year ended September 30, 2008 as a  result of the
decrease in the valuation allowance on these assets.





Non-GAAP
Financial Information





This
section includes non-GAAP financial information, specifically operating income
exclusive of the restructuring charge of $1,496,624.  Management believes
that the presentation of this non-GAAP financial measure provides useful
information to investors because this information may allow investors to better
evaluate ongoing business performance and certain components of the Company's
results.  In addition, because the restructuring charge related to a
non-recurring event in the fourth quarter of fiscal 2009, the Company
believes that the presentation of this non-GAAP financial measure enhances an
investor's ability to make period-to-period comparisons of the Company's
operating results.  This information should be considered in addition
to the results presented in accordance with GAAP, and should not be considered a
substitute for the GAAP results.





Factors
That May Affect Operating Results and Financial Condition





The
Company's future operating results and financial condition are dependent on the
Company's ability to increase demand for the FC2 female condom and to
cost-effectively manufacture it in sufficient quantities to meet demand.
Inherent in this process are a number of factors that the Company must
successfully manage in order to achieve favorable future results and improve its
financial condition.





Reliance
on a Single Product





The
Company expects to derive the vast majority, if not all, of its future revenues
from the FC2 female condom, its sole current product. While management believes
the global potential for the FC2 female condom is significant, the ultimate
level of consumer demand around the world is not yet known.





Distribution
Network





The
Company's strategy is to develop a global distribution network for FC2 by
entering into partnership arrangements with financially secure companies with
appropriate marketing expertise. This strategy has resulted in numerous
in-country distributions in the public sector, particularly in Africa, Latin
America and India. The Company has also entered into several partnership
agreements for the commercialization of the FC female condoms (FC1 and FC2) in
consumer sector markets around the world. However, the Company is dependent on
country governments, global donors, as well as U.S. municipal and state public
health departments to continue AIDS/HIV/STI prevention programs that include FC2
as a component of such programs. The Company’s commercial market penetration is
dependent on its ability to identify appropriate business partners who will
effectively market and distribute FC2 within its contractual territory. Failure
by the Company's partners to successfully market and distribute the FC2 female
condom or failure of donors and/or country governments to establish and sustain
HIV/AIDS prevention programs which include distribution of female condoms, the
Company’s inability to secure additional agreements with global AIDS prevention
organizations, or the Company’s inability to secure agreements in new markets,
either in the public or private sectors, could adversely affect the Company’s
financial condition and results of operations.





23





Inventory
and Supply





All of
the key components for the manufacture of the FC2 female condom are essentially
available from either multiple sources or multiple locations within a
source.





Global
Market and Foreign Currency Risks





The
Company manufactured FC1 in a leased facility located in London, England and
manufactures FC2 in a leased facility located in Malaysia. Although a material
portion of the Company's future sales are likely to be in foreign markets, FC2
sales are denominated in US dollars only. Manufacturing costs are subject to
normal currency risks associated with changes in the exchange rate of
the Malaysian ringgit relative to the United States dollar.





On an
ongoing basis, management continues to evaluate its commercial transactions and
is prepared to employ currency hedging strategies when it believes such
strategies are appropriate. Such factors may adversely affect the Company's
results of operations and financial condition.





Government
Regulation





The FC2
female condoms are subject to regulation by the FDA pursuant to the Federal
Food, Drug and Cosmetic Act (the "FDC Act"), and by other state and foreign
regulatory agencies. Under the FDC Act, medical devices must receive FDA
clearance before they can be sold. FDA regulations also require the Company to
adhere to certain current "Good Manufacturing Practices," which include testing,
quality control and documentation procedures. The Company's compliance with
applicable regulatory requirements is monitored through periodic inspections by
the FDA. The failure to comply with applicable regulations may result in fines,
delays or suspensions of clearances, seizures or recalls of products, operating
restrictions, withdrawal of FDA approval and criminal prosecutions. The
Company's operating results and financial condition could be materially
adversely affected in the event of a withdrawal of approval from the
FDA.





Liquidity
and Sources of Capital





In fiscal
2009, the Company’s operations generated cash of $5.7 million primarily due to
higher net income and the timing of accounts receivable
collections.  In fiscal 2008, the Company generated $4.2 million in
positive cash flow from operations.  In fiscal 2009, investing
activities used $1.5 million, primarily in purchasing fixed
assets.  Financing activities used a net of $3.2 million, as $3.8
million was used to repurchase stock, $0.7 million was generated by stock option
and warrant exercises, and $0.1 million was used for preferred dividend and
capital lease payments.  Cash flows from operations, investing
activities and financing activities together with a $0.1 million negative
currency exchange rate impact resulted in a positive net cash flow of $0.9
million in fiscal 2009.





24





At
September 30, 2009, the Company had working capital of $9.2 million and
stockholders' equity of $13.0 million compared to working capital of $9.2
million and stockholders' equity of $9.7 million as of September 30,
2008.





In March
2009, the Company announced plans to expand FC2 manufacturing capacity at its
Malaysia manufacturing facility by 150%.  Now completed, the expansion
increased capacity from approximately 30 million units annually to approximately
75-80 million units annually.   The Company self-funded the
expansion from existing cash and cash generated from operations.





The
Company believes its current cash position is adequate to fund operations of the
Company in the near future, although no assurances can be made that such cash
will be adequate. However, the Company may sell equity securities to raise
additional capital and may borrow funds under its Heartland Bank credit
facility.





The
Company renewed two revolving notes with Heartland Bank, which will expire July
1, 2010, that allow the Company to borrow up to $1,500,000. These notes were
extended under the same terms as the initial notes dated May 19, 2004, with the
exception of the interest rate which has been reduced to base rate plus 0.5%,
with an interest rate minimum of 6%. No new warrants were issued as part of the
extension of these notes. These notes are collateralized by substantially all of
the assets of the Company. No amounts were outstanding under the revolving notes
at September 30, 2009.





As of
December 10, 2009, the Company had approximately $4.2 million in cash, net trade
accounts receivable of $3.1 million and current trade accounts payable of $0.4
million. Presently, the Company has no required debt service
obligations.





Impact of
Inflation and Changing Prices





Although
the Company cannot accurately determine the precise effect of inflation, the
Company has experienced increased costs of product, supplies, salaries and
benefits, and increased general and administrative expenses. In 2008 and 2009
the Company has, where possible, increased selling prices to offset such
increases in costs.













Item 7A.
Quantitative and Qualitative Disclosures About Market Risk





Not
applicable to a smaller reporting company.








25





Item 8.
Financial Statements and Supplementary Data





The
consolidated financial statements of the Company and notes thereto are filed
under this item beginning on page F-1 of this report.





Supplementary
data is not applicable to a smaller reporting company.


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







None.





Item
9A(T). Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and the Company's Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
It should be noted that in designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. The Company has designed its disclosure
controls and procedures to reach a level of reasonable assurance of achieving
desired control objectives and, based on the evaluation described above, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective at reaching that
level of reasonable assurance.





Changes
in Internal Control Over Financial Reporting





There was
no change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934,
as amended) during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.





Management’s
Report on Internal Control Over Financial Reporting





Management
of the Company is responsible for establishing and maintaining effective
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended).  The
Company’s internal control over financial reporting is designed to provide
reasonable assurance to the Company’s management and board of directors
regarding the preparation and fair presentation of published financial
statements.  The Company’s internal control over financial reporting
includes those policies and procedures that:





26
 
 (i)
              
              pertain to the
      maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the
      Company;(ii)
              
              provide reasonable
      assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. generally
      accepted accounting principles, and that receipts and expenditures of the
      Company are being made only in accordance with authorizations of
      management and directors of the Company; and(iii)
              
              provide reasonable
      assurance regarding prevention or timely detection of unauthorized
      acquisition, use or disposition of the Company's assets that could have a
      material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.  Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.





Management
assessed the effectiveness of the Company's internal control over financial
reporting as of September 30, 2009.  In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework.  Based on its assessment, management believes that,
as of September 30, 2009, the Company's internal control over financial
reporting was effective based on those criteria.





This
Annual Report on Form 10-K does not include an attestation report of the
Company's registered public accounting firm regarding internal


control
over financial reporting.  Management's report was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this Annual Report on Form
10-K.





Item 9B.
Other Information





None.








27





PART
III





Item 10.
Directors and Executive Officers and Corporate Governance





Certain
information about the Company's executive officers, directors and certain key
employees as of September 30, 2009, is as follows:





NAME
            POSITION
            AGEO.B.
      Parrish
            Chairman
      of the Board, Chief Executive Officer, acting President and
      Director
            76Mary
      Ann Leeper, Ph.D.
            Senior
      Strategic Adviser and Director
            69William
      R. Gargiulo, Jr.
            Secretary
      and Director
            81Michael
      Pope
            Vice
      President and General Manager of  The Female Health Company (UK)
      Plc
            52Donna
      Felch
            Vice
      President and Chief Financial Officer
            62Janet
      Lee
            Controller
            45David
      R. Bethune
            Director
            69Stephen
      M. Dearholt
            Director
            63Michael
      R. Walton
            Director
            72Richard
      E. Wenninger
            Director
            62Mary
      Margaret Frank
            Director
            40





O.B.
PARRISH


Age: 76;
Elected Director: 1987; Present Term Ends: 2010 Annual Meeting





O.B.
Parrish has served as Chief Executive Officer of the Company since 1994, as
acting President since May 2006, as acting Chief Financial and Accounting
Officer from February 1996 to March 1999 and as the Chairman of the Board and a
Director of the Company since 1987. Mr. Parrish is a shareholder and has served
as the President and as a Director of Phoenix Health Care of Illinois, Inc.
("Phoenix of Illinois") since 1987. Phoenix of Illinois owns approximately
233,501 shares of the Company's common stock. Mr. Parrish also is Chairman and a
Director of Abiant, Inc., a neuroimaging company.  Mr. Parrish is also
a trustee of Lawrence University. From 1977 until 1986, Mr. Parrish was the
President of the Global Pharmaceutical Group of G.D. Searle & Co.
("Searle"), a pharmaceutical/consumer products company. From 1974 until 1977,
Mr. Parrish was the President of Searle International, the foreign sales
operation of Searle. Prior to that, Mr. Parrish was Executive Vice President of
Pfizer's International Division.





MARY ANN
LEEPER, Ph.D.


Age: 69;
Elected Director: 1987; Present Term Ends: 2010 Annual Meeting





Dr.
Leeper has served as Senior Strategic Adviser since May 2006. Dr. Leeper served
as the President and Chief Operating Officer of the Company from February 1996
to April 2006, as President and Chief Executive Officer of The Female Health
Company Division from May 1994 until January 1996, as Senior Vice President -
Development of the Company from 1989 until January 1996 and as a Director of the
Company since 1987. Dr. Leeper is a shareholder and has served as a Vice
President and Director of Phoenix of Illinois since 1987. From 1981 until 1986,
Dr. Leeper served as Vice President - Market Development for Searle's
Pharmaceutical Group and in various Searle research and development management
positions. As Vice President - Market Development, Dr. Leeper was responsible
for worldwide licensing and acquisition, marketing and market research. In
earlier positions, she was responsible for preparation of new drug applications
and was a liaison with the FDA. Dr. Leeper serves on the Board of Neenah Paper,
Inc. and is chair of its nominating and governance committee. She is also an
adjunct professor at the University of Virginia Darden School of
Business.





28





WILLIAM
R. GARGIULO, JR.


Age: 81;
Elected Director: 1987; Present Terms Ends: 2010 Annual Meeting





William
R. Gargiulo, Jr. has served as Secretary of the Company from 1996 to present, as
Vice President from 1996 to September 30, 1998, as Assistant Secretary of the
Company from 1989 to 1996, as Vice President - International of The Female
Health Company Division from 1994 until 1996, as Chief Operating Officer of the
Company from 1989 to 1994, and as General Manager of the Company from 1988 to
1994. Mr. Gargiulo has also served as a Director of the Company since 1987. Mr.
Gargiulo is a trustee of a trust which is a shareholder of Phoenix of Illinois.
From 1984 until 1986, Mr. Gargiulo was the Executive Vice-President of the
Pharmaceutical Group of Searle, in charge of Searle's European operations. From
1976 until 1984, Mr. Gargiulo was the Vice President of Searle's Latin American
operations.





MICHAEL
POPE


Age: 52;
Vice President, General Manager - The Female Health Company (UK)
Plc.





Mr. Pope
has served as Vice President of the Company since 1996 and as General Manager of
The Female Health Company (UK) Plc. (formerly Chartex International, Plc.) since
the Company's 1996 acquisition of Chartex. Mr. Pope has also served as a
Director of The Female Health Company, Ltd. (formerly Chartex Resources Limited)
and The Female Health Company (UK) Plc. since 1995. From 1990 until 1996, Mr.
Pope was Director of Technical Operations for Chartex with responsibility for
manufacturing, engineering, process development and quality assurance. Mr. Pope
was responsible for the development of the high speed proprietary manufacturing
technology for the female condom and securing the necessary approvals of the
manufacturing process by regulatory organizations, including the FDA. Mr. Pope
was also instrumental in developing and securing Chartex's relationship with its
Japanese marketing partner. Prior to joining Chartex, from 1986 to 1990, Mr.
Pope was Production Manager and Technical Manager for Franklin Medical, a
manufacturer of disposable medical devices. From 1982 to 1986, Mr. Pope was Site
Manager, Engineering and Production Manager, Development Manager and Silicon
Manager for Warne Surgical Products.





DONNA
FELCH


Age 62;
Vice President and Chief Financial Officer





Ms. Felch
has served as Vice President and Chief Financial Officer of the Company since
February 2006. Prior to joining the Company, Ms. Felch was Vice President and
Treasurer of American Pharmaceutical Partners, Inc., a pharmaceutical company
that develops, manufactures and markets injectible pharmaceutical products, from
November 2002 until June 2005. In these positions, she directed the
treasury, tax, financial planning and analysis, credit and collections and risk
management functions. Ms. Felch joined American Pharmaceutical Partners in 1998
and during such time held the positions of Senior Director of Corporate
Accounting and Director of General Accounting and Tax. In these roles her
responsibilities included internal and external financial reporting, tax,
treasury, financial planning, credit and risk management. Previously, Ms Felch
served as Director of Corporate Tax with Fujisawa USA, a subsidiary of a major
Japanese pharmaceutical company. Ms. Felch had formerly worked as a Tax Manager
for LyphoMed, Inc., a generic pharmaceutical manufacturer.





29





JANET
LEE


Age: 45;
Controller





Ms. Lee
has served as Controller of the Company since May 2007.  From November
2002 until May 2007, Ms. Lee served the Society of Thoracic Surgeons as
Accounting Manager/Analyst.  Previously, she held various financial
positions at RR Donnelley and Sons Company and ServiceMaster.





DAVID R.
BETHUNE


Age: 69;
Elected Director: 1996; Present Term Ends: 2010 Annual Meeting





Mr.
Bethune has served as a Director of the Company since January 1996. He was
Chairman of Zila, Inc., an oral cancer screening company, from August 2007
to September 2009 and Chief Executive Officer of Zila, Inc. from
March 2008 to September 2009. Additionally, he is a member of the
Board of Directors of the CAMBREX Corporation, a life sciences company dedicated
to providing products and services that accelerate and improve the discovery and
commercialization of human therapeutics. Mr. Bethune served as Chairman and
Chief Executive Officer of Atrix Laboratories, Inc. from 1999 until his
retirement in 2004. From 1997 to 1998, Mr. Bethune held the positions of
President and Chief Operating Officer of the IVAX Corporation. From 1996 to
1997, Mr. Bethune was a consultant to the pharmaceutical industry. From 1995 to
1996, Mr. Bethune was President and Chief Executive Officer of Aesgen, Inc., a
generic pharmaceutical company. From 1992 to 1995, Mr. Bethune was Group Vice
President of American Cyanamid Company and a member of its Executive Committee
until the sale of the company to American Home Products. He had global executive
authority for human biologicals, consumer health products, pharmaceuticals and
opthalmics, as well as medical research. Mr. Bethune is a founding trustee of
the American Cancer Society Foundation. He is the founding chairman of the
Corporate Council of the Children's Health Fund in New York City and served on
the Arthritis Foundation Corporate Advisory Council.





STEPHEN
M. DEARHOLT


Age: 63;
Elected Director: 1996; Present Term Ends: 2010 Annual Meeting





Mr.
Dearholt has served as a Director of the Company since April 1996. Mr. Dearholt
is a co-founder of, and partner in, Insurance Processing Center, Inc., one of
the largest privately owned life insurance marketing organizations in the United
States, since 1972. He has over 36 years of experience in direct response
advertising and data based marketing of niche products. In late 1995, Mr.
Dearholt arranged, on very short notice, a $1 million bridge loan which assisted
the Company in its purchase of Chartex.  He is a past board member of the
Children’s Hospital Foundation of Wisconsin, the Zoological Society of
Milwaukee, Planned Parenthood Association of Wisconsin, and past Chairman of the
Board of the New Day Club, Inc.





30





MICHAEL
R. WALTON


Age: 72;
Elected Director: 1999; Present Term Ends: 2010 Annual Meeting





Mr.
Walton has served as a Director of the Company since April 1999. Mr. Walton is
President and owner of Sheboygan County Broadcasting Co., Inc., a company he
founded in 1972. The company has focused on start-up situations, and growing
value in under-performing, and undervalued radio stations and newspapers.
Sheboygan County Broadcasting Co. has owned and operated businesses in
Wisconsin, Illinois, Michigan and New York.  It has specialized in
creating, building and managing news media properties and has acquired existing
companies as well. Prior to 1972, Mr. Walton was owner and President of Walton
Co., an advertising representative firm he founded in New York City. He has held
sales and management positions with Forbes Magazine, The Chicago Sun Times and
Gorman Publishing Co. Mr. Walton has served on the Boards of the American Red
Cross, the Salvation Army, the Sheboygan County Chamber of Commerce and the
Rogers Memorial Hospital Foundation.





RICHARD
E. WENNINGER


Age: 62;
Director: 2001; Present Term Ends: 2010 Annual Meeting





Mr.
Wenninger has served as a Director of the Company since July 2001. Mr. Wenninger
is former Chairman of Wenninger Company, Inc., a mechanical contracting and
engineering company. From 1976 to 2001, Mr. Wenninger served as President and
Chief Executive Officer of Wenninger Company, Inc. He is also Secretary of Wenn
Soft, Inc., a software development, sales and service company he founded in
1997. From 1992 to 1999, Mr. Wenninger served as Secretary of Liftco, Inc. Mr.
Wenninger is a former board member of the Boys & Girls Club of Milwaukee, a
former President and board member of the Milwaukee Athletic Club, a former board
member of the Wisconsin Psychoanalytic Foundation, a former board member of
University Lake School, the former President and a former board member of the
Plumbing and Mechanical Contractors Association of Milwaukee, the former
President and a former board member of the Sheet Metal Contractors Association
of Milwaukee and a former board member of the Mechanical Contractors Association
of America.





MARY
MARGARET FRANK


Age: 40;
Director: 2004; Present Term Ends: 2010 Annual Meeting





Dr. Frank
has served as a Director of the Company since October 2004. Dr. Frank has served
as an Associate Professor of Accounting at the Darden Graduate School of
Business at the University of Virginia where she teaches financial and tax
accounting since 2002. From 1999 to 2002, Dr. Frank was an Assistant Professor
at the Graduate School of Business at the University of Chicago. During 1997,
Dr. Frank was an accounting instructor at the Kenan-Flagler Business School at
the University of North Carolina at Chapel Hill. From 1992 to 1994, Dr. Frank
served as a Senior Tax Consultant at Arthur Andersen.  She has her
master’s degree and Ph.D. in accounting from the University of North Carolina at
Chapel Hill and was issued her CPA in 1994.





31





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934 requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") on Forms 3, 4 and
5. Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Forms 3, 4 and 5 they
file.





Based
solely on a review of the copies of such forms furnished to the Company, or
written representations that no Forms 5 were required, the Company believes that
during the year ended September 30, 2009, all reports required by Section 16(a)
to be filed by the Company's officers, directors and more than 10% shareholders
were filed on a timely basis.





Code of
Ethics





The
Company has adopted a Code of Business Ethics that applies to all of the
Company's employees, including the Company's Chief Executive Officer and Chief
Financial Officer.  A copy of the Code of Business Ethics is available
on the Company's corporate website which is located at www.femalehealth.com. The
Company also intends to disclose any amendments to, or waivers from, the Code of
Business Ethics on its corporate website.





Audit
Committee





The
members of the Audit Committee of the Company's Board of Directors are Mary
Margaret Frank, Ph.D. (Chairperson), David R. Bethune and Michael Walton. The
Company's Board of Directors has determined that Dr. Frank qualifies as an
"audit committee financial expert" as defined by the rules of the SEC based on
her work experience and education. Dr. Frank and the other members of the Audit
Committee are independent directors in accordance with the listing standards of
the NASDAQ Stock Market. The Audit Committee is an "audit committee" for
purposes of Section 3(a)(58)(A) of the Securities Exchange Act of
1934.








32





Item 11.
Executive Compensation





Summary
Compensation Table





The table
shown below provides information for the Company's last two fiscal years
regarding compensation paid by the Company to its Chief Executive Officer and
the other two most highly compensated executive officers of the Company based on
total compensation for services rendered during the fiscal year ended September
30, 2009.  The individuals listed in this table are referred to
elsewhere in this report as the "named executive officers."




Name
      and Principal Position
              
              Year
              
              
              Salary
              
              
              Bonus
      (1)
              
              
              Stock
                Awards
      (2)
              
              
              Nonequity
                Incentive
      Plan
                Compensation
      (3)
              
              
              All
      Other
                Compensation
      (4)
              
              
              TotalO.B.
      Parrish,
                Chief
      Executive
                Officer
      and
                Acting
      President
              
              
              2009
                2008
              
              
              $
                $
              152,825
                145,100
              
              
              $
                $
              31,250
                93,750
              
              
              $
              -
                66,063
              
              
              $
                $
              555,500
                366,000
              
              
              $
                $
              25,426
                22,073
              
              
              $
                $
              765,001
                692,986Donna
      Felch,
                Vice
      President
                and
      Chief
                Financial
      Officer
              
              
              2009
                2008
              
              
              $
      $
              191,244
                185,000
              
              
              
              -
                -
              
              
              $
                $
              63,849
                15,188
              
              
              $
                $
              151,500
                122,000
              
              
              $
                $
              12,610
                9,504
              
              
              $
                $
              419,203
                331,692Mike
      Pope, Vice
                President
      and
                General
      Manager
                of
      Female Health
                Company
      (UK)Plc.
              
              
              2009
                2008
              
              
              $
                $
              171,900
                211,725
              (5)
                (5)
              
              
              -
                -
              
              
              $
                $
              63,849
                15,188
              
              
              $
                $
              151,500
                122,000
              
              
              $
                $
              28,87034,468
              (5)
                (5)
              
              $
                $
              416,119
                383,381
 
  (1)
              Bonus amount for
      2008 represents a retention bonus payable monthly to Mr. Parrish based on
      continued service from January 1, 2008 through September 30,
      2008.  Bonus amount for 2009 represents the last three months of
      the retention bonus paid to Mr. Parrish for his continued service through
      calendar-year end 2008.(2)
              These
      amounts reflect the dollar value of the compensation cost of all
      outstanding restricted stock awards and outstanding rights to receive
      shares of common stock recognized over the requisite service period,
      computed in accordance with Accounting Standards Codification Topic 718-10
      (formerly FAS No. 123R). The stock awards are valued at the closing market
      price of the Company's common stock on the date of
  grant.(3)
              Amounts
      for 2009 represent payouts under the Company’s Key Executive Incentive
      Program based on achieving net income objectives for
      2009.  Under this program, each named executive officer is
      entitled to a payout based on the Company exceeding a target amount of net
      income for 2009, with the amount of the payout based on the value of the
      Company’s common stock on September 30, 2009.  Amounts for 2008
      represent payouts under the Company's Key Executive Incentive Program
      based on achieving net income objectives for 2008. Under this program,
      each named executive officer is entitled to a payout based on the Company
      exceeding a target amount of net income for 2008 and an additional payout
      for exceeding 110% of such target amount, with the amount of the payout
      based on the value of the Company's common stock on September 30,
      2008.
  33
 
  (4)
              The amount of "All
      Other Compensation" for Mr. Parrish consists of premiums paid by the
      Company for term life insurance and disability insurance under which
      Mr. Parrish or his designee is the beneficiary; for Ms. Felch
      consists of matching contributions by the Company under the Company's
      Simple Individual Retirement Account plan for its employees and disability
      insurance; and for Mr. Pope consists of an automobile
  allowance.(5)
              Mr.
      Pope's salary and automobile allowance are paid in U.K. pounds. Amounts
      shown for Mr. Pope's salary are based on the 12-month average exchange
      rate for the year, which was 1.5516 U.S. dollars per U.K. pound in fiscal
      2009 and 1.9756 U.S. dollars per U.K. pound in fiscal
    2008.


Stock
Awards





No stock
options were granted to any of the named executive officers during the fiscal
year ended September 30, 2009.





On
December 10, 2008, Ms. Felch was issued 60,000 shares of restricted common stock
by the Company’s Board of Directors, of which 30,000 shares vest on each
December 10, 2010 and December 10, 2011.  None of the shares were
vested on September 30, 2009.  Unvested shares are subject to
forfeiture if Ms. Felch voluntarily leaves the Company or is terminated for
cause.  All shares will vest immediately if there is a change in control of
the Company.





On
December 10, 2008, the Company's Board of Directors granted Mr. Pope the right
to receive 60,000 shares of common stock, of which 30,000 shares will be issued
on each of December 10, 2010 and December 10, 2011, unless Mr. Pope voluntarily
leaves the Company or his employment is terminated for cause prior to such
dates.  None of the shares had been issued as of September 30,
2009.  Any remaining grants will be immediately issued if there is a change
in control of the Company.





The
following table provides information regarding unexercised options, unvested
restricted stock and the right to receive shares of common stock held by the
named executive officers at September 30, 2009.  All of these option
awards are fully vested. During the fiscal year ended September 30, 2009, Mr.
Pope exercised 185,000 options.





34





Outstanding
Equity Awards at Fiscal Year-End
  
 Option
      Awards
              
              
              Stock
      AwardsName
              
              Number
      of
                Securities
                Underlying
                Unexercised
                Options
      (#)
                Exercisable
              
              
              Option
                Exercise
                Price
              
              
              Option
                Expiration
                Date
              
              
              Number
                of
      Shares
                of
      Stock that
                have not vested
              
              
              Market
      Value
                of
      Shares of
                Stock
      that
                have not vestedO.B.
      Parrish
              
              
              464,000
              
              
              $
              1.40
              
              
              04/22/13
              
              
              
              
              -
              
              
              
              -Donna
      Felch
              
              
              -
              
              
              
              -
              
              
              -
              
              
              
              
              60,000
              (1)
              
              $
              303,000
              (2)Michael
      Pope
              
              
              185,000
              
              
              $
              1.40
              
              
              04/22/13
              
              
              
              
              60,000
              (3)
              
              $
              303,000
              (4)
 ____________________________
 
 (1)
              30,000
      shares vest on each December 10, 2010 and December 10,
    2011.
 
 (2)
              Market
      value equals the number of shares of restricted stock that have not vested
      multiplied by the closing price of the Company's common stock on
      September 30, 2009, which was $5.05 per
  share.
 
 (3)
              Represents
      the right to receive 30,000 shares on December 10, 2010 and 30,000
      shares on December 10, 2011.
 
 (4)
              Market
      value equals the number of shares of common stock that Mr. Pope has the
      right to receive multiplied by the closing price of the Company's common
      stock on September 30, 2009, which was $5.05 per
    share.
 
 Employment
and Change of Control Agreements





Effective
October 1, 2005, the Company entered into Amended and Restated Change of Control
Agreements with each of O.B. Parrish, its Chairman, Chief Executive Officer and
Acting President and Michael Pope, its Vice President, and effective
February 8, 2006, the Company entered into a Change of Control Agreement
with Donna Felch, its Chief Financial Officer and Vice President. These
agreements essentially act as springing employment agreements which provide
that, upon a change of control, as defined in the agreement, the Company will
continue to employ the executive for a period of three years in the same
capacities and with the same compensation and benefits as the executive was
receiving prior to the change of control, in each case as specified in the
agreements. If the executive is terminated without cause or if he or she quits
for good reason, in each case as defined in the agreements, after the change of
control, the executive is generally entitled to receive the following
benefits:






35





●
              
              a
      lump sum payment equal to the sum of the executive's base salary through
      the termination date, a prorated payment of bonus which the executive is
      eligible to receive and any compensation previously deferred by the
      executive;●
              
              a
      lump sum payment equal to three times the sum of the executive's base
      salary and the amount of the executive's prorated
bonus;●
              
              continuation
      of health and other similar benefits for a period of three years after the
      termination date; and●
              
              a
      "gross-up" payment which will, in general, effectively reimburse the
      executive for any amounts paid under federal excise taxes relating to
      change of control benefits.
 Director
Summary Compensation Table





Directors
who are executive officers or employees of the Company do not receive
compensation for serving as directors.  In fiscal 2009, the Company
paid fees to its directors who are not executive officers or employees of the
Company for their committee participation.  As described below, one of
our directors, Mary Ann Leeper, receives compensation as the Company's Senior
Strategic Adviser pursuant to an employment agreement, and another director,
William R. Gargiulo, Jr. receives consulting fees. They do not receive
compensation as directors. The following table provides information concerning
the compensation paid by the Company in 2009 to each of its directors who are
not executive officers of the Company.


Name
              Fees
                Earned
                or
      Paid in
                Cash
      (1)
              
              Stock
                Awards
      (2)
              
              Option
                Awards(3)
              
              Nonequity
                Incentive
                Plan
                Compensation(4)
              
              All
      Other
                Compensation
      (5)
              
              TotalMary
      Ann Leeper
              
              –
              
              $
              63,849
              
              
              –
              
              $
              151,500
              
              $
              187,600
              
              $
              402,949William
      R. Gargiulo, Jr.
              
              –
              
              
              –
              
              
              –
              
              $
              101,000
              
              $
              60,000
              
              $
              161,000David
      R. Bethune
              $
              10,000
              
              
              –
              
              $
              15,555
              
              
              –
              
              
              –
              
              $
              25,555Stephen
      M. Dearholt
              
              –
              
              
              –
              
              $
              15,555
              
              
              –
              
              
              –
              
              $
              15,555Mary
      Margaret Frank
              $
              12,000
              
              
              –
              
              $
              15,555
              
              
              –
              
              
              –
              
              $
              27,555Michael
      R. Walton
              
              –
              
              
              –
              
              $
              15,555
              
              
              –
              
              
              –
              
              $
              15,555Richard
      E. Wenninger
              
              –
              
              
              –
              
              $
              15,555
              
              
              –
              
              
              –
              
              $
              15,555
 
 (1)
              The
      amounts in this column reflect fees paid to board members for their
      committee participation.(2)
              On
      December 10, 2008, Dr. Leeper was issued 60,000 shares of restricted
      common stock by the Company’s Board of Directors.  The shares
      vest pro-rata over a three year period, such that 30,000 shares vest on
      each December 10, 2010 and December 10, 2011.  None of the
      shares were vested on September 30, 2009.  The closing
      price of the Company’s common stock on December 10, 2008 was $3.16 per
      share.  As of September 30, 2009, the value of Dr. Leeper’s
      restricted stock was $303,000 based on a value of $5.05 per share, the
      closing price of the Company’s common stock on that date. The shares of
      restricted stock have all the rights of the Company’s common stock,
      including voting and dividend rights.  The amount in the table
      reflects the dollar value of the compensation cost of the restricted stock
      award recognized over the requisite service period, computed in accordance
      with Accounting Standards Codification Topic 718-10 (formerly FAS No.
      123R). The stock award is valued at the closing market price of the
      Company's common stock on the date of
grant.   36
  (3)
              The
      amounts in this column reflect the dollar amount recognized for financial
      statement reporting purposes for the fiscal year ended September 30, 2009,
      in accordance with Accounting Standards Codification Topic 718-10
      (formerly FAS No. 123R), of stock option awards granted to the listed
      directors both in 2009 and prior to fiscal 2009 that vested in fiscal
      2009. The assumptions made in valuing the stock option awards are included
      under "Note 7, Share-based Payments" in the Notes to Consolidated
      Financial Statements, included herein.On
      October 12, 2006, each of the directors of the Company other than
      O.B. Parrish, Mary Ann Leeper and William Gargiulo, Jr. received a
      grant of options to purchase 30,000 shares of common stock with an
      exercise price of $1.27 per share.  All such stock options vest
      on the 12th of each month commencing on November 12, 2006 and ending
      on October 12, 2009 and have a ten year term.In
      May, 2009, the Company granted 150,000 stock options under the 2008 Stock
      Incentive plan to its independent board members.  The options
      will vest evenly over 36 months, at a rate of 1/36 of the grant per
      month.  The options have a ten year life.(4)
              Amounts
      for 2009 represent payouts under the Company's Key Executive Incentive
      Program based on achieving net income objectives for
      2009.  Under this program, each participant is entitled to a
      payout based on the Company exceeding a target amount of net income for
      the fiscal year and an additional payout for exceeding 110% of such target
      amount, with the amount of the payout based on the value of the Company's
      common stock as of fiscal year end.  In 2009, the Key Executive
      Incentive Program payment was based on achieving at least 100% of the
      annual goal.(5)
              The
      amount of "All Other Compensation" for Dr. Leeper consists of salary of
      $164,237 as well as $8,587 in matching contributions by the Company under
      the Company's Simple Individual Retirement Account plan for its employees
      and $14,776 of premiums paid by the Company for term life insurance and
      disability insurance under which Dr. Leeper or her designee is the
      beneficiary.  Dr. Leeper is employed as a Senior Strategic
      Advisor. She had specific responsibility for the preparation, submission
      and presentation of the FC2 PMA to the FDA.  She is presently
      responsible for the FC2 launch in the United States.  In
      addition, she participates as a member of the Executive Operation
      Committee. Dr. Leeper's compensation is for the execution of these
      responsibilities. She does not receive compensation for her role as a
      director of the Company. Mr. Gargiulo is a consultant to the Company and
      serves as the Corporate Secretary.  In this role, he is responsible
      for scheduling all board and board committee meetings and distribution of
      material and preparation and approval of minutes for each
      meeting.  In addition, he is responsible for the Company's
      relationship with its transfer agent and the issuance of
      shares.  Mr. Gargiulo also assists Ms. Felch with investor
      relations.  Mr. Gargiulo's compensation for the execution of
      these responsibilities was $60,000.  He does not receive compensation
      for being a director of the
Company.


37







Dr.
Leeper has served as the Company's Senior Strategic Adviser since May 2006
when she retired from the positions of President and Chief Operating Officer of
the Company.  Dr. Leeper's services as Senior Strategic Adviser are
governed by the terms of an employment agreement dated January 20, 2006, between
the Company and Dr. Leeper.  The employment agreement took effect as
of May 1, 2006, and originally was to expire on September 30, 2006, but has been
extended a number of times with the most recent extension lasting until December
31, 2007.  Pursuant to the employment agreement, Dr. Leeper
receives an annual base salary of at least $150,000 and is entitled to
participate in the Company’s bonus plans, stock incentive plan and other
employee benefit plans. Additionally, Dr. Leeper is eligible to participate in
any medical, health, dental, disability and life insurance policy that is in
effect for the Company’s other senior management.  Pursuant to the
employment agreement, Dr. Leeper has agreed not to compete with the Company
during employment and for a period of two years following termination of
employment (six months if employment is terminated by the Company after a
“change of control”) and has agreed to maintain the confidentiality of the
Company’s proprietary information and trade secrets during the term of
employment and for three years thereafter. The employment agreement provides
that if Dr. Leeper’s employment is terminated by the Company without “cause” or
by Dr. Leeper for “good reason,” Dr. Leeper will be entitled to a severance
payment of $125,000 and a payment of $50,000 in consideration of the
noncompetition and confidentiality covenants, except that if such termination
occurs at any time after or in anticipation of a “change of control” with
respect to the Company, Dr. Leeper will be entitled solely to those amounts to
which she is entitled under the Amended and Restated Change of Control Agreement
dated October 1, 2005 by and between the Company and Dr. Leeper.  The
terms of such Amended and Restated Change of Control Agreement are substantially
the same as those summarized under the heading "Employment and Change of Control
Agreements."  If the termination of Dr. Leeper’s employment occurs as
a result of the death or disability of Dr. Leeper, then she shall be entitled to
receive the greater of (a) her base salary or (b) the remaining amounts due her
under the terms of the employment agreement.  Since the contract
expiration, the Company has continued to employ Dr. Leeper based on the same
terms.





Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters





The
following table sets forth information regarding the beneficial ownership of the
Company's common stock as of December 10, 2009 with respect to (a) each
person known to the Company to own beneficially more than 5% of the Company's
common stock, (b) each named executive officer and each director of the Company
and (c) all directors and executive officers as a group.





The
Company has determined beneficial ownership in accordance with the rules of the
SEC. Unless otherwise indicated, the persons and entities included in the table
have sole voting and investment power with respect to all shares beneficially
owned, except to the extent authority is shared by spouses under applicable law.
Shares of the Company's common stock subject to options or warrants that are
either currently exercisable or exercisable within 60 days of December 10,
2009 are treated as outstanding and beneficially owned by the holder for the
purpose of computing the percentage ownership of the holder. However, these
shares are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.  The table lists applicable
percentage ownership based on 26,569,461 shares outstanding as of
December 10, 2009.





38








Shares
      Beneficially OwnedName and Address of Beneficial Owner
      (1)
            
            Number
            
            
            PercentO.B.
      Parrish (2)
            
            
            1,295,401
            
            
            
            4.8
            %William
      R. Gargiulo, Jr. (3)
            
            
            137,500
            
            
            
            *Mary
      Ann Leeper, Ph.D. (4)
            
            
            1,009,500
            
            
            
            3.7
            %Stephen
      M. Dearholt (5)
            
            
            3,444,079
            
            
            
            12.6
            %David
      R. Bethune (6)
            
            
            209,167
            
            
            
            *Michael
      R. Walton (7)
            
            
            864,723
            
            
            
            3.2
            %Richard
      E. Wenninger (8)
            
            
            2,819,838
            
            
            
            10.6
            %Mary
      Margaret Frank (9)
            
            
            66,667
            
            
            
            *Michael
      Pope (10)
            
            
            186,350
            
            
            
            *Donna
      Felch (11)
            
            
            125,000
            
            
            
            *Red
      Oak Partners (12)
            
            
            1,637,621
            
            
            
            6.2
            %All
      directors and executive officers
              as
      a group (10 persons) (2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
            
            
            10,158,225
            
            
            
            34.6
            %


_______________


* Less
than 1 percent.




(1)
              Unless
      otherwise indicated, the address of each beneficial owner is 515 North
      State Street, Suite 2225, Chicago, IL 60654; the address of Mr. Dearholt
      is 36365 Trail Ridge Road, Steamboat Springs, CO 80488; the address of
      Mr. Walton is 929 North Astor, Unit 2101, Milwaukee, WI 53202; the
      address of Mr. Wenninger is 14000 Gypsum Creek Road, Gypsum, CO 81637; the
      address of Dr. Frank is P.O. Box 6550, Charlottesville, VA 22906; and the
      address of Red Oak Partners is 654 Broadway, Suite 5, New York, NY
      10012.(2)
              Includes
      233,501 shares owned by Phoenix of Illinois. Under the rules of the SEC,
      Mr. Parrish may be deemed to have voting and dispositive power as to such
      shares since Mr. Parrish is an officer, director and the majority
      shareholder of Phoenix of Illinois. Also includes 346,400 shares of common
      stock owned directly by Mr. Parrish, 225,000 shares of common stock owned
      by the Geneva O. Parrish 1996 Living Trust of which Mr. Parrish is
      beneficiary and for which Mr. Parrish may be deemed to share voting and
      investment power, 464,000 shares of common stock subject to stock options
      held by Mr. Parrish and 26,500 shares subject to warrants held by Mr.
      Parrish.(3)
              Consists
      of 37,500 shares of common stock owned directly by Mr. Gargiulo and
      100,000 shares of common stock subject to stock options held by Mr.
      Gargiulo.(4)
              Consists
      of 219,500 shares of common stock owned directly by Dr. Leeper and 790,000
      shares of common stock subject to stock options held by Dr.
      Leeper.
   39
 
  (5)
              Includes
      1,875,492 shares owned directly by Mr. Dearholt. Also includes 69,500
      shares held by the Dearholt, Inc. Profit Sharing Plan, 28,500 shares held
      in a self-directed IRA, 275,820 shares held by the Mary C. Dearholt Trust
      of which Mr. Dearholt, a sibling and his mother are trustees, and 418,100
      shares held by the John W. Dearholt Trust of which Mr. Dearholt is a
      co-trustee with a sibling. Mr. Dearholt shares the power to vote and
      dispose of 693,920 shares of common stock held by the Mary C. Dearholt
      Trust and the John W. Dearholt Trust. Mr. Dearholt has sole power to vote
      and dispose of the remaining shares of common stock. Also includes 176,667
      shares of common stock subject to stock options held by Mr. Dearholt and
      1,000,000 shares of common stock subject to warrants held by Mr.
      Dearholt.(6)
              Consists
      of 32,500 shares of common stock owned directly by Mr. Bethune and 176,667
      shares of common stock subject to stock options held by Mr.
      Bethune.(7)
              Consists
      of 748,056 shares of common stock owned directly by Mr. Walton and 116,667
      shares of common stock subject to stock options held by Mr.
      Walton.(8)
              Consists
      of (a) 2,468,923 shares of common stock owned directly by Mr. Wenninger,
      (b) 34,248 shares of common stock held by Mr. Wenninger's spouse (Mr.
      Wenninger disclaims beneficial ownership of the shares held by his
      spouse), (c) 250,000 shares of Common Stock held by a trust of which Mr.
      Walton is trustee, and (d) 66,667 shares of common stock subject to stock
      options held by Mr. Wenninger.(9)
              Consists
      of 66,667 shares of common stock subject to stock options held by Dr.
      Frank.(10)
              Consists
      of 1,350 shares of common stock owned directly by Mr. Pope and 185,000
      shares of common stock subject to stock options held by Mr.
      Pope.(11)
              Consists of 125,000
      shares of common stock owned directly by Ms. Felch.(12)
              Red
      Oak Partners and certain affiliates filed a Schedule 13G dated
      February 5, 2009 reporting that Red Oak Partners, as general partner
      of Red Oak Fund LP, beneficially owned 1,637,621 shares of common stock
      with shared voting and investment power over such
  shares.
      40




Equity
Compensation Plan Information





The
following table summarizes share information, as of September 30, 2009, for the
Company's equity compensation plans and arrangements. The plans and arrangements
dated prior to July, 2007, were not required to be approved by the Company's
shareholders, and, accordingly, none of these plans or arrangements have been
approved by the Company's shareholders.   In March 2008, the
Company’s shareholders approved the 2008 Stock Incentive Plan and authorized
2,000,000 shares (subject to adjustment in the event of stock splits and other
similar events) for issuance under the plan.




EQUITY
      PLAN CATEGORY
              
              NUMBER
      OF COMMON
                SHARES
      TO BE ISSUED
                UPON
      EXERCISE OF
                OUTSTANDING
      O
                PTIONS,
      WARRANTS,
                AND
      RIGHTS
              
              
              NUMBER
      OF
                WEIGHTED-AVERAGE
                EXERCISE
      PRICE OF
                OUTSTANDING
                OPTIONS,
      WARRANTS,
                AND
      RIGHTS
              
              
              COMMON
      SHARES
                AVAILABLE
      FOR
                FUTURE
      ISSUANCE
                UNDER
                COMPENSATION
                PLANSEquity
      compensation plans approved by shareholders
              
              
              238,250
              (1)
              
              $
              3.92
              
              
              
              1,626,750Equity
      compensation plans not approved by shareholders
              
              
              2,229,000
              
              
              $
              1.40
              
              
              
              -Total
              
              
              2,467,250
              
              
              $
              1.56
              
              
              
              1,626,750





(1)
Includes rights to receive a total of 88,250 shares contingent on continued
employment.





The
Company's equity compensation plans not approved by shareholders include the
1997 Stock Option Plan, the 1997 Outside Director Stock Option Plan and a
warrant issuance to a consultant. Options granted under these plans are
nonqualified stock options under the Internal Revenue Code. Options expire at
such time as the Board of Directors determines, provided that no stock option
may be exercised later than the tenth anniversary of the date of its grant.
Options cannot be exercised until the vesting period, if any, specified by the
Board of Directors. Options are not transferable other than by will or the laws
of descent and distribution, and may be exercised during the life of the
participant only by him or her. The option price per share is determined by the
Board of Directors, but cannot be less than 100% of the fair market value of the
Common Stock on the date such option is granted. The 1997 Stock Option Plan
expired as of December 31, 2006, thus no further shares can be issued under this
plan.





In July
2006, the Company issued 200,000 warrants to purchase shares of common stock to
a consultant in part for payment to assist in evaluating strategic growth
opportunities.  In fiscal 2009, 90,000 warrants were exercised,
leaving 110,000 outstanding as of September 30, 2009.  These warrants
have an exercise price of $1.30 per share and expire on July 10,
2016.





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





Transactions
with Related Persons





It has
been and currently is the policy of the Company that transactions between the
Company and its officers, directors, principal shareholders or affiliates are to
be on terms no less favorable to the Company than could be obtained from
unaffiliated parties.  The Company intends that any future
transactions between the Company and its officers, directors, principal
shareholders or affiliates will be approved by a majority of the directors who
are not financially interested in the transaction.





41





Director
Independence





The
Company's Board of Directors currently consists of eight
members:  O.B. Parrish, Mary Ann Leeper, Ph.D., William R. Gargiulo,
Jr., Stephen M. Dearholt, David R. Bethune, Michael R. Walton, Richard E.
Wenninger and Mary Margaret Frank, Ph.D.  The Board of Directors has
reviewed the independence of the directors under the applicable standards of the
NASDAQ Stock Market, and based on this review, the Board of Directors determined
that all of the directors are independent under the NASDAQ Stock Market listing
standards other than O.B. Parrish, Mary Ann Leeper and William R. Gargiulo,
Jr.





Item 14.
Principal Accountant Fees and Services.





The
following table summarizes the fees the Company paid for audit and non-audit
services rendered by the Company's independent auditors, McGladrey & Pullen,
LLP, during fiscal 2009 and fiscal 2008:





Service
      Type
            
            Fiscal
      2009
            
            
            Fiscal
      2008Audit
      Fees (1)
            
            $
            259,075
            
            
            $
            287,017Audit-Related
      Fees (2)
            
            
            12,025
            
            
            
            12,211Tax
      Fees (3)
            
            
            46,083
            
            
            
            12,481All
      Other Fees
            
            
            -
            
            
            
            -Total  Fees
            
            $
            317,183
            
            
            $
            311,709





(1)
            Consists
      of fees for professional services rendered in connection with the audit of
      the Company's financial statements for the fiscal years ended September
      30, 2009 and September 30, 2008; the reviews of the financial statements
      included in each of the Company's quarterly reports on Form 10-Q’s during
      those fiscal years; and consents and assistance with documents filed by
      the Company with the SEC.





(2)
            Consists
      of costs incurred for consultation on various accounting matters in
      support of the Company's financial statements and comment letters from the
      SEC.





(3)
            For
      the fiscal years ended September 30, 2008 and September 30, 2009 consists
      of fees for professional services rendered in connection with preparation
      of federal and state income tax returns, including foreign tax filings,
      and assistance with foreign tax
structuring.





The Audit
Committee of the Board of Directors of the Company considered that the provision
of the services and the payment of the fees described above are compatible with
maintaining the independence of McGladrey & Pullen, LLP.





42





The Audit
Committee is responsible for reviewing and pre-approving any non-audit services
to be performed by the Company's independent auditors. The Audit Committee has
delegated its pre-approval authority to the Chairman of the Audit Committee to
act between meetings of the Audit Committee. Any pre-approval given by the
Chairman of the Audit Committee pursuant to this delegation is presented to the
full Audit Committee at its next regularly scheduled meeting. The Audit
Committee or Chairman of the Audit Committee reviews and, if appropriate,
approves non-audit service engagements, taking into account the proposed scope
of the non-audit services, the proposed fees for the non-audit services, whether
the non-audit services are permissible under applicable law or regulation and
the likely impact of the non-audit services on the independence of the
independent auditors.





Each new
engagement of the Company's independent auditors to perform non-audit services
set forth in the table above has been approved in advance by the Audit Committee
or the Chairman of the Audit Committee pursuant to the foregoing
procedures.





PART
IV





Item 15.
Exhibits and Financial Statement Schedules.





(a)  The
following documents are filed as part of this report:





1.        Financial
Statements





The
      following consolidated financial statements of the Company are included in
      Item 8 of this report:





Report
      of Independent Registered Public Accounting
Firm





Consolidated
      Balance Sheets as of September 30, 2009 and
2008





Consolidated
      Statements of Income for the Years Ended September 30, 2009 and
      2008





Consolidated
      Statements of Stockholders’ Equity for the Years Ended September 30, 2009
      and 2008





Consolidated
      Statements of Cash Flows for the Years Ended September 30, 2009 and
      2008





Notes
      to Consolidated Financial
Statements





2.        Financial
Statement Schedules





All
schedules for which provision is made in the applicable accounting regulations
of the Commission are not required under the related instructions, are
inapplicable or the required information is shown in the financial statements or
notes thereto, and therefore, have been omitted.








43





3.           Exhibits





EXHIBIT NO.
              DESCRIPTION3.1
              Amended
      and Restated Articles of Incorporation of the Company.
  (1)3.2
              Articles
      of Amendment to the Amended and Restated Articles of Incorporation of the
      Company increasing the number of authorized shares of common stock to
      27,000,000 shares. (2)3.3
              Articles
      of Amendment to the Amended and Restated Articles of Incorporation of the
      Company increasing the number of authorized shares of common stock to
      35,500,000 shares. (3)3.4
              Articles
      of Amendment to the Amended and Restated Articles of Incorporation of the
      Company increasing the number of authorized shares of common stock to
      38,500,000 shares. (4)3.5
              Articles
      of Amendment to the Amended and Restated Articles of Incorporation of the
      Company designating the terms and preferences for the Class A Preferred
      Stock – Series 3. (5)3.6
              Amended
      and Restated By-Laws of the Company. (6)4.1
              Amended
      and Restated Articles of Incorporation, as amended (same as
      Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5).4.2
              Articles
      II, VII and XI of the Amended and Restated By-Laws of the Company
      (included in Exhibit 3.6).10.1
              Trademark
      License Agreement for Reality Trademark. (7)10.2
              Outside
      Director Stock Option Plan. (8)10.3
              Lease
      dated November 2, 2009, among O&T Properties Limited, the Company
      and The Female Health Company (UK) Plc. (9)10.4
              Deed
      of Surrender dated November 2, 2009, among O&T Properties
      Limited, the Company, The Female Health Company (UK) Plc. and The Female
      Health Company Limited. (9)10.5
              Rent
      Deposit Deed dated November 2, 2009, between O&T Properties
      Limited and The Female Health Company (UK) Plc. (9)10.6
              1997
      Stock Option Plan, as amended.
   44
  10.7
              Amended
      and Restated Change of Control Agreement between the Company and O.B.
      Parrish dated October 1, 2005. (10)10.8
              Amended
      and Restated Change of Control Agreement between the Company and Mary Ann
      Leeper dated October 1, 2005. (10)10.9
              Amended
      and Restated Change of Control Agreement between the Company and Michael
      Pope dated October 1, 2005. (10)10.10
              Change
      of Control Agreement between the Company and Donna Felch dated February 8,
      2006. (11)10.11
              Employment
      Agreement between the Company and Mary Ann Leeper dated effective as of
      May 1, 2006. (12)10.12
              The
      Female Health Company 2008 Stock Incentive Plan. (13)10.13
              Form
      of Nonstatutory Stock Option Grant Agreement for The Female Health Company
      2008 Stock Incentive Plan.21
              Subsidiaries
      of Registrant.23.1
              Consent
      of McGladrey & Pullen, LLP24.1
              Power
      of Attorney (included as part of the signature page
    hereof).31.1
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
              Certification
      of Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
              Certification
      of Chief Executive Officer and Principal Financial Officer pursuant to 18
      U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002.
      (14)





(1)
            Incorporated
      herein by reference to the Company's Form SB-2 Registration Statement
      filed with the Securities and Exchange Commission on October 19,
      1999.(2)
            Incorporated
      herein by reference to the Company's Form SB-2 Registration Statement
      filed with the Securities and Exchange Commission on September 21,
      2000.(3)
            Incorporated
      by reference herein to the Company's Form SB-2 Registration Statement
      filed on September 6, 2002.(4)
            Incorporated
      herein by reference to the Company's March 31, 2003 Form
      10-QSB.(5)
            Incorporated
      herein by reference to the Company's March 31, 2004 Form
      10-QSB.   45
  (6)
              Incorporated
      herein by reference to the Company's Registration Statement on Form S-18,
      Registration No. 33-35096, as filed with the Securities and Exchange
      Commission on May 25, 1990.(7)
              Incorporated
      herein by reference to the Company's 1992 Form 10-KSB.(8)
              Incorporated
      herein by reference to the Company's Form S-1 Registration Statement filed
      with the Securities and Exchange Commission on April 23,
      1996.(9)
              Incorporated
      herein by reference to the Company's Form 8-K filed with the Securities
      and Exchange Commission on November 6, 2009.(10)
              Incorporated
      herein by reference to the Company's September 30, 2005 Form
      10-KSB.(11)
              Incorporated
      herein by reference to the Company's Form 8-K filed with the Securities
      and Exchange Commission on February 8, 2006.(12)
              Incorporated
      hereby by reference to the Company's Form 8-K/A filed with the Securities
      and Exchange Commission on February 21, 2006.(13)
              Incorporated
      hereby by reference to the Company's Form 8-K filed with the Securities
      and Exchange Commission on March 31, 2008.(14)
              This
      certification is not "filed" for purposes of Section 18 of the Securities
      Exchange Act of 1934, as amended, or incorporated by reference into any
      filing under the Securities Exchange Act of 1933, as amended, or the
      Securities Exchange Act of 1934, as
amended.





(b)  Exhibits





The
response to this portion of Item 15 is submitted as a separate section of this
report.





(c)  Financial
Statement Schedules





The
response to this portion of Item 15 is submitted as a separate section of this
report.








46





SIGNATURES





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








Date:  December 17,
2009


THE
FEMALE HEALTH COMPANY








BY:  /s/ O.B.
Parrish


O.B. Parrish,
Chairman,


Chief
Executive Officer





BY:  /s/ Donna
Felch


Donna
Felch, Vice President,


Chief
Financial Officer








POWER OF
ATTORNEY





Each
person whose signature appears below hereby appoints O.B. Parrish and Donna
Felch, and each of them individually, his true and lawful attorney-in-fact, with
power to act with or without the other and with full power of substitution and
resubstitution, in any and all capacities, to sign any or all amendments to the
Form 10-K and file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully cause to be done by virtue
hereof.





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





Signature
            
            Title
            Date/s/
      O. B. Parrish
            
            Chairman
      of the Board, Chief Executive Officer
            December 17,
      2009O.B.
      Parrish
            
            and
      Director (Principal Executive Officer)/s/
      Mary Ann Leeper, Ph.D.
            
            Director
            December 17,
      2009Mary
      Ann Leeper, Ph.D.





47








/s/
      Donna Felch
            
            Vice
      President and Chief Financial Officer (Principal
            December 17,
      2009Donna
      Felch
            
            Accounting
      and Financial Officer)/s/
      William R. Gargiulo
            
            Secretary
      and Director
            December 17,
      2009William
      R. Gargiulo/s/
      David R. Bethune
            
            Director
            December 17,
      2009David
      R. BethuneDirector
            December 17,
      2009Stephen
      M. Dearholt/s/
      Michael R. Walton
            
            Director
            December 17,
      2009Michael
      R. WaltonDirector
            December 17,
      2009Richard
      E. WenningerDirector
            December 17,
      2009Mary
      Margaret Frank







48


The
Female Health Company and Subsidiaries


Index
to Consolidated Financial Statements
 
  Document
              Page
    No.Audited
      Consolidated Financial Statements.Report
      of McGladrey & Pullen, LLP, Independent Registered Public Accounting
      Firm.
              F-1Consolidated
      Balance Sheets as of September 30, 2009 and 2008
              F-2Consolidated
      Statements of Income for the years ended September 30, 2009 and
      2008.
              F-3Consolidated
      Statements of Stockholders’ Equity for
      the years ended September 30, 2009 and 2008.
              F-4
      and F-5Consolidated
      Statements of Cash Flows for the years ended September
      30, 2009 and 2008
              F-6Notes
      to Consolidated Financial Statements.
              F-7
      through F-24
 
  
  Report
of Independent Registered Public Accounting Firm
  To the
Board of Directors and Stockholders
 The
Female Health Company
 
 We have
audited the accompanying consolidated balance sheets of The Female Health
Company and Subsidiaries, as of September 30, 2009 and 2008, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The Female Health Company
and Subsidiaries as of September 30, 2009 and 2008, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
 
 We were
not engaged to examine management’s assessment of the effectiveness of The
Female Health Company and Subsidiaries’ internal control over financial
reporting as of September 30,2009, included in the accompanying Controls and
Procedures and, accordingly, we do not express an opinion thereon.
 
 /s/
McGladrey & Pullen, LLP
 
 Chicago,
Illinois
 December
17, 2009
  F-1
 THE
      FEMALE HEALTH COMPANY AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS
                SEPTEMBER
      30, 2009 AND 20082009
              
              
              2008ASSETSCurrent
      AssetsCash
              
              $
              2,810,197
              
              
              $
              1,922,148Restricted
      cash
              
              
              105,074
              
              
              
              211,873Accounts
      receivable, net of allowance for doubtful accounts 2009 $40,000
      and 2008 $53,000
              
              
              7,806,007
              
              
              
              6,810,050Income
      tax receivable
              
              
              68,106
              
              
              
              -Inventories
              
              
              1,203,063
              
              
              
              1,322,652Prepaid
      expenses and other current assets
              
              
              429,602
              
              
              
              414,040Deferred
      income taxes
              
              
              2,181,000
              
              
              
              1,600,000TOTAL
      CURRENT ASSETS
              
              
              14,603,049
              
              
              
              12,280,763Other
      Assets
              
              
              87,621
              
              
              
              55,330EQUIPMENT,
      FURNITURE AND FIXTURESEquipment
      not yet in service
              
              
              166,226
              
              
              
              -Equipment,
      furniture and fixtures
              
              
              7,037,099
              
              
              
              6,046,2837,203,325
              
              
              
              6,046,283Less
      accumulated depreciation and amortization
              
              
              (4,381,709
              )
              
              
              (4,551,638
              )2,821,616
              
              
              
              1,494,645Deferred
      income taxes
              
              
              1,028,149
              
              
              
              -TOTAL
      ASSETS
              
              $
              18,540,435
              
              
              $
              13,830,738LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              602,196
              
              
              $
              621,115Accrued
      expenses and other current liabilities
              
              
              1,420,099
              
              
              
              1,160,086Accrued
      compensation
              
              
              1,597,662
              
              
              
              1,225,454Restructuring
      accrual
              
              
              1,116,911
              
              
              
              -Deferred
      gain on sale of facility
              
              
              657,605
              
              
              
              -Preferred
      dividends payable
              
              
              -
              
              
              
              25,068TOTAL
      CURRENT LIABILITIES
              
              
              5,394,473
              
              
              
              3,031,723Obligations
      under capital leases
              
              
              34,428
              
              
              
              49,597Deferred
      gain on sale of facility
              
              
              -
              
              
              
              836,733Deferred
      grant income
              
              
              157,143
              
              
              
              203,483TOTAL
      LIABILITIES
              
              
              5,586,044
              
              
              
              4,121,536STOCKHOLDERS’
      EQUITYConvertible
      preferred stock, Class A Series 1, par value $.01 per
      share;
                authorized 5,000,000 shares; no shares issued and outstanding in
      2009and
      2008.
              
              
              -
              
              
              
              -Convertible
      preferred stock, Class A Series 3, par value $.01 per share;
                authorized 700,000 shares; no shares issued and outstanding in 2009;

                  307,602
      shares issued and outstanding in 2008.
              
              
              -
              
              
              
              3,076Convertible
      preferred stock, Class B, par value $.50 per share;
                authorized 15,000 shares; no shares issued and outstanding in 2009 and
      2008.
              
              
              -
              
              
              
              -Common
      Stock, par value $.01 per share; authorized 38,500,000
                shares;
      issued 28,382,766 and 27,112,908 shares, and
                26,538,961 and 26,271,908 outstanding in 2009 and 2008,
      respectively.
              
              
              283,828
              
              
              
              271,129Additional
      paid-in capital
              
              
              66,395,902
              
              
              
              65,366,130Accumulated
      other comprehensive loss
              
              
              (581,519
              )
              
              
              (162,705
              )Accumulated
      deficit
              
              
              (47,143,309
              )
              
              
              (53,598,971
              )Treasury
      stock, at cost, 1,843,805 and 841,000  shares of common stock in
      2009 and 2008, respectively
              
              
              (6,000,511
              )
              
              
              (2,169,457
              )TOTAL
      STOCKHOLDERS’ EQUITY
              
              
              12,954,391
              
              
              
              9,709,202TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              18,540,435
              
              
              $
              13,830,738See
      notes to consolidated financial statements.
  F-2
  THE
      FEMALE HEALTH COMPANY AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME
                YEARS
      ENDED SEPTEMBER 30, 2009 AND 20082009
              
              
              2008Product sales
              
              $
              27,383,165
              
              
              $
              25,528,250Royalty
      income
              
              
              160,176
              
              
              
              105,876Net
      revenues
              
              
              27,543,341
              
              
              
              25,634,126Cost
      of sales
              
              
              14,025,523
              
              
              
              14,904,325Gross
      profit
              
              
              13,517,818
              
              
              
              10,729,801Operating
      expenses:Advertising
      and promotion
              
              
              191,153
              
              
              
              223,800Selling,
      general and administrative
              
              
              7,006,111
              
              
              
              7,038,060Research
      and development
              
              
              105,916
              
              
              
              284,216Restructuring
      costs
              
              
              1,496,624
              
              
              
              -Total
      operating expenses
              
              
              8,799,804
              
              
              
              7,546,076Operating
      income
              
              
              4,718,014
              
              
              
              3,183,725Non-operating
      income:Interest
      and other income
              
              
              55,984
              
              
              
              53,445Foreign
      currency transaction gain
              
              
              276,113
              
              
              
              966,736Total
      non-operating income
              
              
              332,097
              
              
              
              1,020,181Income
      before income taxes
              
              
              5,050,111
              
              
              
              4,203,906Income
      tax benefit
              
              
              (1,485,268
              )
              
              
              (762,862
              )Net income
              
              
              6,535,379
              
              
              
              4,966,768Preferred
      dividends, Class A, Series 1
              
              
              -
              
              
              
              8,397Preferred
      dividends, Class A, Series 3
              
              
              79,717
              
              
              
              129,109Net
      income attributable to common stockholders
              
              $
              6,455,662
              
              
              $
              4,829,262Net
      income per basic common shares outstanding
              
              $
              0.25
              
              
              $
              0.18Basic
      weighted average common shares outstanding
              
              
              25,651,915
              
              
              
              26,116,499Net
      income per diluted common share outstanding
              
              $
              0.24
              
              
              $
              0.18Diluted
      weighted average common shares outstanding
              
              
              27,806,832
              
              
              
              27,983,263See
      notes to consolidated financial statements.
  F-3
  THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 YEARS
ENDED SEPTEMBER 2009 AND 2008
 AccumulatedClass
      A
                
                
                Class
      A
                
                
                
                
                
                
                
                
                
                
                
                OtherSeries
      1
                
                
                Series
      3
                
                
                Preferred
                
                
                
                
                
                Additional
                
                
                Comprehensive
                
                
                
                
                
                Cost
      ofPreferred
                
                
                Preferred
                
                
                Stock
                
                
                Common
                
                
                Paid-in
                
                
                (Loss)
                
                
                Accumulated
                
                
                TreasuryStock
                
                
                Stock
                
                
                Class
      B
                
                
                Stock
                
                
                Capital
                
                
                Income
                
                
                Deficit
                
                
                Stock
                
                
                TotalBalance
      at September  30, 2007
                
                $
                560
                
                
                $
                4,734
                
                
                $
                -
                
                
                $
                264,379
                
                
                $
                64,954,610
                
                
                $
                1,051,156
                
                
                $
                (58,428,233
                )
                
                $
                (399,747
                )
                
                $
                7,447,459Share-based
      compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                800
                
                
                
                264,002
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                264,802Amortization
      of unearned consulting fees
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                57,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                57,000Issuance
      of 290,000 shares of Common Stock forwarrants
      exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,900
                
                
                
                419,600
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                422,500Issuance
      of 291,000 shares of Common Stock foroptions
      exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,910
                
                
                
                299,340
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                302,250Issuance
      of 14,000 shares of Common Stock andcash
      payment  for 42,000 shares for redemption56,000
      shares preferred stock Class A ,Series 1
                
                
                (560
                )
                
                
                -
                
                
                
                -
                
                
                
                140
                
                
                
                (104,580
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (105,000
                )Repurchase
      165,773 shares preferred stock Class A,Series
      3
                
                
                -
                
                
                
                (1,658
                )
                
                
                -
                
                
                
                -
                
                
                
                (523,842
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (525,500
                )Stock
      repurchase – 667,600 Treasury Shares
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,769,710
                )
                
                
                (1,769,710
                )Preferred
      Stock dividends
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (137,506
                )
                
                
                -
                
                
                
                (137,506
                )Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,966,768
                
                
                
                -
                
                
                
                4,966,768Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,213,861
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,213,861
                )Comprehensive
      income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,752,907Balance
      at September  30, 2008
                
                $
                -
                
                
                $
                3,076
                
                
                $
                -
                
                
                $
                271,129
                
                
                $
                65,366,130
                
                
                $
                (162,705
                )
                
                $
                (53,598,971
                )
                
                $
                (2,169,457
                )
                
                $
                9,709,202See
      Notes to Consolidated Financial Statements.
 
  F-4
  THE
FEMALE HEALTH COMPANY AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 YEARS
ENDED SEPTEMBER 2009 AND 2008
 Class
      A
                      Series
      3PreferredStock
                
                Class
      ASeries
      1PreferredStock
                
                PreferredStockClass
    B
                
                CommonStock
                
                AdditionalPaid-inCapital
                
                Accumulated
                    Other
                    Comprehensive
                    (Loss)Income
                
                Accumulated
                  Deficit
                
                Cost
      ofTreasuryStock
                
                
                TotalBalance
      at September  30, 2008
                $
                3,076
                
                
                -
                
                
                -
                
                $
                271,129
                
                $
                65,366,130
                
                $
                (162,705
                )
                $
                (53,598,971
                )
                $
                (2,169,457
                )
                
                $
                9,709,202Share-based
      compensation
                
                -
                
                
                -
                
                
                -
                
                
                1,733
                
                
                297,430
                
                
                -
                
                
                -
                
                
                -
                
                
                
                299,163Issuance
      of 67,524 shares of Common Stock uponwarrants
      cashless exercised
                
                -
                
                
                -
                
                
                -
                
                
                675
                
                
                (675
                )
                
                -
                
                
                -
                
                
                -
                
                
                
                -Issuance
      of 400,000 shares of Common Stockupon
      exercise of warrants
                
                -
                
                
                -
                
                
                -
                
                
                4,000
                
                
                285,000
                
                
                -
                
                
                -
                
                
                -
                
                
                
                289,000Issuance
      of 320,980 shares of Common Stockfor
      option exercised
                
                -
                
                
                -
                
                
                -
                
                
                3,210
                
                
                446,162
                
                
                -
                
                
                -
                
                
                -
                
                
                
                449,372Issuance
      of 500 shares of Common Stock
                
                -
                
                
                -
                
                
                -
                
                
                5
                
                
                1,855
                
                
                -
                
                
                -
                
                
                -
                
                
                
                1,860Issuance
      of 307,604 shares of Common Stockupon
      conversion of 307,604 shares Preferred Stock Series 3
                
                (3,076
                )
                
                -
                
                
                -
                
                
                3,076
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                
                -Stock
      repurchase – Total 1,002,805 Treasury Shares
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,831,054
                )
                
                
                (3,831,054
                )Preferred
      Stock dividends
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (79,717
                )
                
                -
                
                
                
                (79,717
                )Comprehensive
      income:
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                
                -Net
      income
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,535,379
                
                
                -
                
                
                
                6,535,379Foreign
      currency translation adjustment
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (418,814
                )
                
                -
                
                
                -
                
                
                
                (418,814
                )Comprehensive
      income
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                
                6,116,565Balance
      at September  30, 2009
                $
                -
                
                $
                -
                
                $
                -
                
                $
                283,828
                
                $
                66,395,902
                
                $
                (581,519
                )
                $
                (47,143,309
                )
                $
                (6,000,511
                )
                
                
                12,954,391
 See Notes
to Consolidated Financial Statements.
  F-5
  THE
      FEMALE HEALTH COMPANY AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS
      ENDED SEPTEMBER  30, 2009 AND 20082009
              
              
              2008OPERATIONSNet
      income
              
              $
              6,535,379
              
              
              $
              4,966,768Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
              
              
              268,382
              
              
              
              217,085Amortization
      of deferred gain on sale and leaseback of building
              
              
              (88,367
              )
              
              
              (112,512
              )Amortization
      of deferred income from grant - BLCF
              
              
              (24,198
              )
              
              
              (23,466
              )Provision
      for obsolete inventory
              
              
              53,028
              
              
              
              (15,100
              )Provision
      for bad debts
              
              
              (7,758
              )
              
              
              9,878Interest
      added to certificate of deposit
              
              
              (2,709
              )
              
              
              (2,586
              )Amortization
      of unearned consulting fees
              
              
              -
              
              
              
              57,000Share-based
      compensation
              
              
              373,776
              
              
              
              264,802Deferred
      income taxes
              
              
              (1,597,552
              )
              
              
              (775,000
              )Loss
      on disposal of fixed assets
              
              
              6,739
              
              
              
              6,288Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (1,287,103
              )
              
              
              (1,158,701
              )Income
      tax receivable
              
              
              (66,369
              )
              
              
              -Inventories
              
              
              (72,259
              )
              
              
              (110,081
              )Prepaid
      expenses and other assets
              
              
              (48,795
              )
              
              
              134,823Accounts
      payable
              
              
              44,476
              
              
              
              (94,241
              )Accrued
      expenses and other current liabilities
              
              
              1,660,444
              
              
              
              879,441Net
      cash provided by operating activities
              
              
              5,747,114
              
              
              
              4,244,398INVESTING
      ACTIVITIESDecrease
      (increase) in restricted cash
              
              
              106,799
              
              
              
              (125,438
              )Proceeds
      from disposal of fixed assets
              
              
              32,079
              
              
              
              13,859Capital
      expenditures
              
              
              (1,643,593
              )
              
              
              (347,602
              )Net
      cash used in investing activities
              
              
              (1,504,715
              )
              
              
              (459,181
              )FINANCING
      ACTIVITIESPayment
      on capital lease obligations
              
              
              (39,448
              )
              
              
              (36,499
              )Proceeds
      from exercise of stock options
              
              
              449,372
              
              
              
              302,250Proceeds
      from exercise of common stock warrants
              
              
              289,000
              
              
              
              422,500Redemption
      and repurchase of preferred stock
              
              
              -
              
              
              
              (630,500
              )Proceeds
      from issuance of common stock
              
              
              1,860
              
              
              
              -Purchases
      of common stock for treasury shares
              
              
              (3,831,054
              )
              
              
              (1,769,710
              )Dividends
      paid on preferred stock
              
              
              (104,785
              )
              
              
              (165,463
              )Net
      cash used in financing activities
              
              
              (3,235,055
              )
              
              
              (1,877,422
              )Effect
      of exchange rate changes on cash
              
              
              (119,295
              )
              
              
              (785,068
              )Net
      increase in cash
              
              
              888,049
              
              
              
              1,122,727Cash
      at beginning of year
              
              
              1,922,148
              
              
              
              799,421CASH
      AT END OF YEAR
              
              $
              2,810,197
              
              
              $
              1,922,148Schedule
      of noncash financing and investing activities:Preferred
      dividends declared
              
              
              -
              
              
              
              25,068Reduction
      of accrued expense upon issuance of shares
              
              
              72,688
              
              
              
              76,516Capital
      lease obligations incurred for the purchase of equipment
              
              
              45,808
              
              
              
              103,559Foreign
      currency translation adjustment
              
              
              (418,814
              )
              
              
              (1,213,861
              )Income
      tax paid
              
              
              133,914
              
              
              
              42,564Fixed
      asset additions in accounts payable at year end
              
              
              86,104
              
              
              
              -See
      notes to consolidated financial statements.
 
  F-6
   The
      Female Health Company and Subsidiaries
                
                Notes
      to Consolidated Financial
Statements
  Note
1.            Nature
of Business and Significant Accounting Policies
  Principles of consolidation
and nature of operations:  The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
The Female Health Company – UK, and its wholly owned subsidiaries, The Female
Health Company - UK, plc and The Female Health Company (M) SDN. BHD. All
significant intercompany transactions and accounts have been eliminated in
consolidation. The Female Health Company ("FHC" or the "Company") is currently
engaged in the marketing, manufacture and distribution of a consumer health care
product, the female condom.  The original female condom is known as
the “FC Female Condom” in the U.S., and "femidom" or "femy" outside the U.S; the
second generation product is known as FC2 throughout the world.  The
Female Health Company - UK, is the holding company of The Female Health Company
- UK, plc, which is located in a 40,000 sq. ft. leased manufacturing facility
located in London, England. The Female Health Company (M) SDN.BHD leases a
16,000 sq. ft. manufacturing facility located in Selangor D.E.,
Malaysia.
 
 The
Company's standard credit terms vary from 30 to 90 days, depending on the class
of trade and customary terms within a territory, so accounts receivable is
affected by the mix of purchasers within the quarter.  As is typical
in the Company's business, extended credit terms may occasionally be offered as
a sales promotion.  For the past twelve months, the Company's average
days sales outstanding has averaged approximately 75 days.  Over the
past five years, the Company’s bad debt expense has been less than .01% of
sales.
 
 Use of
estimates:  The preparation of financial statements requires
management to make estimates and use assumptions that affect certain reported
amounts and disclosures.  Actual results may differ from those
estimates.
 
 Significant
accounting estimates include the allowance for doubtful accounts, reserve for
inventory obsolescence, estimated useful lives of fixed assets, deferred income
tax valuation allowance and value of equity-based compensation.
 
 Cash concentration:
The Company’s cash is maintained primarily in three financial institutions, one
located in Clayton, Missouri, one located in London, England and the other in
Kuala Lumpur, Malaysia.
 
 Accounts receivable and
concentration of credit risk:  Accounts receivable are carried
at original invoice amount less an estimate made for doubtful receivables based
on a review of all outstanding amounts on a periodic basis. As of September 30,
2009, the $7,806,007 accounts receivable balance was comprised of $7,534,290
trade receivables and $271,717 other receivables, compared to an accounts
receivable balance of $6,810,050 as of September 30, 2008 which was comprised of
$6,351,493 trade receivables and $458,557 other receivables. Management
determines the allowance for doubtful accounts by identifying troubled accounts
and by using historical experience applied to an aging of accounts. 
Management also periodically evaluates individual customer receivables and
considers a customer’s financial condition, credit history, and the current
economic conditions.  Accounts receivable are written off when deemed
uncollectible.  Recoveries of accounts receivable previously written
off are recorded when
received.   The Company’s customers are primarily governments,
ministries of health and large global agencies which purchase and distribute the
female condom for use in HIV/AIDS prevention programs. In fiscal year 2009,
significant customers were John Snow, Inc., facilitator of USAID I DELIVER
project (34% of unit sales) and UNFPA (25% of unit sales). No other single
customer accounted for more than 10% of unit sales in fiscal 2009.
 
 Inventories:  Inventories
are valued at the lower of cost or market.  The cost is determined
using the first-in, first-out (FIFO) method.  Inventories are also
written down for management’s estimates of product which will not sell prior to
its expiration date.  Write-downs of inventories establish a new cost
basis which is not increased for future increases in the market value of
inventories or changes in estimated obsolescence.
  F-7
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
1.            Nature
of Business and Significant Accounting Policies (Continued)
 
 Foreign currency translation
and operations: The financial statements of the Company's international
subsidiaries are translated into U.S. dollars using the exchange rate at each
balance sheet date for assets and liabilities, the historical exchange
rate for stockholders' equity and a weighted average exchange rate for each
period for revenues, expenses, and gains and losses.  Translation
adjustments are recorded as a separate component of stockholders' equity as the
local currency is the functional currency. Assets located outside of the United
States totaled approximately $8,700,000 and $7,500,000 at September 30, 2009 and
2008, respectively.
 
 Equipment and furniture and
fixtures:  Depreciation and amortization are computed using
primarily the straight-line method.  Depreciation and amortization are
computed over the estimated useful lives of the respective assets which range as
follows:
  Manufacturing
      equipment
              5 -
      10 yearsOffice
      equipment
              3
      yearsFurniture
      and fixtures
              7 -
      10 years
 
 Depreciation
on leased assets is computed over the lesser of the remaining lease term or the
estimated useful lives of the assets.  Depreciation on leased assets
is included with depreciation on owned assets.
 
 Patents and
trademarks:  FC2 patents have been issued in Europe, Canada,
Australia, South Africa and the People’s Republic of China.  Patent
applications for FC2 are pending in the U.S. and in other countries around the
world through the Patent Cooperation Treaty. The applications cover the key
aspects of the second generation female condom, including its overall design and
manufacturing process.
 
 The
Company has the registered trademark “FC2 Female Condom” in the United
States. The Company has also secured, or applied for, 12 trademarks in 22
countries to protect the various names and symbols used in marketing the product
around the world. These include "femidom" and "femy," “Reality” and others. The new patents were
expensed when incurred.
 
 Financial
instruments: On October 1, 2008, the Company adopted a new accounting
standard, which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. However, the FASB
provided a one year deferral in November 2007 which deferred the effective date
of this standard, until the beginning of our 2010 fiscal year, as it relates to
fair value measurement requirements for nonfinancial assets and liabilities that
are not re-measured at fair value on a recurring basis. The Company determined
that the adoption of this standard did not have a material effect on its
consolidated financial statements. The fair
value framework requires the categorization of assets and liabilities into three
levels based upon the assumptions (inputs) used to price the assets or
liabilities. Level 1 provides the most reliable measure of fair value, whereas
Level 3 generally requires significant management judgment. The three levels are
defined as follows:
   ●
              
              Level 1: Unadjusted
      quoted prices in active markets for identical assets and
      liabilities.●
              
              Level 2: Observable
      inputs other than those included in Level 1. For example, quoted prices
      for similar assets or liabilities in active markets or quoted prices for
      identical assets or liabilities in inactive markets.●
              
              Level 3: 
      Unobservable inputs reflecting managment's own assumptions abou the inputs
      used in pricing the asset or liability.
 
  F-8
 The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 
 Note
1.            Nature of Business and Significant
Accounting Policies (Continued)
 
 The
Company currently does not have any assets measured at fair value on a recurring
basis. Substantially all of the Company’s cash and cash equivalents, as well as
restricted cash, are held in demand deposits, including money market accounts,
with its bank. The Company has no financial instruments for which the carrying
value is materially different than fair value.
 
 Research and development
costs:  Research and development costs are expensed as
incurred. The amount of costs expensed for the years ended September 30, 2009
and 2008, was approximately $106,000 and $284,000, respectively.
 
 Restricted
cash:  Restricted cash relates to security provided to one of
the Company’s UK banks for performance bonds issued in favor of customers. Such
security has been extended infrequently and only on occasions where it has been
a contract term expressly stipulated as an absolute requirement by the funds’
provider. The expiration of the bond
is defined by the completion of the event such as, but not limited to, delivery
of goods or at a period of time after product has been distributed.
 
 Revenue
recognition:  The Company recognizes revenue from product sales
when each of the following conditions has been met: an arrangement exists,
delivery has occurred, there is a fixed price, and collectability is reasonably
assured.  The Company also derives revenue from licensing its
intellectual property under an agreement with its business partner, Hindustan
Lifecare Limited.  Such revenue appears as royalty income on the
Consolidated Statements of Income for the years ended September 30, 2009 and
2008, and is recognized in the period in which the sale is made by Hindustan
Lifecare Limited.
 
 Deferred grant
income:  The Company received grant monies from the British
Linkage Challenge Fund to help the Company defray certain expenses and the cost
of capital expenditures related to a project.  The underlying project
related to the development of a linkage between the UK subsidiary and Hindustan
Lifecare Limited, in India, to do end-stage manufacturing of the female condom
and develop the market for the product in that country.  The grant
received was split between the Company and Hindustan Lifecare Limited pro-rata
to their respective expenditure on the project. The Company utilized the general
precepts of U.S. GAAP and the principles of matching and conservatism to
determine how to account for the grant monies received.  The Company
also utilized the guidance of International Accounting Standard No. 20 –
Accounting for Government Grants and Disclosure of Government Assistance to
further support the Company's accounting treatment of the grant
received.  The Company allocated its share of the grant monies to
capital and expense pro-rata to the respective cost allocated to the
project.  Grant proceeds for expenses were credited to income in the
quarter incurred.  Grant proceeds for capital expenditure were deferred and
released to income in line with the depreciation of the relevant
assets.
 
 Share-based
compensation: The Company accounts for stock-based compensation expense
for equity awards exchanged for employee services over the vesting period based
on the grant-date fair value.
 
 Advertising:  The
Company's policy is to expense advertising and promotion costs as
incurred.
 
 Income
taxes:  The Company files separate income tax returns for its
foreign subsidiaries. Accounting Standards Codification (topic 740) requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns.  Under this method, deferred tax assets and liabilities
are determined based on the differences between the financial statements and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax assets are also
provided for carryforwards for income tax purposes. In addition, the amount of
any future tax benefits is reduced by a valuation allowance to the extent such
benefits are not expected to be realized.
  F-9
 The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
      1.
              Nature
      of Business and Significant Accounting Policies
  (Continued)
  Earnings per share
(EPS):  Basic EPS is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period.  Diluted EPS is computed giving effect to all dilutive
potential common shares that were outstanding during the
period.  Dilutive potential common shares consist of the
incremental common shares issuable upon the exercise of stock options and
warrants and upon restrictions lapsing on restricted shares, for all
periods. In fiscal 2008, dilutive potential common shares also consisted of the
incremental common shares issuable upon conversion of convertible preferred
shares. All convertible preferred shares were converted to common shares in
fiscal 2009.
 
 Other comprehensive
income:  Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net
income.  Although certain changes in assets and liabilities, such as
foreign currency translation adjustments, are reported as a separate component
of the equity section of the balance sheet, such items, along with net income,
are components of comprehensive income.
 
 Over the
years, the US parent company financed the operations of its U.K. subsidiaries
through an intercompany loan with The Female Health Company-UK, plc., which is
eliminated upon consolidation.  The Company had designated the
intercompany loan to be long-term in nature. Further, the Company follows the
guidance of Accounting Standards Codification (topic 830) when translating the
subsidiary’s balance sheet for consolidation purposes, which states that gains
and losses on intercompany foreign currency transactions that are of a long-term
investment nature (that is, settlement is not planned or anticipated in the
foreseeable future) would not be included in the computation of net income when
the entities to the transaction are consolidated.
 
 In
December, 2008, a long term intercompany loan from the U.S. parent to the U.K.
subsidiary in the amount of $3,572,733 was retired in exchange for a reduction
in the intercompany trade accounts payable to the U.K. subsidiary from the U.S.
parent company.  The settlement of this long term intercompany loan
resulted in a foreign currency translation loss of approximately $135,000 which
is recognized as a decrease to accumulated other comprehensive income.
Translation adjustments on intercompany trade accounts are recorded in earnings
as the local currency is the functional currency.
 
 The US
parent company routinely purchases inventory produced by its UK and Malaysia
subsidiaries, and the UK entity purchases inventory produced by its Malaysia
subsidiary, for sale to its customers. This intercompany trade account is
eliminated in consolidation. The Company’s policy and intent is to settle the
intercompany trade account on a current basis, and as such, translation gains
and losses are recognized in the consolidated statement of income. Included in
foreign currency transaction gains  is approximately $302,000 and
$551,000 of translation gains on the intercompany trade account for the years
ended September 30, 2009 and 2008, respectively, which fluctuate based on the
timing of inventory purchases as well as variability in exchange
rates.
 
 Subsequent events: In
May 2009, the Financial Accounting Standards Board (FASB) issued a new
accounting standard, which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. Specifically,
this standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date.   Management has evaluated
all events or transactions that occurred after September 30, 2009 up
through December 17, 2009, the date these financial statements were issued.
During this period the Company did not have other material recognizable
subsequent events.
  F-10
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 
 Note
1.            Nature of Business and Significant
Accounting Policies (Continued)
 
 Reclassification:
Certain items in the financial statements for the year ended September 30, 2008
have been reclassified to be consistent with the presentation shown for the year
ended September 30, 2009.
 
 Note
2.       Earnings per Share
 
 Basic EPS
is computed by dividing net income attributable to common stockholders by the
weighted average number of common shares outstanding for the period. In the
diluted earnings per share calculation, the numerator is the sum of net income
attributable to common stockholders and preferred dividends. Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period.  Dilutive potential common shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants and unvested shares granted to employees. In fiscal 2008,
dilutive potential common shares also consist of the incremental common shares
issuable upon conversion of convertible preferred shares.
 
 September
      30,2009
              
              
              2008Denominator:Weighted
      average common shares outstanding - basic
              
              
              25,651,915
              
              
              
              26,116,499Net
      effect of dilutive securities:Options
              
              
              1,405,169
              
              
              
              755,600Warrants
              
              
              526,566
              
              
              
              757,060Convertible
      preferred stock
              
              
              -
              
              
              
              307,604Unvested
      restricted shares
              
              
              223,182
              
              
              
              46,500Total
      net effect of dilutive securities
              
              
              2,154,917
              
              
              
              1,866,764Weighted
      average common shares outstanding - diluted
              
              
              27,806,832
              
              
              
              27,983,263Income
      per common share – basic
              
              $
              0.25
              
              
              $
              0.18Income
      per common share – diluted
              
              $
              0.24
              
              
              $
              0.18
 
  F-11
 The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
3.        Inventories
  The
components of inventory consist of the following at September 30, 2009 and
2008:
 
 2009
              
              
              2008Raw
      material
              
              $
              519,046
              
              
              $
              910,130Work
      in process
              
              
              305,778
              
              
              
              135,020Finished
      goods
              
              
              474,239
              
              
              
              323,502Inventory,
      gross
              
              
              1,299,063
              
              
              
              1,368,652Less:
      inventory reserves
              
              
              (96,000
              )
              
              
              (46,000
              )Inventory,
      net
              
              $
              1,203,063
              
              
              $
              1,322,652
  Note
4.        Notes Payable and Long-Term
Debt
  Presently,
the Company has two revolving notes with Heartland Bank that allow the Company
to borrow up to $1,500,000. These notes, which expire July 1, 2010, were
extended under the same terms as the initial notes dated May 19, 2004, with the
exception of the interest rate which has been reduced to base rate plus 0.5%,
with an interest rate minimum of 6%. No new warrants were issued as part of the
extension of these notes. These notes are collateralized by substantially all of
the assets of the Company. No amounts were outstanding under the revolving notes
at September 30, 2009 and 2008.
 
 Note
5.        Operating Leases, Rental
Expense and Subsequent Event
 
 The
Company’s corporate headquarters is located in 5,100 square feet of leased
office space in Chicago, Illinois.  The lease, which expires October
31, 2011, requires monthly payments of $6,882 plus real estate taxes, utilities,
and maintenance expenses.
 
 On
December 10, 1996, the Company entered into what is in essence a sale and
leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England.  The Company received $3,365,000
(£1,950,000) for leasing the facility to a third party for a nominal annual
rental charge and for providing the third party with an option to purchase the
facility for one pound during the period December 2006 to December 2027. As part
of the same transaction, the Company entered into an agreement to lease the
facility back from the third party for base rents of $460,399 (£296,725) per
year payable quarterly until 2016. The lease was renewable through December
2027. The Company was also required to make an initial security deposit of
$483,168 (£268,125) which has been reduced to $151,281 (£97,500) and is included
in accounts receivable in the consolidated balance sheet at September 30, 2009
because the deposit was returned to the Company in fiscal year 2010.  The
facility had a net book value of $1,398,819 (£810,845) on the date of the
transaction.  The $1,966,181 (£1,139,155) gain which resulted from
this transaction is being recognized as short term as of September 30, 2009 due
to the lease surrender that occurred in fiscal year 2010 and is discussed in the
following paragraph.  Unamortized deferred gain as of September 30,
2009 and 2008, was $657,605 (£413,017) and $836,733 (£469,969),
respectively.
 
  F-12
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
5.        Operating Leases, Rental
Expense and Subsequent Event  (Continued)
 
 Subsequent
to the fiscal year end, the Company entered into an agreement with the new owner
of the property to surrender its existing UK facility lease, which would have
expired in December, 2016, in exchange for a surrender fee and a new short-term
lease.  On November 2, 2009, the Company entered into the new lease
and related agreements. The rent of approximately $488,100 annually was
deposited by the Company upon execution of the new agreement.  Should
the lease terminate in six months rather than twelve, the Company would receive
a refund of approximately $244,000.  In connection with the new lease, the
Company made an initial lease surrender payment of approximately
$986,940.  An additional lease surrender payment of approximately
$493,470 will be due on or before February 2, 2010.  From a cash flow
perspective, replacing the previous lease at this time eliminates future
payments of approximately $4.3 million (for rent and related expenses) over the
remaining term of the previous lease, producing a positive net impact of $2.8
million (after deducting the lease surrender payments).  The new lease
expires on the earlier of (1) at least three months after the landlord provides
a notice of termination, but in any event not before May 2, 2010 and (2)
November 2, 2010. The lease buyout and other termination costs resulted in a
one-time charge of approximately $1.7 million, net of the recognition of
deferred gain on the sale of the facility of $658,000, that is being recognized
as incurred in fiscal 2010. All property, plant and equipment which will be
disposed of in fiscal 2010 is fully depreciated, so has no net book
value.
 
 In
September, 2007, the Company leased 16,000 sq. ft. of manufacturing space in
Selangor D.E., Malaysia.  The lease term is for three years at a
monthly rate of $6,735 and may be renewed for two additional three year
terms.
  The
Company also leases equipment under a number of lease agreements which expire at
various dates between March 2009 and June 2013.  The aggregate monthly
rental was $4,406 at September 30, 2009.
 
 Details
of operating lease expense, including real estate taxes and insurance, are as
follows:
 
 September
      30,2009
              
              
              2008Operating
      Lease Expense:Factory
      and office leases
              
              $
              871,235
              
              
              $
              1,052,918Other
              
              
              52,872
              
              
              
              23,038$
              924,107
              
              
              $
              1,075,956
 
 In fiscal
year 2009 and 2008, the Company entered into several capital leases. Each of the
leases have a thirty-six month term and require monthly rentals of
$3,964.
 
  F-13
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
5.        Operating Leases, Rental
Expense and Subsequent Event  (Continued)
 
 Future
minimum payments under leases, including the effects of the lease arrangements
that occurred subsequent to year end, consisted of the following as of September
30, 2009:
 
 Operatingleases
              
              
              Capitalleases2010
              
              $
              649,936
              
              
              $
              36,0952011
              
              
              89,317
              
              
              
              23,9292012
              
              
              11,231
              
              
              
              13,6152013
              
              
              2,974
              
              
              
              -Total
      minimum lease payments
              
              $
              753,458
              
              
              
              73,639Less
      amounts representing interest
              
              
              
              
              
              
              (
      8,150
              )Present
      value of net minimum lease payments
              
              
              
              
              
              
              65,489Less
      current obligations
              
              
              
              
              
              
              (31,061
              )Long-term
      obligations
              
              
              
              
              
              $
              34,428
  Note
6.        Income Taxes
  The
Company accounts for income taxes using the liability method, which requires the
recognition of deferred tax assets or liabilities for the tax-effected temporary
differences between the financial reporting and tax bases of assets and
liabilities, and for net operating loss and tax credit
carryforwards.
 
 In
evaluating the Company’s ability to realize it’s deferred tax assets management
considers all available positive and negative evidence including past operating
results and forecast of future taxable income. In determining future taxable
income, management makes assumptions to forecast U.S. federal, U.S. state, and
international operating income, the reversal of temporary differences, and the
implementation of any feasible and prudent tax planning strategies. These
assumptions require significant judgment regarding the forecasts of future
taxable income, and are consistent with the forecasts used to manage the
Company’s business.
 
 Although
management uses the best information available, it is reasonably possible that
the estimates used by the Company will be materially different from the actual
results.  These differences could have a material effect on the
Company's future results of operations and financial condition.
 
 A
reconciliation of income tax expense (benefit) and the amount computed by
applying the statutory Federal income tax rate to income before income taxes as
of September 30, 2009 and 2008 is as follows:
  September
      302009
              
              
              2008Income
      tax expense at statutory rates
              
              $
              1,717,000
              
              
              $
              1,429,000State
      income tax, net of federal benefits
              
              
              267,000
              
              
              
              222,000Effect
      of AMT expense
              
              
              112,284
              
              
              
              -Non-deductible
      expenses
              
              
              33,000
              
              
              
              (76,000
              )Effect
      of foreign income tax
              
              
              -
              
              
              
              12,138Utilization
      of NOL carryforwards
              
              
              (1,331,340
              )
              
              
              (1,087,000
              )Decrease
      in valuation allowance
              
              
              (2,283,212
              )
              
              
              (1,263,000
              )Income
      tax benefit
              
              $
              (1,485,268
              )
              
              $
              (762,862
              )
 
  F-14
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
6.        Income Taxes
(Continued)
 
 As of
September 30, 2009, the Company had federal and state net operating loss
carryforwards of approximately $37,393,000 and $28,224,000, respectively, for
income tax purposes expiring in years 2010 to 2028.   The
Company's UK subsidiary, The Female Health Company - UK, plc has UK net
operating loss carryforwards of approximately $68,790,000 as of September 30,
2009 which can be carried forward indefinitely to be used to offset future UK
taxable income. The Female Health Company – Malaysia has net operating loss
carryforwards of approximately $352,000 as of September 30, 2009 which can be
carried forward indefinitely to be used to offset future Malaysian taxable
income.
 
 The
federal and state income tax provision (benefit) for the years ended September
30, 2009 and 2008 is summarized below:
 
 2009
              
              
              2008Deferred
      – U.S.
              
              $
              (508,000
              )
              
              $
              (697,500
              )Deferred
      – U.K.
              
              
              (1,089,552
              )
              
              $
              (77,500
              )Current
      – U.S.
              
              
              112,284
              
              
              
              -Current
      – Malaysia
              
              
              -
              
              
              
              12,138Income
      tax benefit
              
              $
              (1,485,268
              )
              
              $
              (762,862
              )
 
 
 Significant
components of the Company's deferred tax assets and liabilities are as follows
at September 30, 2009 and 2008:
 
 September
      30Deferred Tax
      Assets:
              
              2009
              
              
              2008Federal
      net operating loss carryforwards
              
              $
              12,714,000
              
              
              $
              14,144,000State
      net operating loss carryforwards
              
              
              2,258,000
              
              
              
              1,771,000AMT
      credit carryforward
              
              
              103,000
              
              
              
              -Foreign
      net operating loss carryforwards – UK
              
              
              19,261,000
              
              
              
              23,907,000Foreign
      capital allowance – UK
              
              
              500,000
              
              
              
              1,010,000Foreign
      net operating loss carryforwards – Malaysia
              
              
              99,149
              
              
              
              104,000Foreign
      capital allowance – Malaysia
              
              
              559,000
              
              
              
              -Other,
      net
              
              
              55,000
              
              
              
              31,000Gross
      deferred tax assets
              
              
              35,549,149
              
              
              
              40,967,000Valuation
      allowance for deferred tax asset
              
              
              (32,340,000
              )
              
              
              (39,367,000
              )Deferred
      income taxes
              
              $
              3,209,149
              
              
              $
              1,600,000
 
 The
deferred tax amounts have been classified in the accompanying consolidated
balance sheets as follows:
 
 2009
              
              
              2008Current
      assets – U.S.
              
              $
              1,417,000
              
              
              $
              1,440,000Current
      assets – U.K.
              
              
              764,000
              
              
              
              160,000Long-term
      assets – U.S.
              
              
              531,000
              
              
              
              -Long-term
      assets – U.K.
              
              
              497,149
              
              
              
              -$
              3,209,149
              
              
              $
              1,600,000
 
  F-15
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
6.        Income Taxes
(Continued)
 
 The
valuation allowance decreased by $2,283,212 (representing a reduction of
$7,027,000 net of the effects of foreign currency translations of $4,743,788)
and decreased by $1,263,000 (representing a reduction of $2,757,000 net of the
effects of foreign currency translations of $1,494,000), for the years ended
September 30, 2009 and 2008, respectively. Under the Internal Revenue Code,
certain ownership changes, including the prior issuance of preferred stock, the
Company’s public offering of common stock and the exercise of common stock
warrants and options may subject the Company to annual limitations on the
utilization of its net operating loss carryforward.   Under the
Inland Revenue statutes, certain triggering events may subject the Company to
limitations on the utilization of its net operating loss carryforward in the
UK.  As of September 30, 2009, management does not believe any limitations
have occurred.
 
 Accounting
Standards Codification Topic 740 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Topic 740
developed a two-step process to evaluate a tax position and also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. The Company has not
recorded a reserve for any tax positions for which the ultimate deductibility is
highly certain but for which there is uncertainty about the timing of such
deductibility.  The Company files tax returns in all appropriate
jurisdictions.  The open tax years are those years ending September
30, 2005 through September 30, 2008, which statutes expire in
2009-2012.  The Internal Revenue Service is currently auditing the
Federal Income tax return for 2008. The 2009 tax return has not been filed
as of the date of this filing. As of September 30, 2009 and 2008, the Company
has no recorded liability for unrecognized tax benefits.
 
 The
Company recognizes interest and penalties related to uncertain tax positions as
income tax expense as incurred.  No expense for interest and penalties
was recognized for the years ended September 30, 2009 and 2008.
 
 Note
7.        Share-based
Payments
 
 In March
2008, the Company’s shareholders approved the 2008 Stock Incentive Plan which
will be utilized to provide equity opportunities and performance–based
incentives to attract, retain and motivate those persons who make (or are
expected to make) important contributions to the Company.  A total of
2,000,000 shares are available for issuance under the plan. As of September 30,
2009, a total of 373,250 shares have been granted under the plan, 150,000 shares
were in the form of stock options, all others were in the form of restricted
stock or other share grants.
 
 Stock Option
Plans
 
 Under the
Company’s previous share based long-term incentive compensation plan, the 1997
Stock Option Plan, the Company granted non-qualified stock options to
employees.  There are no shares available for grant under the plan
which expired on December 31, 2006.  Options issued under that plan
expire in 10 years and generally vested 1/36 per month, with full vesting after
three years.
 
 Compensation
expense is recognized only for share-based payments expected to vest. The
Company estimates forfeitures at the date of grant based on historical
experience and future expectations. Stock compensation expense related to
options for the years ended September 30, 2009 and 2008 was $77,776 and $56,470,
respectively.
 
  F-16
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
7.        Share-based Payments
(Continued)
 
 Stock Option Plans
(continued)
 
 The
Company did not grant any stock options for the year ended September 30,
2008.  In May, 2009, the Company granted 150,000 stock options to its
independent board members under the 2008 Stock Incentive plan.  The
options vest evenly over 36 months, at a rate of 1/36 of the grant per
month.  The options have a ten year life.  The estimated
forfeiture rate was 1.44% based on the Company’s prior forfeiture
history.
 
 The table
below outlines the weighted average assumptions for options granted during the
year ended September 30, 2009.
 
 Year  ended
                September 30,
      2009Weighted Average
    Assumptions:Expected
      Volatility
              
              
              42.19
              %Expected
      Dividend Yield
              
              
              0
              %Risk-free
      Interest Rate
              
              
              3.06
              %Expected
      Term (in years)
              
              
              6.5Fair
      Value of Options Granted
              
              
              $               
      1.83
 
 During
the year ended September 30, 2009, the Company used historical volatility of its
common stock over a period equal to the expected life of the options to estimate
their fair value. The dividend yield assumption is based on the Company’s
history and expectation of future dividend payouts on the common stock. The
risk-free interest rate is based on the implied yield available on U.S. treasury
zero-coupon issues with an equivalent remaining term.
 
 The
expected term of the options represents the estimated period of time until
exercise and is based on the simplified method. To value option grants for
actual stock-based compensation, the Company used the Black-Scholes option
valuation model. When the measurement date is certain, the fair value of each
option grant is estimated on the date of grant and is based on the assumptions
used for the expected stock price volatility, expected term, risk-free interest
rates and future dividend payments.
 
  F-17
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
7.        Share-based Payments
(Continued)
 
 Option
Activity:
 
 The
following table summarizes the stock options outstanding and exerciserable at
September 30, 2009:
 
 Weighted
      AverageShares
              
              
              Exercise
      Price
                Per
      Share
              
              Remaining
                Contractual
                Term
                (years)
              Aggregate
                Intrinsic
                ValueOutstanding
      at September 30, 2007
              
              
              2,745,980
              
              
              $
              1.37Granted
              
              
              -
              
              
              
              -Exercised
              
              
              (291,000
              )
              
              
              1.04Forfeited
              
              
              (15,000
              )
              
              
              1.27Outstanding
      at September 30, 2008
              
              
              2,439,980
              
              
              
              1.41Granted
              
              
              150,000
              
              
              
              3.92Exercised
              
              
              (320,980
              )
              
              
              1.40Forfeited
              
              
              -
              
              
              
              -Outstanding
      at September 30, 2009
              
              
              2,269,000
              
              
              $
              1.58
              
              4.30
              $
      7,884,000Exercisable
      on September 30, 2009
              
              
              2,135,667
              
              
              $
              1.43
              
              3.97
              $
      7,734,000
 
 The
aggregate intrinsic value in the table above is before income taxes, based on
the Company’s closing stock price of $5.05 on the last day of business for the
period ended September 30, 2009. The total intrinsic value of options exercised
during the years ended September 30, 2009 and 2008 was approximately $1,599,000
and $506,000, respectively.
 
 Total
unrecognized compensation cost for stock options as of September 30, 2009 was
approximately $243,000. This compensation cost will be recognized over a
weighted average period of 2.71 years.  The deferred tax asset and
realized tax benefit from stock options exercised and other share-based payments
for the years ended September 30, 2009 and 2008 was not recognized, based on the
Company’s election of the “with and without” approach.
 
 Restricted
Stock:
 
 The
Company issues restricted stock to employees and consultants. Such issuances may
have vesting periods that range from one to three years or the issuances may be
contingent on continued employment for periods that range from one to three
years. In addition, the Company has issued stock awards to certain employees
that contain vesting provisions or provide for future issuance contingent
continued employment.
 
  F-18
 The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
7.        Share-based Payments
(Continued)
 
 A summary
of the non-vested stock activity for fiscal 2009 and 2008 is summarized in the
table below:
 
 Non-vested
      awards summary:
              
              Shares
              
              
              Weighted
      Average
                Grant
      -Date
                Fair
      ValueOutstanding
      at September 30, 2007
              
              
              113,333
              
              
              $
              1.53Stock
      granted
              
              
              46,500
              
              
              
              2.32Vested
              
              
              (157,278
              )
              
              
              1.75Forfeited
              
              
              -
              
              
              
              -Total
      Outstanding September 30, 2008
              
              
              2,555
              
              
              $
              2.65Stock
      granted
              
              
              223,182
              
              
              
              3.14Vested
              
              
              (100,913
              )
              
              
              2.93Cancelled
              
              
              (5,235
              )
              
              
              2.45Total
      Outstanding September 30, 2009
              
              
              119,589
              
              
              $
              3.16
  The
Company recognized share-based compensation expense for restricted stock of
approximately $296,000 ($147,000 of which is included in accrued expenses
at September 30, 2009 since the related shares have not been issued) for the
year ended September 30, 2009 and $265,000 for the year ended September 30,
2008. This expense is included in selling, general and administrative expenses
for the respective periods.
 
 As of
September 30, 2009, there was approximately $378,000 of total unrecognized
compensation cost related to non-vested restricted stock compensation
arrangements granted under the incentive plans. This unrecognized cost will be
recognized over the weighted average period of the next 1.75 years. The fair
value of the shares that vested during the years ended September 30, 2009 and
2008 was $296,000 and $656,000, respectively.
 
 Common Stock Purchase
Warrants
 
 The
Company did not issue any common stock purchase warrants in either fiscal 2009
or fiscal 2008.  In fiscal 2009, warrant holders exercised
490,000 warrants.  The Company received $289,000 of proceeds from the
exercise of these warrants.  In fiscal 2008, warrant holders exercised
290,000 warrants and the Company received $422,000 in proceeds from the exercise
of these warrants. The intrinsic value of warrants outstanding and exercisable
at September 30, 2009 is $2,851,000.  There is no unrecognized
compensation cost related to warrants as of September 30, 2009.
 
  F-19
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
7.        Share-based Payments
(Continued)
 
 Common Stock Purchase
Warrants (continued)
 
 At
September 30, 2009, the following warrants were outstanding and
exercisable:
 
 NumberOutstandingWarrants
      issued in connection with:Investor
      relations
              
              110,000Notes
      payable, related party
              
              626,500Total
      Outstanding September 30, 2009
              
              736,500
  
 Warrants
      outstanding and exercisable:NumberRange
      of
              Outstanding
              Wghtd.Avg.
              Wghtd.Avg.
              AggregateExercise
              and
      Exercisable
              Remaining
              Exercise
              IntrinsicPrices
              at
      9/30/09
              Life
              Price
              Value$0.40
      - $0.50
              14,000
              1.39
              $           0.40$0.51
      - $1.00
              12,500
              0.39
              0.72$1.01
      - $3.00
              710,000
              5.69
              1.20736,500
              5.52
              $         1.18
              $        
      2,851,000
  The
aggregate intrinsic value in the table above is before taxes, based on the
Company’s closing price of $5.05 on the last day of business for the year ended
September 30, 2009.
  Note
8.        Preferred Stock
  Redemption
of Class A Convertible Preferred Stock - Series 1
 
 In May
2008, the Company elected to exercise its right to redeem all of the 56,000
outstanding shares of its Class A Convertible Preferred Stock -
Series 1 (the "Series 1 Preferred Stock"), subject to the right of the
holders to elect to convert their shares of Series 1 Preferred Stock into
Common Stock in lieu of redemption.  On the redemption dates in
June 2008, 42,000 of the outstanding shares of Series 1 Preferred
Stock were acquired by the Company pursuant to the redemption and
cancelled and the remaining 14,000 outstanding shares of Series 1 Preferred
Stock were converted into 14,000 shares of Common Stock and cancelled.  The
Series 1 Preferred Stock was subject to an 8% dividend, paid
annually.  The Company paid a redemption price per share equal to the
liquidation value per share (which was $2.50 per share plus accrued and unpaid
dividends) for the 42,000 shares that were redeemed.  Shareholders who
elected to convert received one common share for each share of Series 1
Preferred Stock plus accumulated dividends.  The final unpaid
dividends of $2,100 for the converted 14,000 shares of Series 1 Preferred Stock
were paid in July 2008.
 
  F-20
 The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
8.        Preferred Stock
(Continued)
  Repurchases
and Conversion of Class A Convertible Preferred Stock - Series
3
 
 The
Company issued 473,377 shares of Class A Convertible Preferred Stock – Series 3
(the "Series 3 Preferred Stock") to 11 investors during February 2004 and
received $1,500,602 in proceeds. Each share of Series 3 Preferred Stock is
convertible at any time into one share of the Company’s common stock. Holders of
shares of the Series 3 Preferred Stock are entitled to cumulative dividends in
preference to any dividend on the Company’s common stock at the rate of 10
percent of the original issuance price ($3.17 per share) per annum, payable
quarterly at the Company’s option in cash or shares of the Company’s common
stock. If dividends are paid in shares of common stock, the dividend rate will
be equal to 95 percent of the average of the closing sales prices of the common
stock on the five trading days preceding the dividend reference date. The
dividend reference date means January 1, April 1, July 1, and October 1 of each
year. In the event of a liquidation or dissolution of the Company, the Series 3
Preferred Stock would have had priority over the Company’s common stock and
holders of any other series of preferred stock of the Company. The Company had
the right to redeem any share of Series 3 Preferred Stock at any time that is
after the second anniversary of the date of issuance of the share, provided that
the redemption may not occur until the first day on or after the second
anniversary of the date of issuance of such share in which the market value of
the Company’s common stock is at least 150 percent of the original issue price
of $3.17 per share.  The liquidation preference on the Series 3
Preferred Stock is $3.17 per share plus accrued and unpaid
dividends.
 
 In April
2008, the Company repurchased 150,000 shares of Series 3 Preferred
Stock. The shares were repurchased at $3.17 per share for a total of
approximately $475,000.  In July, 2008, the Company repurchased an
additional 15,773 shares of Series 3 Preferred Stock for a total of
approximately $50,000; the dividend of approximately $500 of this purchase was
paid in October, 2008.  All of the shares were purchased at the same
per share price at which they were sold to the shareholder, $3.17 per
share.  The repurchased preferred shares have been
retired.
 
 In
February 2009, 31,546 shares of Series 3 Preferred Stock were converted to
31,546 shares of common stock.  The shares have been
retired.
 
 On July
14, 2009, in accordance with the terms of the Series 3 Preferred Stock, the
Company notified all of the holders of outstanding shares of Series 3 Preferred
Stock that it was exercising its right to redeem all of the outstanding shares
of Series 3 Preferred Stock on August 13, 2009.  As of July 14, 2009,
a total of 276,058 shares of Series 3 Preferred Stock were outstanding and
subject to the redemption notice.  The Company has the right to redeem
the Series 3 Preferred Stock because as of the close of the market on July 10,
2009, the Company’s Common Stock has a closing price on the NASDAQ Capital
Market of at least 150% of the $3.17 Face Amount of the Series 3 Preferred Stock
for five consecutive days. Holders of outstanding shares of Series 3 Preferred
Stock have the right to elect to convert all or part of their Series 3 Preferred
Stock into shares of the Company’s common stock by providing written notice of
conversion to the Company on or before the redemption date.   As
of August 13, 2009, all the 276,058 outstanding  shares of Series 3
Preferred Stock were converted to 276,058 shares of common stock.  The
shares have been retired.  The final unpaid dividends of $10,548 were
paid on August 20, 2009.
 
  F-21
 The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
  Note
9.        Stock Repurchase
Program
 
 On
January 17, 2007, the Company announced a Stock Repurchase Program under the
terms of which up to a million shares of its common stock could be purchased
during the subsequent twelve months. In late March 2008, repurchase program was
expanded up to a total of 2,000,000 shares to be acquired through December 31,
2009.  In February 2009, the Board further expanded the repurchase
program to a maximum of 3,000,000 shares to be acquired through December 31,
2010.  From the program’s onset through September 30, 2009, the total
number of shares repurchased by the Company is 1,843,805.  The Stock
Repurchase Program authorizes purchases in privately negotiated transactions as
well as in the open market, and in October 2008 the Company's board of
directors authorized repurchases in private transactions under the Stock
Repurchase Program of shares issued under the Company's equity compensation
plans to directors, employees and other service providers at the market price on
the effective date of the repurchase request.  The maximum repurchase
for the remainder of calendar 2008 was a total of 62,500 shares or 6,250 shares
per individual.  No shares were repurchased under the amendment in
calendar year 2008.  Thereafter, total repurchases under this
amendment are limited to an aggregate of 250,000 shares per calendar year and to
a maximum of 25,000 shares annually per individual.  Year-to-date
purchases under this amendment for calendar 2009, as of September 30, 2009, were
152,644 shares.
 
 
 Issuer
      Purchases of Equity Securities:
              
              Details
      of Treasury Stock Purchases to Date through September 30,
    2009Period:
              
              Total
                Number
                of
      Shares
                Purchased
              
              Average
                Price
      Paid
                Per
                Share
              
              Total
      Number
                of
      Shares Purchased
                As
      Part of Publicly
                Announced
      Program
              
              Maximum
      Number
                of
      Shares that May
                Yet
      be Purchased
                Under
      the ProgramJanuary
      1, 2007 –  September 30, 2007
              
              
              173,400
              
              
              $
              2.12
              
              
              
              173,400
              
              
              
              826,600October
      1, 2007 –  September 30, 2008
              
              
              667,600
              
              
              
              2.65
              
              
              
              841,000
              
              
              
              1,159,000October
      1, 2008 – September 30, 2009
              
              
              1,002,805
              
              
              
              3.82
              
              
              
              1,843,805
              
              
              
              1,156,195Total
              
              
              1,843,805
              
              
              $
              3.25
              
              
              
              1,843,805
              
              
              
              1,156,195
  Note
10.        Employee Benefit
Plans
 
 Employee retirement
plan:
 The
Company has a Simple Individual Retirement Account (IRA) plan for its
employees.  Employees are eligible to participate in the plan if their
compensation reaches certain minimum levels and are allowed to contribute up to
a maximum of $14,000 annual compensation to the plan.  The Company has
elected to match 100 percent of employee contributions to the plan up to a
maximum of 3 percent of employee compensation for the years ended September 30,
2009 and 2008.  Annual Company contributions were approximately
$32,000 and $30,000 for 2009 and 2008, respectively.
 
 Note
11.        Industry Segments and
Financial Information about Foreign and Domestic Operations
 
 The
Company currently operates primarily in one industry segment which includes the
development, manufacture and marketing of consumer health care
products.
  F-22
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
11.    Industry Segments and Financial Information about
Foreign and Domestic Operations (Continued)
 
 The
Company operates in foreign and domestic regions.  Information about
the Company's operations by geographic area is as follows (in
thousands).
 
 Product
      Sales to External Customers for the Year Ended
              
              
              Long-Lived
      Asset As OfSeptember
      30,
              
              
              September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008South
      Africa
              
              $
              2,436
              (2)
              
              $
              4,302
              (1)
              
              $
              -
              
              
              $
              -Zimbabwe
              
              
              8,909
              (1)(3)
              
              
              4,084
              (1)
              
              
              -
              
              
              
              -United
      States
              
              
              2,491
              
              
              
              2,356
              
              
              
              342
              
              
              
              194Brazil
              
              
              1,157
              
              
              
              2,239
              
              
              
              -
              
              
              
              -Tanzania
              
              
              1,141
              
              
              
              1,460
              
              
              
              -
              
              
              
              -Papua
      New Guinea
              
              
              937
              
              
              
              1,292
              
              
              
              -
              
              
              
              -DR
      of Congo
              
              
              883
              
              
              
              *
              
              
              
              -
              
              
              
              -Zambia
              
              
              969
              
              
              
              *
              
              
              
              -
              
              
              
              -Netherlands
              
              
              891
              
              
              
              *
              
              
              
              -
              
              
              
              -India
              
              
              *
              
              
              
              *
              
              
              
              133
              
              
              
              174United
      Kingdom
              
              
              *
              
              
              
              *
              
              
              
              214
              
              
              
              171Malaysia
              
              
              *
              
              
              
              *
              
              
              
              2,220
              
              
              
              1,011Other
              
              
              7,569
              
              
              
              9,795
              
              
              
              -
              
              
              
              -$
              27,383
              
              
              $
              25,528
              
              
              $
              2,909
              
              
              $
              1,550*
      Less than 3% and 5% percent of total net sales in 2009 and 2008
      respectively.(1)
      Comprised of a single customer considered to be a major customer (exceeds
      10 percent of net sales).(2)
      This customer had approximately $401,000 of outstanding accounts
      receivable at September 30, 2009. All of the receivable was paid by
      the date of this filing.(3)This customer had approximately $3,753,000 of outstanding accounts
      receivable at September 30, 2009. All of the receivable was paid by
      the date of this filing.
  Note
12.        Contingent
Liabilities
  The
testing, manufacturing and marketing of consumer products by the Company entail
an inherent risk that product liability claims will be asserted against the
Company.  The Company maintains product liability insurance coverage
for claims arising from the use of its products.  The coverage amount
is currently $5,000,000 for FHC's consumer health care product.
 
 Note
13.           Restructuring
Costs
  On August
5, 2009, the Company announced to its UK employees that the Company would
evaluate the future of its UK facility following the decision of two of its
largest customers to switch their purchases from the first generation product,
FC1, manufactured in the UK facility, to the second generation product, FC2,
which is manufactured in Malaysia. As is required by British labor law, the
Company went through an evaluation process, working in tandem with employee
representatives, in which various manufacturing alternatives were
considered.  As the process failed to identify a satisfactory
alternative, the facility’s manufacturing operations ceased in October 2009,
when the final FC1 orders were shipped.  The evaluation process
concluded in late November 2009, when employees received their termination
payments.
  F-23
  The
      Female Health Company and Subsidiaries
                  
                  Notes
      to Consolidated Financial
Statements
 Note
13.           Restructuring
Costs (Continued)
 
 In fiscal
2009, the Company incurred a one-time charge of $1,496,624 for restructuring
costs related to the cessation of FC1 manufacturing at its UK
facility.  This comprised of $1,116,911 redundancy and $379,713 other
expenses.
  Accrual
      at September 30, 2008
              
              $
              -Provision
      of restructuring costs
              
              
              1,496,624Settlement
              
              
              (379,713
              )Accrual
      at September 30, 2009
              
              $
              1,116,911
  The
Company evaluated, measured and recognized the restructure costs under the
guidance of Accounting Standards Codification Topic 420. This Standard addresses
financial accounting and reporting for costs associated with exit or disposal
activities.
 
 All of
the Company’s other UK operations will continue without
interruption.  The functions include, but are not limited to, global
sales and marketing of the Company’s female condom, management and direction of
Global Manufacturing Operations, management and direction of the Global
Technical Support Team, and product development.
  Note
14.        Recent Accounting
Pronouncements
 
 In
December 2007, the FASB issued a new accounting standard, which establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. The Standard also establishes
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the
noncontrolling owners. This Standard  is effective as of the beginning
of an entity’s fiscal year that begins after December 15, 2008 (our Fiscal
2010). The Company does not believe this standard will have an effect on the
Company’s consolidated financial statements.
 
 In
December 2007, the FASB issued a new accounting standard related to accounting
for business combinations using the acquisition method of accounting (previously
referred to as the purchase method). This standard establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. The Standard
also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. This Standard is
effective as of the beginning of an entity’s fiscal year that begins after
December 15, 2008 (our Fiscal 2010).  This standard will have an
effect on the Company’s consolidated financial statements for any business
combinations the Company may enter into.
 
 In
March 2008, the FASB issued a new accounting standard which requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation. This Standard is effective for financial
statements issued for fiscal years beginning after November 15, 2008. The
adoption of this standard is not expected to have a material effect on the
Company's future reported financial position or results of
operations.




F-24