Certain statements included in this quarterly report on Form 10-Q 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 achievement 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 working capital requirements and advertising and promotional expenditures; factors related to increased competition from existing and ne w 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; payment of dividends is in the discretion of the Board of Directors and the Company may not have sufficient cash flows to continue to pay dividends; and developments or assertions by or against the Company relating to intellectual property rights.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to unaudited condensed consolidated financial statements.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See notes to unaudited condensed consolidated financial statements.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See notes to unaudited condensed consolidated financial statements.

THE FEMALE HEALTH COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to unaudited condensed consolidated financial statements.

The accompanying condensed financial statements are unaudited but in the opinion of management contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flow for the periods presented in conformity with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

Operating results for the three months and sixnine months ended March 31,June 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2009.

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.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 FC2 Female Condom ("FC2").  The Female Health Company - UK, is the holding company of The Female Health Company - UK, plc, which is located in a 40,0006,398 sq. ft. leased manufacturingoffice 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.Malaysia .

The FC2 Female Condom is currently sold or available in either or both commercial (private sector) and public sector markets in 107 countries. The product is marketed directly to consumers in 11 countries by various country-specific commercial partners. 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 6970 days. Over the past five years, the Company’s bad debt expense has been less than .01% of product sales.

The Company also derives revenue from licensing its intellectual property under an agreement with its business partner, Hindustan Lifecare Limited (“HLL”).  HLL is authorized to manufacture FC2 at HLL's facility in Kochi, India for sale in India.  HLL is the Company's exclusive distributor in India and the Company receives a royalty based on the number of units sold by HLL in India.  Such revenue appears as royalty income on the Consolidated Statements of Income for the three and sixnine months ended March 31,June 30, 2010 and 2009, and is recognized in the period in which the sale is made by HLL.

Restricted cash relates to security provided to one of the Company’s U.K. 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.

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 was recognized as a decrease to other comprehensive income.

Basic EPS is computed by dividing 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 conversion of convertible preferred shares and the exercise of stock options and warrants and unvested shares granted to employees, as well as the incremental common shares issuable upon conversion of convertible preferred shares.

All the outstanding warrants and stock options were included in the computation of diluted net income per share during the three and sixnine months ended March 31,June 30, 2010 and March 31,during the three months ended June 30, 2009.  For the nine months ended June 30, 2009, outstanding stock options to purchase 150,000 shares of common stock at an exercise price of $3.92 were not included in the computation of diluted net income per share for that period because the effect was anti-dilutive.

Total comprehensive income was $1,844,531$75,159 and $1,146,181$1,221,341 for the three and sixnine months ended March 31,June 30, 2010, respectively, as there was no foreign currency effect in the current period. Total comprehensive income was $1,977,791$1,545,617 and $2,320,756$3,866,371 for the three and sixnine months ended March 31,June 30, 2009, respectively.

The components of inventory consist of the following:

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 March 31,June 30, 2010, 412,182 shares had been issued under the plan; no shares were issued in the quarter then ended.

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. The Company recognized share-based compensation expense for stock options of approximately $23,000 and $47,000$70,000 in selling, general and administrative expenses in the Consolidated Statements of Income for the three and sixnine months ended March 31,June 30, 2010, respectively, and $12,000$19,000 and $24,000$43,000 for the three and sixnine months ended March 31,June 30, 2009, respectively.

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 over 36 months at a rate of 1/36 of the grant per month.  The options have a ten year life.  The Company did not grant any options during either the sixnine months ended March 31, 2010 or 2009.June 30, 2010.

The following table summarizes the Company’s option activity during the sixnine months ended March 31,June 30, 2010:

Option Activity:

The aggregate intrinsic value in the table above is before income taxes, based on the Company’s closing stock price of $7.17$5.19 as of the last business day of the period ended March 31,June 30, 2010.  As of March 31,June 30, 2010, the Company had unrecognized compensation expense of approximately $196,000$173,000 related to unvested stock options.  These expenses will be recognized over approximately 2.171.92 years. The deferred tax asset and realized benefit from stock options exercised and other share-based payments for the periods ended March 31,June 30, 2010 and 2009 was not recognized, based on the Company’s election of the “with and without” approach.

The Company issues restricted stock to employees and consultants. Such issuances may have vesting periods that range from one to three years and/or the issuances may be contingent on continued employment for periods that range from one to three years.

No warrants were issued in the sixnine months ended March 31,June 30, 2010 or March 31,June 30, 2009.

During the three and sixnine months ended March 31,June 30, 2010, a warrant holder exercised 30,000 warrants using the cashless exercise option available within the warrant agreements which entitled the warrant holder to 23,085 shares of common stock.  During the three and sixnine months ended March 31,June 30, 2010, warrant holders exercised 626,500 warrants which provided proceeds of $725,600.  During the three and sixnine months ended March 31,June 30, 2009, warrant holders exercised 50,000 warrants for cash, which provided proceeds of $135,000.  During that same period, warrant holders exercised 40,000 warrants using the cashless exercise option available within the warrant agreements which entitled them to 26,021 shares of common stock.

At March 31,June 30, 2010, 80,000 warrants were outstanding and exercisable with weighted average remaining contractual lives of 6.296.04 years.  The aggregate intrinsic value was approximately $469,600$311,000 based on the Company’s closing stock price of $7.17$5.19 as of the last business day of the period ended March 31,June 30, 2010.  There is no unrecognized compensation cost related to warrants as of March 31,June 30, 2010.

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, the Board approved expansion of the repurchase program 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.  On March 25, 2010, the Board extended the buyback period through December 31, 2011. From the program’s onset through March 31,June 30, 2010, the total number of shares repurchased by the Company is 1,868,611.1,874,611.  The Stock Repurchase Program authorizes purchases in privately negotiated transactions as well as in the open market.

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. 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.  Purchases under this amendment for calendar year 2010 and 2009 were 14,80020,800 and 162,650 shares, respectively. There were no share repurchases under this amendment in calendar year 2008.

The Company currently operates primarily in one industry segment which includes the development, manufacture and marketing of consumer health care products.

The Company operates in foreign and domestic regions. Information about the Company's operations by geographic area is as follows:

 

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.

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 its assets and liabilities, and for net operating loss and tax credit carryforwards.

As of March 31,June 30, 2010, 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 U.K. subsidiary, The Female Health Company-UK, plc, has U.K. net operating loss carryforwards of approximately $68,790,000 as of March 31,June 30, 2010.  These U.K. net operating loss carryforwards can be carried forward indefinitely to offset future U.K. taxable income.  The Company’s Malaysian subsidiary has net operating loss carryforwards of approximately $352,000 as of March 31,June 30, 2010, which can be carried forward indefinitely to offset future Malaysian taxable income.  With the increasing demand for and profitability of the FC2 Female Condom, the Company expects utilization of its net operating losses in both the U.K. and the U.S. will continue.  However, because some of the U.S. Federal tax losses have a net loss carryforward limitation of fifteen years, it is possible that some of the Company’s early losses carried forward in the U.S. will not be fully utilized.  The U.K. net operating losses do not expire.  The losses incurred in Malaysia are related to the recent start-up and are expected to be utilized over the next several years.

On August 5, 2009, the Company announced to its U.K. employees that the Company would evaluate the future of its U.K. facility following the decision of two of its largest customers to switch their purchases from the first generation product, FC1, manufactured in the U.K. 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.

In September 2009, the process concluded when management and the labor representatives were unable to identify a viable alternative.  In late September, production employees were notified of the redundancy (plan to terminate their employment) and of the one-time termination payments due them, a total of $1,116,911.  Manufacturing ceased in mid-October 2009.  Following manufacturing cessation, production employees were no longer required to report for work. In compliance with British labor law, the termination payments were made in late November 2009.  The liability for the termination payments was properly recognized at the communication date (in September 2009).

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 U.K. facility.  This was comprised of $1,116,911 termination costs, $181,340 facility exit costs, $104,247 consulting costs and $94,126 inventory write-downs. These other related costs fall under the scope of other associated costs of an exit activity, as suggested by the Interpretive Response in Staff Accounting Bulletin Topic 5(P)(4), including footnote 17. These costs were recognized in the period in which the related cost was incurred in accordance with ASC 420-10-25-15, Exit or Disposal Cost Obligations.

Normal manufacturing and distribution costs, including materials, labor and overhead, related to the production and selling of product through the cessation date are not a component of the one-time termination payments and were accounted for when incurred rather than included in the restructuring accrual as of September 30, 2009.

In November 2009,  following the cessation of FC1 manufacturing in the U.K. facility, the Company entered into an agreement with the new owner of the U.K. manufacturing facility to surrender its existing property lease, which would have expired in December 2016, in exchange for a lease surrender fee of $1,490,716 and a new short-term lease.  On November 2, 2009, the new agreements were executed.  Per the terms of the agreement, the Company was responsible for removing certain leasehold improvements from the property (dilapidations) prior to termination of the lease.  Upon execution of the new agreements, as required by the lease terms, the Company deposited the new annual rent of approximately $484,049.$484,049, as required by the lease terms. From a cash flow perspective, replacing the previous lease at this time eliminated future paymentspayment s 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 paymen ts)payments).  The lease buyout and other termination costs have resulted

Upon cessation of manufacturing in one-timethe U.K. facility, the Company charged $605,025 to restructuring charges of $1,968,100, which is net of recognition of deferred gain on the Company’s 1996 salerelated to excess capacity of the facility.facility, as was reported in the first quarter of fiscal year 2010.  This was determined by multiplying 82%, the portion of the building previously used for manufacturing activities, to the total lease expenses for the period beginning when manufacturing ended through the end of the lease.  This calculation reflected the guidance of ASC Topic 420-10-25-11 through 420-10-25-13, which addresses financial accounting and reporting for costs associated with exit or disposal activities.

On April 27, 2010, the Company signed two related agreements, with the former and new landlords of the U.K. facility, which terminateterminated the current U.K. lease and grantgranted the Company rent-free occupation of the premises from April 28, 2010 through June 30, 2010.  Per the terms of these agreements, the Company agreed to a lease exit fee of $216,000 and a $248,000 payment in lieu of dilapidations of $248,000.dilapidations.  Those obligations were fulfilled by a cash payment of $234,000 and by surrendering the remaining rent prepayment of $230,000, that was beingwhich had been held in trust since November.

All of the Company’s other significant U.K. operations are continuing without interruption.ongoing.  The functions include, but are not limited to, global sales and marketing of the FC2 Female Condom, management and direction of Global Manufacturing Operations, management and direction of the Global Technical Support Team, and product development.

On July 22, 2010, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share.  The Company expects to incur uppay, from its cash on hand, approximately $1.4 million pursuant to $25,000 in additional restructuring costs, whichthe dividend on August 11, 2010, to stockholders of record as of August 4, 2010.

Any future quarterly dividends and the record date for such dividends will be expensedapproved each quarter by the Company’s Board of Directors and announced by the Company.  Payment of future dividends is in the period in which they occur. The additional expenses relatediscretion of the Board of Directors and the Company may not have sufficient cash flows to redundancy, the cost of removing various leasehold improvements and some consulting fees.continue to pay dividends.

On October 1, 2009, The Company adopted ASC Topic 810, 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. This Standard also establishes reporting requirements that provide sufficient disclosures thatto clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The adoption of this Standard had no effect on the Company’s consolidated financial statements.

On October 1, 2009, the Company adopted ASC Topic 805 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. This Standard also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination.   Should the Company enter into any business combination, this Standard will have an effect on the Company’s consolidated financial statements.

In January 2010, the FASB updated ASC Topic 505 (Accounting for Distributions to Shareholders with Components of Stock and Cash) effective for interim and annual periods ending on or after December 15, 2009.  The update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). Should the Company make a distribution of stock and cash to its shareholders, this Standard could have an impact on its financial statements.

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:

FC2 was first marketed internationally in March 2007.  FC2 was introduced in the U.S. in August 2009, after receiving FDA approval in March 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 107 countries.  It is sold directly to consumers in 11 countries.

On March 10, 2009, FC2 received FDA approval as a Class III medical device and became available in the United States in August 2009. 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.  From its introduction in 2007 through March 31,June 30, 2010, approximately 6265 million FC2 Female Condoms have been distributed in 107 countries. The FDA approval permitted the Company to transition from FC1 to FC2.  The last shipments of FC1 were made in October 2009.

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 nitrile polymer Female Condom. 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.

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 that lines the vagina and two flexible O rings. One of the rings is used to insert the device and helps to holdholds it in place.place internally. 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 and became available in the United States in August 2009.  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, WHO agreed that FC2 does perform in the same manner as FC1 and cleared FC2 for purchase by UN agencies.

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

The principal raw material used to produce FC2 is a nitrile polymer. While generalThis raw material is a unique nitrile formulations are available from a number of suppliers, the Company has chosen to work closely withformulation, developed by 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.

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: several microbicides have failed in late stage development and the most promising HIV/AIDS vaccine under development has also failed.  Thus, prevention of sexually transmitted 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 in women aged 15 to 44 years old.  According to a November 2009 AIDS update by the Joint United Nations Joint Programme on HIV/AIDS (UNAIDS), about 2/3 of new cases globally occur from sex between men and women.

In the United States, the CenterCenters for Disease Control and Prevention (CDC) reported in 2006continues to report that the HIV/AIDS epidemic is taking an increasing toll on women and girls. Women of color, particularly Blackblack 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, wo men in these two groups accounted for 82% of the estimated total of AIDS diagnoses for women in 2005.

Most HIV/AIDS diagnoses among women are due to high-risk heterosexual contact (80% in 2005).  The rate of AIDS diagnosisnew HIV infection for black women was approximately 2315 times the rate for white women, while the prevalencenew infection rate among Hispanic women was more than four times that of white women. In 2007, the AIDS diagnoses rate for black women in the United States was 22 times the rate for white women.  In the United States, it is estimated that one in 30 black women will be diagnosed with HIV, compared to the one in 588 incidence rate amongst white women.

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 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 have been greater than 10 billion units annually since 2005. Given the rapid spread of HIV/AIDS in India and China, the Joint United Nations Joint Programme on HIV/AIDS (UNAIDS)UNAIDS estimates that the annual public sector demand for condoms, both male and female, will reach 19 billion units within the next ten years.

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.

Studies show that both FC2’s nitrile polymer is a safe, strong material with a method failure rate similar to that of male condoms.  FC2 Female Condom offers a number of benefits over natural rubber latex, the material that is most commonly used in male condoms. Unlike natural rubber latex, the nitrile polymer quickly transfers heat, immediately warming to body temperature when it is inserted, which may enhance pleasure and sensation during use. Since the FC2 Female Condom is not dependent on the male erection, it may be inserted in advance of arousal, eliminating disruption during sexual intimacy. FC2 does not require immediate withdrawal and is not tight or constricting.  The FC2 Female Condom can be used with both oil and water-based lubricants, unlike natural rubber latex male condoms which can be used with w ater-basedwater- based lubricants only.  The FC2 Female Condom also offers an alternative to those sensitive to natural rubber latex (7% to 20% of the population), who are unable to use male condoms without irritation. To the Company's knowledge, there is no reported allergy to the FC2 nitrile polymer.

Numerous clinical and behavioral studies have been conducted regarding use of FC Female Condoms (FC1 and FC2). Studies show that the Female Condoms are found acceptable by women and their partners in many cultures. Importantly, studies also show that when the Female Condoms are made available as an option to using 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%.

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), UNAIDS, 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 make its Female Condom more accessible to women, the Company developed FC2, a nitrile polymer product.  FC2, more economical to produce, is available at a unit price nearly 30% less than that of its predecessor, FC1.  The Company made its first substantial sales of FC2 in the second quarter of fiscal 2007.  FC2 is produced at the Company’s facility in Selangor D.E., Malaysia and in Kochi, India, in conjunction with FHC’s business partner, HLL. The transition from FC1 to FC2 was completed in October 2009.  All of the Company’s sales are now FC2.

With the product’s primary market currently being the public sector, the Company incurs minimal sales and marketing expense.  Thus, as the public sector demand for the FC2 Female Condom continues to grow, the Company’s operating expenses are likely to grow at a much lowerslower rate than that of unit volume.

The Company has distribution agreements and other arrangements with commercial partners which market FC2 directly to consumers in 11 countries, including India, France and Brazil. 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.

The Company’s customers are primarily governments, ministries of health and large global agencies which purchase and distribute the FC2 Female Condom for use in HIV/AIDS prevention programs.  The Company offers uniform, volume-based pricing to such agencies, rather than entering into long-term agreements to supply FC2 to global agencies. In the United States, the Company sells FC2 is sold to city and state public health clinics as well as not-for-profit organizations such as Planned Parenthood.  FC2 is 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. 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 Hygie neHygiene units.

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 in the U.S., capacity was expanded to the current level of approximately 75-80 million units annually.

The Company’s India-based FC2 end-stage production capacity is located at a facility owned by its business partner, HLL in the Cochin Special Export Zone. Production began at that facility in December 2007 with an initial capacity of 7.5 million units per year.  Two NACO orders of 1.5 million units each have been produced in that facility for distribution in NACO’s prevention program in India.

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.

In the U.S., FC2 is regulated by the FDA. In 1989, female condoms as a group were classified by the FDA as a Class III medical device.  Class III medical devices are deemed by the FDA to carry potential risks with use which must be tested prior to FDA approval, referred to as Premarket Approval (PMA), for sale in the U.S.  As FC2 is a Class III medical device, prior to selling FC2 in the U.S., the Company was required to submit a PMA application containing technical information on the use of FC2 such as pre clinical and clinical safety and efficacy studies which were gathered together in a required format and content.

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

The Company believes that FC2’s PMA and FDA classification as a Class III Medical Devicesmedical device 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.

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. 

The FDA’s approval order for FC2 includes conditions that relate to product labeling, including information on the package itself and instructions for use called a “package insert” which accompanies each product.  The Company believes it is in compliance with the FDA approval order.

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 FC1 and FC2.

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.  The 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 stagephase 2/3 development.  PATH is seeking funding to conduct the large clinical trial required for FDA clearance.  Neither the MP Female Condomfemale condom nor the PATH woman’s condomWoman’s Condom have received FDA approval or have been listed as essential products fo rfor 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.

FC2 patents have been issued by the United States, the European Union, Canada, Australia, South Africa, The People’s Republic of China, Greece, Turkey, Spain and Japan.  Patent applications for FC2 are pending in the U.S. and invarious 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.  There can be no assurance that these patents provide the Company with protection against copycat products entering markets 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 protectsprotect its competitive position.

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 OrganizationWHO 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 and FC2 became available in the United States in August 2009. 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 in 2007 through March 31,June 30, 2010, nearly 62approximately 65 million FC2 Female Condoms have been distributed in 107 countries.  The FDA approval permitted the Company to transition from F C1FC1 to FC2.&# 160; The last shipment of FC1 was produced in October 2009.  All current and future orders will be for FC2.

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, HLL.  Such revenue appears as royalties on the Consolidated Statements of Income for the three and sixnine months ended March 31,June 30, 2010 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:

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

On August 5, 2009, the Company announced to its U.K. employees that the Company would evaluate the future of its U.K. facility following the decision of two of its largest customers to switch their purchases from the first generation product, FC1, manufactured in the U.K. 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.

In September 2009, the process concluded when management and the labor representatives were unable to identify a viable alternative.  In late September, production employees were notified of the redundancy (plan to terminate their employment) and of the one-time termination payments due them, a total of $1,116,911.  Manufacturing ceased in mid-October 2009.  Following manufacturing cessation, production employees were no longer required to report for work. In compliance with British labor law, the termination payments were made in late November 2009.  The liability for the termination payments was properly recognized at the communication date (in September 2009).

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 U.K. facility.  This was comprised of $1,116,911 redundancytermination costs, $181,340 facility exit costs, $104,247 consulting costs and $94,126 inventory write-downs. These other related costs fall under the scope of other associated costs of an exit activity, as suggested by the Interpretive Response in Staff Accounting Bulletin Topic 5(P)(4), including footnote 17. These costs were recognized in the period in which the related cost was incurred in accordance with ASC 420-10-25-15, Exit or Disposal Cost Obligations.

Normal manufacturing and distribution costs, including materials, labor and overhead, related to the production and selling of product through the cessation date are not a component of the one-time termination payments and were accounted for when incurred rather than included in the restructuring accrual as of September 30, 2009.

In November 2009,  following the cessation of FC1 manufacturing in the U.K. facility, the Company entered into an agreement with the new owner of the U.K. manufacturing facility to surrender its existing property lease, which would have expired in December 2016, in exchange for a lease surrender fee of $1,490,716 and a new short-term lease.  On November 2, 2009, the new agreements were executed.  Per the terms of the agreement, the Company was responsible for removing certain leasehold improvement from the property (dilapidations) prior to termination of the lease.  Upon execution of the new agreements, as required by the lease terms, the Company deposited the new annual rent of approximately $484,049.$484,049, as required by the lease terms. From a cash flow perspective, replacing the previous lease at this time eliminated 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 paymen ts)payments).  The lease buyout and other termination costs have resulted in one-time charges of $1,968,100, which is net of recognition of deferred gain on the Company’s 1996 sale of the facility.

On April 27, 2010, the Company signed two related agreements, with the former and new landlords of the U.K. facility, which terminateterminated the current U.K. lease and grantgranted the Company rent-free occupation of the premises from April 28, 2010 through June 30, 2010.  Per the terms of these agreements, the Company agreed to a lease exit fee of $216,000 and a $248,000 payment in lieu of dilapidations of $248,000.  Those obligations were fulfilled by a cash payment of $234,000 and by surrendering the remaining rent prepayment of $230,000, that was beingwhich had been held in trust since November.November 2009. During the three months ended June 30, 2010, the Company made redundancy payments of $127,087. The early termination of the lease (April 2010 versus November 1, 2010) resulted in the reversal of $302,342 in excess capacity costs in the quarter ended June 3 0, 2010.

The components of the restructuring expenses recognized in the three and sixnine months ended March 31,June 30, 2010 are as follows:

All of the Company’s other significant U.K. operations are continuing without interruption.ongoing.  The functions include, but are not limited to, global sales and marketing of the FC2 Female Condom, management and direction of Global Manufacturing Operations, management and direction of the Global Technical Support Team, and product development.

On June 10, 2010, the Company entered a new lease agreement for 6,398 square feet of office space located in London, England. The lease requires quarterly payments of approximately $13,500 through December 2011 and quarterly payments of approximately $27,000 from January 2012 through June 2015.  The lease stipulates that after 5 years (June 2015) the principal rent will be reviewed and adjusted to the higher of the principal rent immediately prior to review date or the market rate.  The Company expects to incur up to $25,000 in additional restructuring costs, which will be expensed inhas the period in which they occur. The additional expenses relate to redundancy, the cost of removing various leasehold improvements and some consulting fees.

THREE MONTHS ENDED MARCH 31,JUNE 30, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31,JUNE 30, 2009

The Company had net revenues of $7,179,147$1,754,211 and net income attributable to common stockholders of $1,844,531,$75,159, or $0.06$0.00 per diluted share, for the three months ended March 31,June 30, 2010 compared to net revenues of $7,319,509$6,966,767 and net income attributable to common stockholders of $1,951,786,$626,441, or $0.07$0.02 per diluted share, for the three months ended March June 30, 2009.  This reduction in net revenues is due to the timing of receipt and shipment of large orders. The Company’s customer base consists primarily of public sector purchasers, such as large global organizations, ministries of health, state and local governments and non-governmental agencies. A limited number of customers purchase large orders (in excess of 1 million units) and account for a significant portion of total revenue. The lower results for the third quarter were due to the conc urrent delay in two multi-million unit orders in process with public sector purchasers. The Company has previously disclosed the possibility of such delays in both its SEC filings and earnings releases.  Historically, such orders are not lost, they are merely delayed. Delays such as these, which generally result from bureaucracy, politics and/or changes in personnel, generally may last from several weeks to six months or more.  The Company cannot predict exactly when these pending orders will be received or which quarters they will impact. The Company does not believe the delay reflects a fundamental change in the Company’s business or demand for FC2.  Strong demand for FC2 was evident in USAID/JSI's recent doubling of its pervious 12 million unit order to 24 million units, deliverable over the period ending September 30, 2011.

Gross profit increased $287,088,decreased $2,408,200, or 7%72%, to $4,180,023$939,447 for the three months ended March 31,June 30, 2010 from $3,892,935$3,347,647 for the three months ended March 31,June 30, 2009.  Gross profit for the three months ended March 31,June 30, 2010 was 58%54% of net revenues versus 53%48% for the same period last year. Gross profit was positively impacted by both higher unit volume and 100% of the 2010 units soldunit sales being the more profitablehigher margin FC2 units versus a 46% FC2 mix in the same quarterperiod last year.year during which approximately 49% of sales mix were FC2.