Summary of FEMALE HEALTH CO

MANAGEMENT'S DISCUSSION AND ANALYSIS

General

The Female Health Company ("FHC" or the "Company") manufactures, markets and sells the FC female condom (FC1 and FC2), the only products under a woman's control that are approved by the U.S. Food and Drug Administration (FDA). These products provide dual protection against unintended pregnancy and sexually transmitted infections ("STIs"), including HIV/AIDS.

FC1 has undergone extensive testing for efficacy, safety and acceptability, not only in the United States but also in many countries around the world. Certain of these studies show that having FC1 available allows women to have more options, resulting in an increase in protected sex acts and a decrease in STIs, including HIV/AIDS. FC1 is currently sold or available through various channels in 116 countries. It is commercially marketed directly to consumers in 15 countries by various country specific partners, including in the United States, the United Kingdom, Canada and France. Currently, public sector female condom programs in various stages are ongoing in over 90 countries.

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 77 countries. It is sold directly to consumers in 3 countries.

Products

Currently, there are only four FDA approved products marketed that prevent the transmission of HIV/AIDS through sexual intercourse: the male latex condom, the male polyurethane condom, FC1 and FC2. FC1 and FC2 are the only FDA approved products controlled by women that prevent sexually transmitted diseases including HIV/AIDS. FC2, which has been marketed internationally since 2007, is expected to be available in the United States in the late summer of 2009.

FC1 is made of polyurethane, a thin but strong material which is resistant to rips and tears during use. FC1 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. FC1 lines the vagina, preventing skin-to-skin contact during intercourse.

FC2, the second generation female condom, is made of a nitrile polymer. FC2 consists of a soft, loose fitting sheath, a rolled outer ring made of the nitrile polymer and one flexible inner ring made of polyurethane. FC2's reduced manufacturing cost results from a less expensive raw material and the product being produced by a more automated process in a more economical manufacturing environment. As a result of its reduced manufacturing cost, the Company offers FC2 at a lower price than FC1.

On March 10, 2009, FC2 received FDA approval as a Class III medical device. FC2 is expected to be available in the United States in late summer of 2009. FDA approval will also enable 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 recommended that FC2 can be purchased by UN agencies. Since then, over 27 million FC2 female condoms have been distributed in 77 countries.

FC1 and FC2 are not seen by the Company as competing with the male condom, but rather as alternatives to either male condom use or to unprotected sex.

Raw Materials

Polyurethane is the principal raw material the Company uses to produce FC1. The Company has entered into a supply agreement with Deerfield Urethane, Inc. for the purchase of the Company's requirement of polyurethane. Under this agreement, the parties negotiate pricing on an annual basis. While the term of the agreement expires on December 31, 2009, the agreement automatically renews for additional one year periods unless either party gives at least 12 months prior written notice of termination.

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 chose 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.

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 Condoms, (FC1 and FC2) are the only products approved by the FDA and cleared by WHO for purchase by U.N. agencies that, when used consistently and correctly, 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 years ago. Since then, HIV/AIDS has become the most devastating pandemic facing humankind in recorded history. UNAIDS in its July 2008 Aids Epidemic Update reported that approximately 33 million people globally were living with HIV. Approximately 2.7 million new cases of HIV will be reported this year while about 2 million people will have died from the disease. Sub-Saharan Africa remains most heavily affected by HIV, accounting for 67% of all people living with HIV and for 72% of AIDS deaths in 2007. Women now account for 50% of those living with HIV/AIDS and in some Sub-Saharan African countries, for more than 70% of those infected. In a published paper by Dr. Colin Mathers and Dejan Loncar of the WHO, "Projections of Global Mortality and Burden of Disease from 2002 to 2030," they estimate that at least 117 million people will have died of or will have AIDS by 2030.

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 (74% 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.

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 have been greater than 10 billion units annually since 2005. 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.

The FC Female Condom and the Male Condom

Currently, there are only four FDA approved products marketed that prevent the transmission of HIV/AIDS through sexual intercourse: the male latex condom, the male polyurethane condom and the FC1 (polyurethane) and FC2 (nitrile polymer) female condoms. FC1 and FC2 are the only FDA approved products, whose use are controlled by women, that prevent sexually transmitted infections including HIV/AIDS. Both FC1 and FC2 are alternatives to male condoms, for reasons of either choice or latex sensitivity.

Studies show that both FC1's polyurethane and FC2's nitrile polymer are safe, strong materials and that method failure rates are similar to that of male condoms. FHC's female condoms offer a number of benefits over natural rubber latex, the material that is most commonly used in male condoms. Unlike natural rubber latex, both materials quickly transfer heat, so the female condom quickly warms to body temperature after insertion, which may enhance pleasure and sensation during use. Unlike the male condom, the female condom may be inserted in advance of arousal, eliminating disruption during sexual intimacy. Use of the female condom is not dependent on the male erection, does not require immediate withdrawal and is not tight or constricting. The female condoms can be used with both oil and water-based lubricants, unlike natural rubber latex male condoms which can be used with water-based lubricants only. The products also offer an alternative to natural rubber latex sensitive users (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 either FC1 polyurethane or the FC2 nitrile polymer.

Numerous clinical and behavioral studies have been conducted regarding use of FC1. Studies show that FC1 is found acceptable by women and their partners in many cultures. Importantly, studies also show that when FC1 is 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%.

Cost Effectiveness

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 is highly cost effective in reducing public health costs in developing countries as well as in the U.S.

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 results of the study estimate 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 determined that if only 16.6 million FC2 female condoms were distributed in South Africa, almost 10,000 HIV infections would be prevented. If 53.7 million FC2 female condoms were distributed, 32,000 HIV infections were estimated to 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 female condoms were distributed in Brazil, an estimated 600 HIV infections would be averted. If 84.8 million female condoms were distributed, 2,000 new HIV infections could be prevented. In total, the savings in Brazil alone could range from $1.1 million to $27 million.

Female Condom Reuse

Studies have shown that FC1 can be reused up to five times. WHO's website includes the proper procedure for the washing and preparation of FC1 if it is going to be reused. WHO, UNAIDS and FHC concur that FC1 should only be reused when a new female condom is not available. FC2 is not reusable.

Regulatory Approvals

FC1 received Pre-Market Approval ("PMA") as a Class III Medical Device from the FDA in 1993. The extensive clinical testing and scientific data required for FDA approval laid the foundation for approvals throughout the rest of the world, including receipt of a CE Mark in 1997 which allows the Company to market FC1 throughout the European Union. In addition to the United States and the EU, several other countries have formally reviewed and approved FC1 for sale, including Canada, Australia, Japan and India.

On March 10, 2009, the Company received FDA's pre-market approval of FC2 as a Class III Medical Device, which allows FHC to market the product in the United States and which enables the United States Agency for International Development (USAID) to distribute FC2 globally. FC2 has received the CE mark which allows it to be marketed throughout the European Union. FC2 has also been approved by regulatory authorities in Brazil and India.

The Company believes that FC1 and FC2 female condoms' PMA's 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 six years to implement, execute and receive FDA approval of a PMA to market another type of female condom.

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.

Strategy

The Company's strategy is to fully develop the market for FC1 and FC2 on a global basis. The Company's objectives in accomplishing this are to increase access to Female Condoms worldwide, significantly reduce the incidence of sexually transmitted infections, and to reduce health care costs. In doing so, it has developed contacts and relationships with global public health sector organizations such as WHO, the United Nations Population Fund (UNFPA), the Joint United Nations 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 program 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 manufactures 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 FC1. 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, HLL Lifecare Limited ("HLL"). The Company made its first substantial sales of FC2 in the second quarter of fiscal 2007. As of March 31, 2009, more than 27 million units of FC2 have been sold internationally.

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.

Commercial Markets - Direct to Consumers

The Company markets FC1 directly in the United Kingdom. The Company has distribution agreements with commercial partners which market FC1 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 female condom to the distributor partners, who, in turn market and distribute the product to consumers in the established territory. FC2 is being sold direct to consumers in India, France and Brazil. Having obtained FDA approval of FC2, the Company is seeking a partner to commercialize it in the United States.

Relationships and Agreements with Public Sector Organizations

The Company has an agreement with UNAIDS to supply FC1 to developing countries at a reduced price which can be negotiated each year based on the Company's cost of production. The current price per unit ranges between �0.42 and �0.445 (British pounds sterling), or approximately $0.60 to $0.65, depending on contractual volumes. Under the agreement, UNAIDS and the Company cooperate in educational efforts and marketing FC1 in developing countries. Sales of FC1 are made directly to international public agencies and to public health authorities in each country at the price established by the agreement with UNAIDS. The agreement expires on December 31, 2009, but is automatically renewed for one year unless either party gives at least 90 days prior written notice of termination. FC1 is available in over 90 countries through public sector distribution.

In May 2006, the Company received an initial order for 500,100 FC1 female condoms from the National AIDS Control Organization (NACO) of the Ministry of Health & Family Welfare, Government of India. The order, placed through UNFPA, supplied female condoms for NACO's year-long program effectiveness study. The female condoms were distributed to 60,000 women at 13 sites in eight states. Because the pilot project was highly successful showing consistent use of FC1, NACO decided to scale 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 to be used in its scaled up HIV/AIDS prevention program. In April, 2009, a NACO order was received for another 1.5 million units. The new NACO order will be produced in HLL Lifecare Limited's Kochi, India factory, as was its previous order.

The Company sells FC1 in the United States to city and state public health clinics as well as not-for-profit organizations such as Planned Parenthood. FC1 is currently available in 125 locations in New York City, including both community based organizations and the N.Y.C. Department of Health and Mental Hygiene units. It 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.

Manufacturing Facilities

FC1
The Company manufactures FC1 in a 40,000 square-foot leased facility in London, England. Manufacturing capacity at this facility is expandable to 60 million units per year with additional investment in equipment.

FC2
The Company's end-stage production of FC2 began in a 1,900 square foot leased facility located in Selangor D.E., Malaysia, under a lease that terminated on December 31, 2007, after production had been relocated. On September 1, 2007, the Company leased 16,000 sq. ft. of production space in Selangor D.E., Malaysia to house the expanding operations. Manufacturing began in that location in December, 2007. In March, 2009, upon FDA's approval of FC2, the Company announced a 150% expansion of the existing production capacity of 30 million units annually. The addition of six more manufacturing lines will bring total capacity to approximately 75-80 million FC2 units annually. The expansion is expected to be completed in the fourth quarter of fiscal 2009.

The Company's India-based FC2 end-stage production capacity is located at a facility owned by its business partner, HLL Lifecare Limited (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. In June, 2008, NACO placed an order of 1.5 million FC2 units for distribution in its HIV/AIDS prevention program in India. In April, 2009, NACO followed-up with a second order for 1.5 million units.

FHC's total FC2 production capacity will be approximately 85 million units annually when the current expansion project is completed. The Company intends to expand its capacity at existing locations and/or additional manufacturing locations as demand for FC2 increases.

Government Regulation

FC1 received PMA as a Class III Medical Device from the FDA in 1993. The extensive clinical testing and scientific data required for FDA approval laid the foundation for approvals throughout the rest of the world, including receipt of a CE Mark in 1997 which allows the Company to market FC1 throughout the European Union. In addition to the United States and the EU, several other countries have formally reviewed and approved FC1 for sale, including Canada, Australia, Japan and India.

FHC received approval of its FC2 PMA as a Class III Medical Device from the FDA in March, 2009. Additionally, FC2 has the CE Mark which allows it to be marketed throughout the European Union and has been approved by both Brazil's and India's Regulatory authorities.

The Company believes that FC1 and FC2 female condoms' PMA and FDA classifications 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 six years to implement, execute and receive FDA approval of a PMA to market another type of female condom.

In the U.S., both FC1 and FC2 are 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 the device 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.

Competition

The Company's 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 FC1 and FC2 is additive in terms of prevention and choice. Latex male condoms cost less and have brand names that are more widely recognized than FC1 or 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. PATH, an international, nonprofit organization based in the United States, has a female condom product in early stage development. USAID and Family Health International (FHI) are currently evaluating the MP female condom for consideration along with the PATH woman's condom and FC2 to qualify for an in-depth Phase 3 clinical study evaluation. 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. 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 also 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

The Company currently holds product and technology patents for FC1 in the United States. The Company's current United States patents expire between 2009 and 2014. The Company understands these U.S. patents to cover FC1 as sold. The patents are generally directed to the structural aspects of the product. The Company also has patents covering technology and products relating to FC1 in Japan, the United Kingdom, France, Italy, Germany, Spain, the European Patent Convention, Canada, the People's Republic of China, South Korea and Australia. These patents expire from 2009 to 2013. 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. 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. FC2 patents have been issued in both South Africa and Australia.

The Company has the registered trademark "FC 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 condom has allowed the Company to develop trade secrets and know-how, including certain proprietary production technologies that further protects its competitive position. The Company has registered the trademark "FC2 Female Condom" in the United States.

Overview

The Company manufactures, markets and sells the FC1 and FC2 female condom, the only FDA-approved products under a woman's control which provides dual protection against unintended pregnancy and sexually transmitted diseases, including HIV/AIDS.

Revenues. Most of the Company's revenues are derived from sales of the female condom, its only product, and are recognized upon shipment of the product to its customers. Since fiscal 2008, revenue is also being derived from licensing its intellectual property to its business partner in India, HLL Lifecare Limited. Such revenue appears as royalties on the Unaudited Condensed Consolidated Statements of Income for the three and six months ended March 31, 2009 and March 31, 2008. Royalty revenues of $44,039 and $78,321 were reported for the three and six months ended March 31, 2009, respectively. For the three and six months ended March 31, 2008, royalty revenues were $4,944.

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

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