We develop, manufacture and market a broad line of innovative, technologically enhanced PVC-free and latex-free urinary continence and urine drainage care products for the home care and acute care markets. Acute care markets are generally hospitals and extended care treatment facilities, while home care users are generally patients who use our products at home. The extended care products we manufacture include our silicone male external catheters, our standard and advanced lines of silicone and anti-infection intermittent catheters and our FemSoft Insert. The acute care products we manufacture include our standard and advanced lines of silicone and anti-infection foley catheters. Through our subsidiary, Laprolan B.V., we also sell certain ostomy and wound and scar care products and other brands of urological products. The primary purchasers of our products are distributors, individual hospitals and healthcare institutions and extended care facilities.

We sell our products directly and through private label partners, both domestically and internationally. Direct sales include all our Rochester Medical ® branded sales, Script Easy sales and all of our other sales at Laprolan. In the UK, we use the Script Easy program to sell our Rochester Medical brand products and other companies' products covered under drug tariff direct to the patient. Private label sales include our products manufactured by us and sold under brand names owned by other companies.

As part of our three year strategic business plan through 2013, we increased the level of investment in our sales and marketing programs in fiscal 2011 to support our direct sales growth in the U.S. and Europe through the addition of more than 30 additional sales staff. Increasing our percentage of direct sales versus private label sales over time will have a positive impact on our gross margin. Direct sales accounted for 82% of total sales for the quarter ended December 31, 2011, compared to 72% for the quarter ended December 31, 2010. Home care direct sales accounted for 88% and 87% of total direct sales for the quarters ended December 31, 2011 and 2010, respectively.

In September 2009, the FemSoft Insert was approved for inclusion in Part IX of the UK Drug Tariff as a prescription product that is reimbursable under the National Healthcare System, commencing in 2010. In November 2009, the Centers for Medicare & Medicaid Services (CMS) issued a specific reimbursement code which covers our FemSoft Insert. The current Medicare fee schedule amount is based on price data that is closest to a 1986/1987 base period and is significantly lower than the current retail price for the FemSoft Insert. Although we believe that the reimbursement fee is unreasonably low, we continue to believe the availability of National Healthcare System and Medicare reimbursement will help this unique device become an economically accessible and often preferred solution for incontinent women in the United Kingdom and in the United States.

On April 7, 2011, we completed the acquisition of the outstanding capital stock of Laprolan B.V., a corporation organized under the laws of The Netherlands and a wholly owned subsidiary of Fornix BioSciences N.V., pursuant to a Share Purchase Agreement dated as of January 12, 2011 (the "Purchase Agreement"). We paid a cash purchase price at closing of €10,474,974 (US$15,057,775, of which $60,217 was paid for the cash balance of Laprolan on January 1, 2011 and $119,433 was interest paid to Fornix from January 1, 2011 until closing). As provided in the Purchase Agreement, the transaction had a retroactive effective date of January 1, 2011, and the operating results of Laprolan are for our account from and after January 1, 2011. We have applied purchase accounting as of that date and have included the results of Laprolan beginning with our second quarter of fiscal 2011.

The following discussion pertains to our results of operations and financial position for the quarters ended December 31, 2011 and 2010. Results of the periods are not necessarily indicative of the results to be expected for the complete year. For each of the first quarters ended December 31, 2011 and 2010, we reported a net loss of $0.01 per diluted share. Loss from operations was $21,000 for the quarter ended December 31, 2011 compared to a loss from operations of $465,000 for the quarter ended December 31, 2010, while net loss was $75,000 for the quarter ended December 31, 2011 compared to a net loss of $169,000 for the quarter ended December 31, 2010.

As of December 31, 2011, we had $8.3 million in cash and cash equivalents and $25.2 million invested in marketable securities. The marketable securities consist of $21.5 million invested in U.S. treasury bills, $3.2 million invested in a mutual fund and $0.5 million invested in CDs. Our investments in marketable securities are subject to interest rate risk and the value thereof could be adversely affected due to movements in interest rates. Our investment choices, however, are conservative and are intended to reduce the risk of loss or any material impact on our financial condition. We are currently reporting an unrealized loss of $335,000 related to the mutual fund investment as a result of the recent fluctuations in the credit markets impacting the current market value. We currently consider this unrealized loss to be temporary.

Results of Operations

The following table sets forth, for the fiscal periods indicated, certain items
from our statements of operations expressed as a percentage of net sales.



                                                Three Months  Ended
                                                    December 31,
                                                2011             2010
             Net sales                             100 %           100 %
             Cost of sales                          50              51

             Gross margin                           50              49

             Operating expenses:
             Marketing and selling                  33              35
             Research and development                3               3
             General and administrative             15              16

             Total operating expenses               51              54

             Loss from operations                   (1 )            (5 )
             Interest income (expense), net         -               -
             Other income                           -               -

             Net loss before taxes                  (1 )            (5 )
             Income tax expense (benefit)           -               (3 )

             Net loss after taxes                   (1 )%           (2 )%

The following table sets forth, for the periods indicated, net sales information by market category (acute care and home care), marketing method (private label and direct sales) and distribution channel (domestic and international markets) (all dollar amounts below are in thousands):

                                                                                         For the Quarter ended December 31,
                                                                       2011                                                               2010
                                                            Europe &           Rest of                                          Europe &          Rest of
                                              US           Middle East          World          Total               US          Middle East         World         Total
Net Sales
Acute Care - Direct                         $   778       $         461       $     135       $  1,374           $   595      $         297      $     105      $    997
Home Care - Direct                            2,179               7,712              94          9,985             1,732              4,960            139         6,831

Direct Total                                  2,957               8,173             229         11,359             2,327              5,257            244         7,828
Private Label                                 1,699                 775              13          2,487             1,990              1,115             13         3,118

Total Revenues                              $ 4,656       $       8,948       $     242       $ 13,846           $ 4,317      $       6,372      $     257      $ 10,946

Direct Product Mix
Acute Care - Direct                              26 %                 6 %            59 %           12 %              26 %                6 %           43 %          13 %
Home Care - Direct                               74 %                94 %            41 %           88 %              74 %               94 %           57 %          87 %

Direct Total                                    100 %               100 %           100 %          100 %             100 %              100 %          100 %         100 %

Direct Geographic Mix
Acute Care - Direct                               7 %                 4 %             1 %           12 %               8 %                4 %            1 %          13 %
Home Care - Direct                               19 %                68 %             1 %           88 %              22 %               63 %            2 %          87 %

Direct Total                                     26 %                72 %             2 %          100 %              30 %               67 %            3 %         100 %

YOY Percentage Net Sales Growth (Decline)
Direct                                           27 %                55 %            (6 %)          45 %
Private Label                                   (15 %)              (30 %)           (0 %)         (20 %)
Total Net Sales                                   8 %                40 %            (6 %)          26 %

Note:

Direct sales include sales made directly to the end consumer and include all Rochester Medical branded sales, UK Script Easy Sales and all Laprolan sales. Private label sales include our products packaged and sold by other manufacturers. Acute care refers to hospital sales. Home care refers to non-hospital sales.

Three Month Periods Ended December 31, 2011 and December 31, 2010

Net Sales. Net sales for the first quarter of fiscal 2012 increased 26% to $13,846,000 from $10,946,000 for the comparable quarter of last fiscal year. The sales increase primarily resulted from an increase in direct sales in the U.S. and the Europe and Middle East ("EME") region, offset by a decrease in sales of private label products domestically and in EME. US direct sales increased by 27% for the quarter compared to the same period last year, led by a 31% increase in acute care sales and a 26% increase in home care sales. Our EME direct sales increased 55% compared to the same period last year led by a strong increase in the UK and inclusion of $2.4 million of sales in the Netherlands. Management believes these results demonstrate the favorable impact of our strategic decision to increase investment in sales and marketing programs, particularly in our direct sales business in the US and EME. Additionally, beginning with the quarter ended March 31, 2011, direct sales include the sales of Laprolan B.V., our recently acquired subsidiary in the Netherlands. Total sales were partially impacted ($23,000) as a result of the change in foreign currency exchange rates

in the United Kingdom as the U.S. dollar was somewhat stronger versus the pound sterling, thereby affecting sales negatively. Direct sales in the rest of the world ("ROW") decreased 6% compared to the same period last year, resulting from a 29% increase in acute care sales offset by a 32% decrease in home care sales. Private label sales for the first quarter were down 20% from last year and continue to fluctuate on a quarterly basis. While private label sales historically have tended to fluctuate quarter to quarter, usually due to the timing of orders, year over year results are generally expected to remain constant. Management believes the current quarterly reduction in private label sales is strictly due to the timing of orders. Private label sales accounted for approximately 18% and 28% of total sales for the quarters ended December 31, 2011 and 2010, respectively.

Gross Margin. Our gross margin as a percentage of net sales for the first quarter of fiscal 2012 increased to 50% from 49% in the same period last fiscal year. Gross margin this quarter was primarily impacted by higher margins on Laprolan sales and direct sales in the U.K., as well as a lower proportion of sales to private label customers that yield a lower margin. Management expects the sale of Laprolan products and our direct sales in both the U.S. and EME will continue to have a positive impact on margin as we continue to focus on direct sales.

Marketing and Selling. Marketing and selling expense primarily includes costs associated with base salary paid to sales and marketing personnel, sales commissions, and travel and advertising expense. Marketing and selling expense for the first quarter of fiscal 2012 increased 16% to $4,504,000 from $3,882,000 for the comparable quarter of last fiscal year. The increase in marketing and selling expense is primarily due to $590,000 of incremental costs associated with Laprolan and increased compensation and benefits associated with the increased sales staff in the US and UK. Marketing and selling expense as a percentage of net sales for the fiscal quarters ended December 31, 2011 and 2010 was 33% and 35%, respectively.

Research and Development. Research and development expense primarily includes internal labor costs, as well as expense associated with third-party vendors performing validation and investigative research regarding our products and development activities. Research and development expense for the first quarter of fiscal 2012 increased 35% to $376,000 from $278,000 for the comparable quarter of last fiscal year. The increase in research and development expense results primarily from general increases in salaries and wages and third-party vendors performing investigative research on new products. Research and development expense as a percentage of net sales for the fiscal quarters ended December 31, 2011 and 2010 was 3%.

General and Administrative. General and administrative expense primarily includes payroll expense relating to our management and accounting, information technology and human resources staff, as well as fees and expenses of outside legal counsel, accounting advisors, auditors and utilities. General and administrative expense for the first quarter of fiscal 2012 increased 23% to $2,109,000 from $1,709,000 for the comparable quarter of last fiscal year. The increase in general and administrative expense is primarily related to $538,000 of administrative expenses in Laprolan, increased taxes and benefits and increased wages offset by decreases in depreciation and merger and acquisition costs. General and administrative expense as a percentage of net sales for the fiscal quarters ended December 31, 2011 and 2010 was 15% and 16%, respectively.

Interest Income. Interest income for the first quarter of fiscal 2012 decreased 81% to $10,000 from $53,000 for the comparable quarter of last fiscal year. The decrease in interest income reflects overall lower interest rates on investments.

Interest Expense. Interest expense for the first quarter of fiscal 2012 increased 161% to $81,000 from $31,000 for the comparable quarter of last fiscal year. The increase in interest expense reflects increased interest related to the acquisition of Laprolan offset by lower amounts of debt as a result of paying off our debt related to our asset purchase agreement with Coloplast.

Income Taxes. For the quarter ended December 31, 2011, we had an effective worldwide income tax rate of approximately 33% compared to 63% for the comparable quarter of last fiscal year. In future periods, we expect to report an income tax provision using an effective tax rate in the range of 32-35% of worldwide income. The effective tax rate on worldwide income may fluctuate depending upon inter-company eliminations, profitability of foreign operations, and any discrete items.

Liquidity and Capital Resources

Our cash, cash equivalents and marketable securities were $33.6 million at December 31, 2011 compared to $34.9 million at September 30, 2011. The decrease in cash primarily resulted from stock repurchases, cash used in operations and capital expenditures offset by cash provided from the sale of common stock upon exercise of options and proceeds from long term debt. As of December 31, 2011, we had $25.2 million invested in marketable securities. The marketable securities consist of $21.5 million invested in U.S. treasury bills and $3.2 million invested in a mutual fund and $0.5 million in CDs. We are currently reporting an unrealized loss of $335,000 primarily related to the mutual fund investment as a result of the recent fluctuations in the credit markets impacting the current market value. We currently consider this unrealized loss to be temporary.

During the three-month period ended December 31, 2011, we used $586,000 of cash from operating activities compared to $204,000 of cash provided by operations during the comparable period of the prior fiscal year. The net cash used in operating activities in the first three months of fiscal 2012 primarily reflects our net loss adjusted for non-cash items related to depreciation, amortization, and stock based compensation and increases in inventories and other current assets and decreases in accounts payable and other current liabilities offset by decreases in accounts receivable. Accounts receivable during this period decreased 2% or $151,000, while inventories increased $451,000, or 4%, primarily as a result of rebuilding inventory levels since year end. Other current assets during this period increased 23% or $309,000, primarily as a result of prepaid income taxes on intercompany profits and taxes receivable related to incentive stock option exercises. Accounts payable decreased 7%, or $189,000, primarily reflecting timing of expenses related to quarter end. Other current liabilities decreased 22%, or $642,000, primarily reflecting timing of normal operating accruals. In addition, capital expenditures during this period were $585,000 compared to $361,000 for the comparable period last year. We also repurchased $1,089,000 worth of common stock.

In December 2010, we entered into a credit facility with RBC Wealth Management. The credit facility consists of a revolving line of credit of up to $25,000,000 with interest accruing monthly at a variable rate currently at 1.375%. In conjunction with the closing of the Laprolan acquisition, on April 7, 2011, we drew down $15,057,775 from the line of credit. As of December 31, 2011, we had an outstanding balance under the revolving line of credit of $18,330,905. In January 2012, we used a portion of our cash and cash equivalents and marketable securities and paid off the entire outstanding balance on our operating line of credit. The credit facility now consists of a revolving line of credit of up to $5,000,000 with interest accruing monthly at a variable rate currently at 1.375%.

We believe that our capital resources on hand at December 31, 2011, together with cash generated from sales, will be sufficient to satisfy our working capital requirements for the foreseeable future as described in the Liquidity and Capital Resources portion of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011. In the event that additional financing is needed, we may seek to raise additional funds through public or private financing, collaborative relationships or other arrangements. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve significant restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies, products or marketing territories. Failure to raise capital when needed could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that such financing, if required, will be available on terms satisfactory to us, if at all.

Cautionary Statement Regarding Forward Looking Information

Statements other than historical information contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by the use of terminology such as "believe," "may," "will," "expect," "anticipate," "predict," "intend," "designed," "estimate," "should" or "continue" or the negatives thereof or other variations thereon or comparable terminology. Such forward-looking statements involve known or unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following:

• the uncertainty of market acceptance of new product introductions;

• the uncertainty of successfully establishing our separate Rochester Medical brand identity;

• the uncertainty of timing of revenues from private label sales (particularly with respect to international customers);

• the uncertainty of successfully growing our international operations;

• the risks associated with operating an international business, including the impact of foreign currency exchange rate fluctuations;

• the securing of Group Purchasing Organization contract participation;

• the uncertainty of gaining significant sales from secured GPO contracts;

• FDA and other regulatory review and response times;

• the impact of continued healthcare cost containment;

• new laws related to healthcare availability, healthcare reform, payment for healthcare products and services or the marketing and distribution of products, including legislative or administrative reforms to the U.S. Medicare and Medicaid systems or other U.S. or international reimbursement systems;

• changes in the tax or environmental laws or standards affecting our business;

and other risk factors listed from time to time in our SEC reports, including, without limitation, the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2011.