Liberator, Inc. (Form: 10-K, Received: 10/12/2011 13:52:28)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

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

For the fiscal year ended June 30, 2011

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

Commission file number : 000-53314

Liberator, Inc.

(Exact name of Company as specified in its charter)

Florida		59-3581576
(State of incorporation)		(IRS Employer Identification No.)

2745 Bankers Industrial Drive, Atlanta, Georgia 30360

(Address of principal executive offices) (Zip Code)

Company's telephone number: (770) 246-6400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ YES x NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ YES x NO

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ YES x NO

The aggregate market value of the common stock held by non−affiliates of the registrant computed by reference to the closing price of the common stock on December 31, 2010, the last trading day of the registrant’s most recently completed second fiscal quarter, was $1,256,807.

The number of shares of Common Stock, $.01 par value, outstanding as of the close of business on September 30, 2011 was 91,947,047.

Liberator, Inc.

Annual Report on Form 10-K

Year Ended June 30, 2011

TABLE OF CONTENTS

		PAGE

FORWARD-LOOKING STATEMENTS		1

PART I

ITEM 1.	Business	2

ITEM 2.	Properties	12

ITEM 3.	Legal Proceedings	13

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

ITEM 8.	Financial Statements and Supplementary Data	22

ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	23

ITEM 9A.	Controls and Procedures	23

ITEM 9B.	Other Information	24

PART III

ITEM 10.	Directors, Executive Officers and Corporate Governance	25

ITEM 11.	Executive Compensation	27

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	28

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	30

ITEM 14.	Principal Accounting Fees and Services	30

PART IV

ITEM 15.	Exhibits, Financial Statement Schedules	32

SIGNATURES		34

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Annual Report”) for Liberator, Inc. (“Liberator” the “Company””we” “our” or “us”) may contain forward-looking statements, which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as "expects," "anticipates," "intends," "plan," "believes," "predicts", "estimates" or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning the Company, the performance of the industry in which they do business and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.

Forward-looking statements speak only as of the date of this report, presentation or filing in which they are made. Except to the extent required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this report include, but are not limited to:

Statements relating to our business strategy;

Statements relating to our business objectives; and

Expectations concerning future operations, profitability, liquidity and financial resources.

These forward-looking statements are subject to risk, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. The following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:

competition from other sexual wellness retailers and adult-oriented websites;

our ability to extend, renew or refinance our existing debt;

our ability to generate significant sales revenue from magazine, internet and radio advertising;

our plan to make continued investments in advertising and marketing;

our ability to maintain our brands;

unfavorable economic and market conditions and the impact on our leveraged financial position;

our reliance on credit cards as a form of payment;

our ability to keep up with new technologies and remain competitive;

our ability to continue as a going concern;

our history of operating losses and the risk of incurring additional losses in the future;

security breaches may cause harm to our systems;

supply interruptions from raw material vendors:

our ability to improve manufacturing efficiency at our production facility;

trends in raw material costs and other costs both in the industry and specific to the Company;

our ability to enforce and protect our intellectual property rights;

we may be subject to claims that we have violated the intellectual property rights of others;

the loss of our main data center or other parts of our infrastructure;

systems failures and interruptions in our ability to provide access to our websites and content;

companies providing products and services on which we rely may refuse to do business with us;

changes in government laws affecting our business;

we may not be successful in integrating any acquisitions we make;

our dependence on the experience and competence of our executive officers and other key employees;

restrictions to access on the internet affecting traffic to our websites;

risks associated with currency fluctuations;

anticipated worsening US deficit and a rise in inflation in coming years that would put further stress on consumer spending;

management’s goals and plans for future operations;

risks associated with litigation and legal proceedings; and

other risks or uncertainties described elsewhere in this report and in other periodic reports previously and subsequently filed by the Company with the Securities and Exchange Commission.

PART I.

ITEM 1. Business

Our Business

We are a vertically integrated manufacturer that designs, develops and markets products and accessories that enhance intimacy. Liberator is also a nationally recognized brand trademark, brand category and a patented line of products commonly referred to as sexual positioning shapes and sex furniture. We are an integrated multi-channel, multi-brand direct-to-consumer retailer, distributor and wholesaler that also operate the Liberator brand website. We conduct our manufacturing, distribution and all administrative functions from a 140,000 square foot facility in Atlanta, Georgia.

We believe our Liberator customer base consists primarily of affluent, college educated couples that buy Liberator to enhance bedroom play and/or to improve sexual performance which may be inhibited by age and/or physical limitations.

The Company conducts direct to consumer business through its owned and managed website URL’s www.liberator.com and www.edenfantasys.com and the Liberator exhibition and concept store within our factory.

Through our wholly-owned subsidiary, OneUp Innovations Inc. (“OneUp”), we conduct wholesale business for Liberator products through five primary channels: (1) adult and female friendly retailers and specialty boutiques, (2) e-tailers who sell our products through adult, mass market, drug and other sites offering sexual wellness products, (3) adult “toy” home party businesses, (4) mail order catalogers, and (5) distributors of adult / sexual wellness products. These wholesale accounts have approximately 1,000 retail locations and/or websites in the United States and Canada. We have a growing number of retailers who are also adding a dedicated Liberator exhibition concept to their merchandising space. We also sell internationally under exclusive license and manufacturing agreements.

Under OneUp, we also function as an exclusive resale distributor of Tenga and Booty Parlor brands sold through the same wholesale and direct-to-consumer channels as branded Liberator products. For the year ended June 30, 2011, these product lines represented approximately fourteen percent of our consolidated net sales.

In addition, the Company sells a line of contemporary beanbag seating under the Jaxx brand. Jaxx is an offshoot from Liberator manufacturing as it provides additional revenue from repurposing our polyurethane foam trim into shredded beanbag fill. The Jaxx product line and accessory products are sold through the following four wholesale channels: (1) beanbag e-tailers, (2) mass market and drug, (3) mail order catalogers, and (4) retail furniture stores. The Company also owns and manages a website under the URL www.studiooneup.com for direct to consumer sales. For the year ended June 30, 2011, this product line represented approximately ten percent of our consolidated net sales.

Unless the context requires otherwise, all references in this report to the “Company,” “Liberator,” “we,” “our,” and “us” refers to Liberator, Inc. and its subsidiaries.

Our executive offices are located at 2745 Bankers Industrial Dr., Atlanta, GA 30360; our telephone number is +1-770-246-6400.

Recent Developments – Entry Into a Material Definitive Agreement.

Stock Purchase Agreement

On October 6, 2011, the Company announced the signing of a definitive Stock Purchase Agreement (the “WMI Sale Agreement”) for the sale of our subsidiary, Web Merchants Inc. (“WMI”) to Web Merchants Atlanta, LLC (“WMA”), an entity controlled by the President and former majority shareholder of WMI, Fred Petrenko. Under the WMI Sale Agreement, the Company will receive the 25.4 million shares of Liberator common stock owned by Mr. Petrenko and a cash payment of $700,000 in exchange for the issued and outstanding stock of WMI currently owned by the Company. The Company received $150,000 upon the signing of the WMI Sale Agreement, with the balance due upon the closing of the transaction.

Upon the closing of the transaction, Fred Petrenko will resign as a director and Executive Vice President of the Company, and Rufina Bulatova will resign as Vice President – Online Marketing of the Company.

The above descriptions of the Stock Purchase Agreement are qualified in their entirety by the terms and conditions of the Stock Purchase Agreement, a copy of which is filed as Exhibit 10.26 hereto.

Escrow Agreement

As part of the WMI Sale Agreement, the Company will also enter into an Escrow Agreement with WMA (the “WMA Escrow Agreement”) covering the 25.4 million shares of Liberator common stock that will be transferred as part of the WMI Sale Agreement. Under the WMA Escrow Agreement, the 25.4 million shares of Liberator common stock will be held in escrow until outstanding loans from Advance Financial Corporation and Credit Cash LLC (see Notes to Consolidated Financial Statements – Note K-Line of Credit and Note L-Credit Card Advance ) are either satisfied or WMI and Mr. Petrenko have been provided with a written release of any liability as a guarantor. Under the agreement, the Company shall obtain such releases no later than August 1, 2012, at which time the Liberator common stock shall be released to the Company. If by August 1, 2012, the Company has not satisfied the loans from Advance Financial Corporation and Credit Cash LLC and WMI and Mr. Petrenko have not been provided with written releases of liability, then the 25.4 million shares of Liberator common stock will be delivered from escrow to WMA who may use them to satisfy such loans. The above descriptions of the WMA Escrow Agreement are qualified in their entirety by the terms and conditions of the Escrow Agreement, a copy of which is filed as Exhibit 10.27 hereto.

Lease Agreement

The Company also entered into a month-to-month Lease Agreement whereby WMI will rent space in the Company’s facility for $12,000 per month. This Lease Agreement may be terminated by either party upon 30 days written notice. The above descriptions of the Lease Agreement are qualified in their entirety by the terms and conditions of the Lease Agreement, a copy of which is filed as Exhibit 10.28 hereto.

The transaction is expected to close no later than October 21, 2011 and will be effective October 1, 2011, the first day of the Company’s second fiscal quarter.

Corporate History

Liberator, Inc. (the “Company”), located in Atlanta, Georgia, was incorporated in the State of Florida on February 25, 1999, under the name of WES Consulting, Inc. to provide consulting and commercial property management services. On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc. (f/k/a Remark Enterprises Inc.), a Nevada corporation (“Old Liberator”). Pursuant to the Merger Agreement, Old Liberator merged with and into the Company, with the Company surviving as the sole remaining entity (the “Merger”). References to the “Company” in this Annual Report includes the Company and its wholly owned subsidiaries, Web Merchants, Inc, OneUp Innovations, Inc. and Foam Labs, Inc.

As a result of the Merger, each issued and outstanding share of the common stock of Old Liberator (the “Old Liberator Common Shares”) were converted into one share of the Company’s common stock, $0.01 par value, which, after giving effect to the Merger, equaled, in the aggregate, 98.4% of the total issued and outstanding common stock of the Company (the “Liberator Common Stock”). Pursuant to the Merger Agreement, each issued and outstanding share of preferred stock of Old Liberator (the “Liberator Preferred Shares”) was to be converted into one share of the Company’s preferred stock with the provisions, rights, and designations set forth in the Merger Agreement (the “Liberator Preferred Stock”). On the execution date of the Merger Agreement, the Company was not authorized to issue any preferred stock. On February 11, 2011 the Company filed an amendment to its Articles of Incorporation authorizing the issuance of the Liberator Preferred Stock, and at that time the Liberator Preferred Stock was exchanged pursuant to the terms of the Merger Agreement. As of the execution date of the Merger Agreement, Old Liberator owned 80.7% of the issued and outstanding shares of the Company’s common stock. Upon the consummation of the Merger, the shares of Liberator Common Stock owned by Old Liberator prior to the Merger were cancelled.

On February 28, 2011, the Company name was changed from WES Consulting, Inc. to Liberator, Inc.

Liberator, Inc. (formerly known as Remark Enterprises, Inc), a Nevada Corporation (“Old Liberator”)

Old Liberator, Inc. was incorporated in the State of Nevada on October 31, 2007 under the name “Remark Enterprises Inc.” Since inception, Old Liberator was engaged in organizational efforts and obtaining initial financing. Old Liberator was formed as a vehicle to pursue a business combination. On March 11, 2009, Old Liberator formed OneUp Acquisition, Inc., a Georgia corporation as a wholly owned subsidiary (the “Subsidiary”). On April 3, 2009, Old Liberator entered into a Stock Purchase and Recapitalization Agreement with OneUp Innovations, Inc., a privately held Georgia corporation (“OneUp”), and the Subsidiary. On June 26, 2009, Old Liberator consummated the transactions contemplated by the agreement, as amended. Pursuant to the agreement, the Subsidiary and OneUp merged, and all of the issued and outstanding common stock of OneUp was exchanged for an aggregate of 45,000,000 shares of Old Liberator’s common stock (90% of the total issued and outstanding shares of common stock of Old Liberator). In addition, all of the issued and outstanding shares of preferred stock of OneUp was exchanged for 4,300,000 shares of preferred stock of Old Liberator. After the merger, OneUp became Old Liberator’s wholly owned subsidiary, and Old Liberator’s business operations were conducted through OneUp. On July 2, 2009, Remark Enterprises, Inc. changed its name to “Liberator, Inc.”

OneUp Innovations, Inc.

Founded in Atlanta, Georgia in 2000, OneUp is a provider of goods to customers who believe that sensual pleasure and fulfillment are essential to a well-lived and healthy life.

Under OneUp Innovations, Liberator is a growing consumer brand that enhances intimacy by inspiring romantic imagination. Established with this conviction, Liberator Bedroom Adventure Gear ® empowers exploration, fantasy and the communication of desire, no matter the person’s shape, size and orientation. Liberator may also be assistive to individuals who might have intimacy limitations due to age, weight, back problems and a myriad of other physical disorders. Products include the original Liberator shapes, sex furniture and accessory products. The company is also a wholesaler and distributor of other sexual wellness products from other manufacturers including vibrators, pleasure objects and related products.

As a brand, Liberator Bedroom Adventure Gear exists in a space where the act of love meets art and invention. Not prurient enough to be an “adult” product, yet too sexy to be considered mainstream, we created a retail category and brand called “Liberator” that defines ourselves in a marketplace that is rapidly gaining in popularity and acceptance.

Since we shipped our first product in 2002, OneUp has evolved into a community of approximately 120 people that create, develop, manufacture, market and promote Liberator products that allow couples to have a fuller sexual experience for themselves and each other.

OneUp is primarily focused on building, developing and marketing its Liberator brand of Bedroom Adventure Gear products. Since inception, we have spent just under nine million dollars building awareness of the brand, primarily through magazine advertisements. We now intend to broaden our marketing reach by expanding our advertising to radio, internet and TV.

OneUp currently occupies 140,000 square feet in a vertically integrated manufacturing facility on eight acres in a suburb of Atlanta, Georgia. Our products are sold directly to consumers and through approximately one thousand domestic resellers and six international resellers, 1,400 internet marketing affiliates, and several dozen independent sales consultants within the United States. Other than the six international resellers, none of our customers are subject to a written agreement or are required to purchase or sell a specific amount of our products. Marketing affiliates are companies that operate websites that market our products on their websites. These marketing affiliates direct visitor traffic to our websites by using our technology to place banners or links on their websites to our website.

Web Merchants, Inc.

In January, 2011, the Company acquired Web Merchants Inc. (“WMI”) for $100,000 and the issuance of 28,524,400 shares of common stock. WMI was incorporated in Delaware on July 12, 2002 and is an online retailer offering a full range of products for the sexual wellness market. WMI sells its products through an internet website located at www.EdenFantasys.com. Sales are generated through organic search, social communities, over 1,000 marketing affiliates, and internet advertising which funnel traffic to the EdenFantasys.com website.

From the acquisition date through June 30, 2011, WMI had net sales of $4.5 million and net income of approximately $76,000.

See Recent Developments – Entry Into a Material Definitive Agreement, above, regarding information on the signing of a definitive agreement for the sale of WMI.

Industry Background

The Company participates in the rapidly growing worldwide market of sexual wellness. What was once called Family Planning has evolved over the last decade into a new category called Sexual Wellness, a growing worldwide movement toward sexual health. Many of the major health and wellness retailers, pharmacies and on-line retailers have started embracing this movement, especially over the last two to three years. A Google search of the term ‘Sexual Wellness” returns over 9 million entries, with the first three entries in organic search being Amazon.com, Walgreens.com, and Overstock.com.

Major consumer brands are rapidly entering the Sexual Wellness market, with either new products or repackaged existing products. Such brands include:

K-Y ® : the personal lubricant first introduced in 1917, now offers 10 products including products marketed as climax enhancers, for massage and foreplay, lubricants with sensation and vaginal moisturizers.

Trojan Condoms ® , the leading condom in North America, now offers a line of eight vibrators and vibrating products. A recent quote from the Trojan Condom website - “vibrators are increasingly becoming as common in Americans’ bedrooms as coffee makers are in their kitchens.”

Durex Condoms ® (a division of £8.4 billion UK-based Reckitt Benckiser) now offers a selection of vibrating products in addition to condoms.

We believe that the category of Sexual Wellness is in the early stages of consumer awareness and that it will continue to grow and gain consumer acceptance to become a major trend in society.

Core Business Strengths

We believe we have the following core business strengths that we can leverage to implement our strategy:

Design Vision

Our in-house design group continues to reinforce our constantly evolving brand image. Our products are designed to reflect utility and sensuality as well as be room décor that incorporates high quality fabrics and construction with comfort and performance in the bedroom. Evolving from our iconic Liberator shapes, we combined form with function to launch contemporary furniture and accessories for sex play, as well as products for mainstream and mass market retailers which embrace the sexual wellness category of products.

Advertising and Branding

The Liberator.com website is the primary branding and advertising vehicle for the Liberator brand. We believe our website reinforces the Liberator mission and brand image while driving sales to all of our wholesale channels. We also believe we have distinguished ourselves from other web e-tailers in the adult and sexual wellness space by using edgy photography, instructional videos and exceptional art direction combined with an entertainment bent.Liberator attracts customers to its website and other retailers and e-tailers through internally developed print ads, and radio and television advertising during holiday periods. These provocative advertising campaigns communicate a distinctive image that differentiates us and creates a connection and following with our customers. Since inception, over $8.7 million has been spent building brand awareness. We have also aligned the brand with the entertainment industry appearing in Meet the Fockers , Burn after Reading and numerous TV and media events.

Diverse Mainstream Appeal

The Liberator brand is marketed and distributed through diverse wholesale mass market channels, specialty retailers and web stores. We estimate that approximately 50% of our purchases are made jointly by couples, varying in ages from 30 to 55 years old, who view sexual expression and experimentation as essential to a well-lived life. Liberator, as a company, also understands and supports sexuality as a potentially positive force in everyone’s life, and celebrates sexual diversity, differing desires, relationships structures, and individual choices based on consent. We offer our customers a broad range of Liberator styles and designs. By offering such a broad range of products, including higher priced luxury items, we believe it elevates the perception of the brand while providing more accessible price points for every customer and budget.

Flexible and Vertically Integrated Model

Our vertically integrated business model, with manufacturing, distribution, product development and marketing in-house, allows us to create new products with reduced lead times at a lower cost while enabling us to quickly respond to market and customer demands for new product releases. For our wholesale accounts, being able to fulfill large orders with shorter turnaround times allows us to capture business during December and February when wholesale customers make just-in-time holiday purchases.

American Manufacturing and Sourcing

We implemented a state-of-the-art conveyor-based sewing system to manufacture sewn products at the lowest possible cost in the United States. Because all cutting, sewing, foam contouring, assembly and packaging are performed in-house, we believe we can exercise greater control over product quality and respond faster to changing customer demands, which gives us a competitive advantage over companies that utilize out-sourced sewing services. Liberator can source raw materials from multiple domestic suppliers and we have supply contracts in place to produce our specialty fabrics under specific quality control and performance standards with just-in-time deliveries.

Management Information Systems

Our Enterprise Resource Planning software is designed specifically for the sewn products industry to provide comprehensive inventory, order processing, production planning, accounting and management information for the marketing, manufacturing, finance and distribution functions of our business. Item level replenishment and real time inventory is directly linked to our website feeds and online wholesale order portals. We continue to expand and upgrade our information systems, networks and infrastructure to support recent and future growth. To support our internal information technology infrastructure, we have agreements with third party providers for hosting services and administration support.

During fiscal 2009, we implemented an enterprise level e-commerce platform and have made continued improvements and upgrades since then. We have agreements with our e-commerce and network providers to manage our data center with 24/7 response time and uptime guarantees.

Business Strategy

As one of the few recognized brands in the sexual wellness market, our goals are to achieve long-term growth and profitability and diversify our sales base. We plan to achieve these goals using the following strategies:

Manufacturing . To improve our business results, we constantly look for ways to reduce the impact of rising raw material costs by improving the productivity of our manufacturing processes. We recently implemented modest price increases for certain products, but are unable to predict if we will be able to successfully pass on recent raw material cost increases to our wholesale and retail customers.

Wholesale Operations. Our goal is to increase consumer demand through advertising and public relations while our wholesale operations expands our offering to distributors, retailers and e-tailers across every channel of adult, mass market drug and specialty accounts. For wholesalers thinking about adding sexual wellness products to their retail or online store, Liberator is typically one of the first “safer” products presented as it can be promoted as an assistive aid to sexual positioning. As the mainstream demand for sexual wellness products grows, our sales staff is training and educating new resellers on how to get started in this space. For retail display, we offer mainstream packaging in a variety of sizes and price points to meet their customers particular demographic. For e-tailers, we maintain brand continuity by providing rich product content, photography and instructional videos for use on their websites. We also provide fulfillment services and can drop-ship orders directly to their customer, typically the same day the order is received. The distribution of other brands like Tenga and Booty Parlor further extends the reach of Liberator products beyond our core channels.

Product Development. This past year we strategically expanded our Liberator offering by introducing several product line extensions, including Liberator Décor Series (shapes that coordinate with bedding), Liberator Contemporary Chaise and Massage Bench, Liberator Sex Toy Mounts and the Liberator Collection featuring exclusive, limited-edition accessories with artisan level details. We also introduced the Liberator “Jaz series”, an offering of smaller-sized shapes designed for easier retail display at lower price points.

We are designing products for both form and function, crafting them with quality materials that define a new class of products that we call “Erotic Luxury”. We have developed a product growth strategy to capitalize on our strengths and core competencies of manufacturing and marketing. As a vertically integrated company, we plan to continue the development of new products in-house. This results in lower development costs and quicker sales execution to our established adult and sexual wellness channels, where the Liberator brand is often asked for by name. We also feel the Liberator brand name can be extended to a variety of other products including vibrators, pleasure objects and consumables like massage oils and lubricants.

Our customers are our source of inspiration for product development and they are sophisticated, creative and independent-minded when it comes to trying and buying new Liberator products. Our ability to grow the Liberator brand and develop new growth opportunities depends in part on our ability to appropriately identify and execute our strategies and initiatives. Implementation of these plans may be delayed or may not be successful for a variety of reasons.

Liberator Concept Store . Our 2,500 square foot Liberator exhibition store is the retail extension of our Liberator.com website. Located at our Atlanta factory, it is a gallery-like setting for sensual and erotic discovery, offering a presentation of products that celebrate intimacy and romantic imagination.

In our opinion, Liberator and luxury pleasure objects are meant to go together. Our concept store is a destination where customers can learn about, touch and purchase the Liberator products they have only been able to see online. In addition to Liberator branded shapes, furniture and accessories, the store features a range of better brands from around the globe including: designer sex toys, lounge-wear and lingerie collections, masks, cuffs and intimate accessories, erotic décor homewares, and bath and body essentials. Also included are limited addition hand-made items in glass, leather, latex and a collection of romantic gifts.

We are dedicated to bringing our customers a compelling in-store experience through knowledgeable associates, interactive media displays and a high level of service, quality and innovation. The store also serves as a laboratory to listen and observe consumer reaction to new products and evaluate price points and merchandising techniques.Our concept store has demonstrated the power of the Liberator brand as customers, both singles and couples want to feel and experience our products and, although we are located in an industrial park, they are willing to travel to the store, return repeatedly and refer friends. We believe that a Liberator branded retail concept is ready to be expanded beyond our single location to large metropolitan areas, providing an upscale experience in-sync with the overall mainstreaming of sexual wellness.

Jaxx and Contract Manufacturing . The Jaxx beanbag product line was originally started in 2007 with the idea that we could create higher value from using our polyurethane foam trim as beanbag fill verses recycling this material as carpet pad regrind. Since then, the Jaxx product line has developed into a wide variety of styles, sizes and fabric choices including those designed for children. Our wholesale and mass market distribution channels are established mostly as drop-ship accounts and are seasonally busy during November and December. Further growth is expected to come from Jaxx as we expand sales into retail stores. We also expect to develop higher priced modern design seating and private labeled products, and offer contract production services around our core competency in manufacturing.

The beanbag retail business is highly competitive. We believe we can compete effectively on the basis of product quality, design, customer service and price. We believe that our primary competitive advantages are consumer recognition of the Jaxx brand, as well as the multiple sale channels customers prefer to buy in. However, our plans to expand this product offering and sales channels may not be successful and implementation may hamper our operational and managerial resources.

Products and Services

Liberator Products

We developed a product category which we call “ Liberator Bedroom Adventure Gear ”. They are positioning props that elevate, rock and create surfaces and textures that expand the sexual repertoire and make the act of love more exciting.

Liberator Shapes are manufactured in a variety of heights and widths to accommodate variations in the human body. They consist of differently shaped cushions and props that are available in an assortment of fabric colors and prints to add to the visual excitement. Each of the product profiles of the Liberator Shapes is unique, designed to introduce positions to the sexual experience that were previously difficult to achieve or impossible to achieve with standard pillows or cushions. Liberator Gear is manufactured from structured polyurethane foam, cut at various angles, platforms and profiles. The foam base is encased in a tight, fluid resistant polyester shell, helping the cushions to maintain their shape. The original offering of the Liberator Wedge and Ramp, sold as a set, are our best-selling items. All of the Liberator Shapes are also available in our Black Label Series which includes blindfolds and snap-on Velcro cuffs.

We have also developed larger profile designs that are commonly referred to as “sex furniture”. Three of the sex furniture pieces are made from contoured urethane foam and covered in a variety of fabrics and colors. These items are marketed as the Esse ® , Esse Stage, and the Equus ® . Other larger designs include products based on shredded polyurethane foam encased in a wide range of fabric types and colors and sold under our Zeppelin ® product offering. The Liberator larger profile designs can also be used as seating when not being used for relaxed interaction and creative sex.

The products sold under the Liberator line provided 33.1% and 59.1% of our revenues for our fiscal years ended June 30, 2011 and 2010, respectively. The decrease from 2010 to 2011, as a percentage of total revenue, is primarily due to the inclusion of the WMI revenues since the acquisition date and, to a lesser extent, lower sales of the products.

Studio OneUp Products

In addition to the Liberator product line, we also produce a line of casual foam-based furniture sold under the “ Jaxx ” brand. These products are primarily offered directly to consumers through our Studio OneUp web site and to e-Merchants under drop-ship arrangements where we ship directly to customers and to other resellers. Our Studio OneUp products provided 9.3% and17.2% of our revenues for our fiscal years ended June 30, 2011and 2010, respectively.

Resale Products including Web Merchants, Inc.

Beginning in 2006, we began importing high-quality pleasure objects and erotica from around the world. With the acquisition of WMI in January, 2011, we significantly expanded the range of sexual wellness products offered. These resale products provided 48.5% and 17.1% of our revenues for our fiscal years ended June 30, 2011 and 2010, respectively. The primary reason for the significant increase from 2010 to 2011 is the inclusion of WMI revenues from the acquisition date and, to a lesser extent, an increase in sales of the Tenga products.

See Recent Developments – Entry Into a Material Definitive Agreement , above, regarding information on the signing of a definitive agreement for the sale of WMI.

Miscellaneous Products and Contract Manufacturing

We also manufacture couture lingerie, latex garments, fetish wear, and a line of boudoir bedding items that are sold under the Fascinator ™ line. The Fascinator line provided an immaterial portion of our revenues during the last 3 fiscal years. Beginning in early fiscal 2007, we began providing contract manufacturing services to companies seeking private label specialty products made from fabric and foam. These products are typically designed by the client companies and manufactured to their specifications and, to date, have not been a material part of our business.

Competition

Competition among retailers of adult products and web based marketers is high. We too compete with retail, catalog, and internet businesses and now mass and drug retailers that sell sexual wellness products including vibrators, pleasure objects, accessories and similar merchandise. We believe we are able to compete favorably as our Liberator products are unique, are couple-centric, and are assistive devices for couples with sexual limitations.

We believe that our primary competitive advantage is consumer recognition of our brand. Since we sell through multiple sales channels, we provide consumers with the ability to shop for intimacy products in an environment or website that they are most comfortable in. In fact, many e-tailer websites refer to Liberator as a product category and not as a discrete product. We also believe that we differentiate ourselves from conventional sex toys based on our utility of design and overall customer satisfaction as it relates to enhanced intimacy.

Our range of retail product price points places us in the 50 th percentile of the average adult retail pleasure object purchased. We believe our success depends, in large part, on our ability to create and market products that enhance intimacy and provide consumers with on-going value which will lead them to purchase other Liberator styles and designs.

For the Liberator e-commerce website, other competitive factors include the effectiveness of our customer mailing lists, maintaining natural search listing, advertising response rates, website design and functionality. The broad range of designs, color choice, fabrics and essential accessories that we offer helps to differentiate us and allows us to compete favorably against many other adult or sexual wellness websites. Liberator.com also competes against numerous mainstream websites, many of which have a greater volume of web traffic, greater financial strength and marketing resources.

Intellectual Property

The Liberator trademark is registered with the United States Patent and Trademark office and with the registries of many foreign countries. In addition we were issued approximately 20 other product name trademarks and trade names including: “Bedroom Adventure Gear”, “Explore More”, Ramp, Wedge, Stage, Esse, Zeppelin, Hipster, Wing, Equus, and Bonbon. In August 2005, we were issued utility patent number US 6,925,669 “Support Cushion and System of Cushions” Additionally, for Jaxx , a United States Trademark was issued in 2009. We believe our trademarks and patent have significant value and we intend to continue to vigorously protect them against infringement.

Sales and Distribution

Our sales personnel are organized by geographic market and by customer type. In addition, in North America, we have sales personnel who routinely visit sexual wellness retailers to assist in product training, merchandising and stocking of selling areas. Through our in-house wholesale sales organization, we engage retailers directly and then either ship to them on a wholesale basis or provide fulfillment services by drop-shipping directly to their customers.

As is customary in the sexual wellness and casual furniture industry, sales to customers are generally made pursuant to purchase orders, and we do not have long-term or exclusive contracts with any of our retail customers or wholesale distributors. We believe that our continuing relationships with our customers are based upon our ability to provide a wide selection and reliable source of sexual wellness and casual furniture products, combined with our expertise in marketing and new product introduction.

Our ten largest customers (excluding our own e-commerce sites) accounted for approximately 14% of net sales for the year ended June 30, 2011. No single customer accounted for more than 10% of our net sales during that period. However, the loss of, or a significant adverse change in our relationship with, any of our largest customers could have a material adverse effect on our business, prospects, results of operations, financial condition or cash flows.

Marketing

Our marketing strategy is designed to increase brand awareness and drive highly targeted new and repeat customers to our websites, our e-merchants websites and our retail customers’ stores. We use a multi-channel approach which includes search engine marketing, print advertising, email campaigns, and affiliate programs to acquire and retain our customer base.

Online Marketing — We promote our websites via keywords and shopping feeds on internet search engines including but not limited to Google, Bing and Yahoo. Banner advertisements on display networks are also used to drive traffic to our websites. In addition, we operate affiliate programs aimed at creating brand awareness through websites who promote our products.

Email Campaigns — Our weekly email marketing campaigns distribute information on new products, promotional discounts and product information to registered e-commerce customers.

Direct Mail — WMI uses direct mail marketing initiatives which are focused on creating a social community and to further develop their EdenFantasys brand.

Print Advertising — For Liberator and Studio OneUp products, we place advertisements in a broad range of national magazines and consumers are directed to one of our primary e-commerce websites to learn more about our products and place their orders. We intend to expand our advertising efforts beyond magazines to reach broader segments of the population and increase our consumer base. These initiatives may include television and radio advertising.

Manufacturing Facilities

Our 140,000 square foot facility on eight acres is located in metro Atlanta, Georgia and includes manufacturing and distribution, sales and marketing, product development, customer service and administrative staff.

Our manufacturing operation has CAD controlled fabric cutting and foam contouring equipment and two state-of-the-art conveyor unit production sewing systems. Our in-house manufacturing capabilities have enabled us to achieve greater efficiencies and cost savings, as well as strict control over the entire manufacturing cycle including raw material procurement, finished goods production and logistics optimization. In addition to providing us with greater production flexibility, our in-house manufacturing provides us with the opportunity to improve market response time, reduces the risk of out-of-stock situations, limits finished goods obsolescence and improves overall operating margins.

Technology and Operations

Our websites are supported by a technology infrastructure that is designed to provide a superior customer experience, including speed, ease of use and security. Our technology infrastructure uses highly scalable, fully fault tolerant enterprise-class technology and provides a high-availability system that we believe rival those of larger companies. We maintain strategic partnerships with vendors to ensure that we can rapidly deploy new products and information technology solutions that we believe are key to our success.

We follow rigorous industry standards to protect our internal operations and the personal information we collect from our customers. We do not sell or disclose the personal information of our customers. We continue to maintain and upgrade our technology framework that can support high levels of security while meeting the compliance requirements of Payment Card Industry (“PCI”) security standards. We are considered a “sender” under the CAN-SPAM Act and comply with the applicable aspects thereof.

WMI has installed a technologically advanced finished goods inventory control system to track finished goods from receipt through shipment. All WMI items are bar-coded to facilitate electronic tracking, allowing us to tie each stock keeping unit (“SKU”) number back to our inventory control, shipping and sales systems. The WMI inventory control system analyzes and automatically reorders a majority of the products we sell, minimizing out-of-stock situations. We consistently evaluate low volume items in order to minimize losses due to obsolescence as well as to efficiently manage our capital and warehouse space.

See Recent Developments – Entry Into a Material Definitive Agreement , above, regarding information on the signing of a definitive agreement for the sale of WMI.

Licenses

In mid-2008, we launched an international expansion program through a licensing program. Through a co-manufacturing arrangement whereby the foam is contoured in the local country, the Company has created a way for local partners to launch the brand quickly and aggressively. Each licensee has the full capability to sell directly to consumers and traditional resellers, and has made significant financial commitments to marketing the Liberator brand through country specific advertising channels which include print, television, and radio. These licensees are also empowered to interpret the brand so as to be culturally sensitive to their respective territories.

Since September 2008, we have issued six license agreements that cover 11 countries around the world including the UK, Germany, Netherlands, Belgium, France, Italy, Australia / New Zealand, Singapore, Indonesia, and Malaysia (with a combined population greater than 250 million residents.) All territories will have, if not already, a fully functional consumer website, and in some cases, our partners intend to develop Liberator Lovestyle retail stores.

International websites are now offering Liberator products in Singapore, the United Kingdom, the Netherlands, Germany, Belgium, France, and Australia/New Zealand.

These international licensees are expected to eventually be distribution pipelines which will market the Liberator branded products, ranging from consumables and toys to shapes and furniture. Under the licensing agreements, the licensees are encouraged to open all sales channels within their territories including big box retailers, drugstores, and other retail channels. Sales to licensees consist of an initial license fee plus recurring product sales. Product sales and license fees from international licensees was less than 3% of total net sales in fiscal 2009 and less than 1% of total net sales during fiscal 2010 and 2011. The international license agreements, which have a term of three to six years, appoint the companies or individuals as exclusive distributors in their respective territories (with no minimum annual purchase requirements) and require the licensees to spend specific amounts on advertising in their local markets. The international license agreements may be terminated at any time upon the mutual written agreement of the parties, and upon the occurrence of any event of default, as defined in the agreements.

Sales Channels

We conduct our business through two primary sales channels: Direct (consisting of our Internet websites) and Wholesale (consisting of our stocking reseller, drop-ship, contract manufacturing and distributor accounts). The following is a summary of our revenues:

(Dollars in thousands)	Fiscal 2009		Fiscal 2010		Fiscal 2011
Direct	$	5,144	$	5,355	$	9,738
Wholesale		4,022		4,736		6,450
Other		1,095		989		1,136
Total Net Sales	$	10,261	$	11,080	$	17,324

Net sales in the Other channel consists of shipping and handling fees derived from our Direct business.

Direct

The following is a summary of our Direct business net sales and the percentage relationship to total revenues:

(Dollars in thousands)	Fiscal 2009			Fiscal 2010			Fiscal 2011
Direct sales channel net sales	$	5,144		$	5,355		$	9,738
Direct net sales as a percentage of total revenues		50.1	%		48.3	%		56.2	%

Wholesale

The following is a summary of our net sales to Wholesale customers and the percentage relationship to total revenues:

(Dollars in thousands)	Fiscal 2009			Fiscal 2010			Fiscal 2011
Wholesale sales channel net sales	$	4,022		$	4,736		$	6,450
Wholesale net sales as a percentage of total revenues		39.2	%		42.7	%		37.2	%

As of June 30, 2011, the Company has approximately 650 active wholesale accounts, most of which are located in the United States.

Internet Websites

Since 2002, our Liberator website located at www.Liberator.com has allowed our customers to purchase our Liberator merchandise over the Internet. We design and operate our websites using an in-house technical and creative staff.

Our www.Liberator.com website is intended to be an entertainment and educational venue where consumers can watch product demonstration videos, videos on sexual wellness topics and humorous videos on the many facets of human sexuality. EdenFantasys.com is the only adult website that leverages community to provide a unique shopping experience in the sexual wellness sector. We believe that peer-to-peer customer introduction to the adult products leads to higher conversions, deeper satisfaction with the purchase and therefore increased repeat business. The product offering on EdenFantasys.com is over 10,000 SKUs that feature 42,000 peer reviews, 1,500 videos, and over 2,000 educational articles contributed by 35,000 active community members. See Recent Developments – Entry Into a Material Definitive Agreement , above, regarding information on the signing of a definitive agreement for the sale of WMI.

Government Regulation

We are subject to customs, truth-in-advertising and other laws, including consumer protection regulations that regulate the promotion and sale of merchandise and the operation of warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws.

Seasonality

Our business is seasonal and, as a result, revenues will vary from quarter to quarter. During the past three years, we have realized an average of approximately 28% of our annual revenues in our second quarter, which includes Christmas, and an average of approximately 28% of our revenues in the third quarter, which includes Valentine’s Day.

Geographic Information

During our last two years, substantially all of our revenue was generated within North America, and all of our long-lived assets are located within the United States.

Employees and Labor Relations

As of September 25, 2011, we had 119 employees. Additional staffing is typically required for peak holiday periods through Valentine’s Day. None of our employees are represented by a union. We have had no labor-related work stoppages, and we believe our relationships with our employees are good.

Available Information

We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public via the Internet at the SEC’s website located at http://www.sec.gov. You may also read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. For more information, please call the SEC at 1-800-SEC-0330.

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports and the Proxy Statement for our Annual Meeting of Stockholders are made available, free of charge, on our website, http://www.liberator.com , as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. Information on this website is not a part of this Report.

ITEM 2.

Properties

We are headquartered in Atlanta, Georgia. Our mailing address is 2745 Bankers Industrial Drive, Atlanta, GA 30360. We lease a 140,000 square feet building on eight acres which we believe allows for expansion when needed. Our facility houses manufacturing, distribution and fulfillment, call center, in-house advertising and creative departments, product design group, administrative offices and a 2,500 square foot factory concept store. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The lease for this facility expires on December 31, 2015.

We believe our facilities are currently adequate for their intended purposes and are adequately maintained.

See Recent Developments – Entry Into a Material Definitive Agreement , above, regarding information on the signing of a definitive agreement for the sale of WMI and other actions, including the signing of a month-to-month lease agreement with WMI.

ITEM 3.

Legal Proceedings

As of the date of this Annual Report, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us, except that on September 1, 2010, Donald Cohen, a former officer, director and independent sales representative of Liberator, Inc., commenced an action against the Company and other defendants including certain current officers and directors, under the caption Cohen v. WES Consulting, Inc., OneUp Innovations, Inc., OneUp Acquisitions, Inc., Liberator, Inc., f/k/a Remark Enterprises, Inc., Remark Enterprises, Inc., Belmont Partners LLC, Louis Friedman, Ronald Scott and Leslie Vogelman , Civil Action File No. 100V10590-8. in the Superior Court of Dekalb County, Georgia. The plaintiff seeks repayment of a shareholder loan in the amount of $29,948 and unspecified amounts of compensatory, punitive, and statutorily trebled damages. The plaintiff alleges breach of fiduciary duty, breach of contract, fraud, and violation of the Georgia Securities Act, among other claims. The Company intends to vigorously contest the case and filed a motion to dismiss the lawsuit on October 15, 2010. The motion was converted to a motion for summary judgment, and the Court held a hearing on that motion on April 12, 2011. The Court has not ruled on the motion for summary judgment and stayed discovery until a ruling is issued. Although we believe that we have meritorious defenses to Mr. Cohen’s claims, this matter is still at a preliminary stage, and we are not in a position to predict or assess the likely outcome of these proceedings. Accordingly, other than the amount of the shareholder loan, we have not reserved for any future loss that may arise as a result of an adverse outcome in this litigation.

PART II.

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is quoted on the Over-the-Counter Bulletin Board (“OTCQB”) under the symbol “LUVU.” The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock as reported on the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and do not necessarily reflect actual transactions.

Fiscal Year
2011	High Bid		Low Bid
Fourth Quarter: 4/1/11 to 6/30/11		0.21		0.15
Third Quarter: 1/1/11 to 3/31/11		0.28		0.05
Second Quarter: 10/1/10 to 12/31/10		0.15		0.05
First Quarter: 7/1/10 to 9/30/10		0.28		0.15

Fiscal Year
2010	High Bid		Low Bid
Fourth Quarter: 4/1/10 to 6/30/10		0.34		0.25
Third Quarter: 1/1/10 to 3/31/10		*		*
Second Quarter: 10/1/09 to 12/31/09		*		*
First Quarter: 7/1/09 to 9/30/09		*		*

* Our common stock commenced trading on the OTCBB in May 3, 2010.

Holders

As of October 7, 2011, we had approximately 87 stockholders of record of our common stock.

Transfer Agent

The transfer agent and registrar for our common stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, OR 97214.

Dividend Policy

We have not paid dividends. We plan to retain all earnings generated by our operations, if any, for use in our business. We do not anticipate paying any cash dividends to our shareholders in the foreseeable future. The payment of future dividends on the common stock and the rate of such dividends, if any, and when not restricted, will be determined by our board of directors in light of our earnings, financial condition, capital requirements, and other factors. Additionally, under the terms of our credit facility, we are precluded from paying a dividend and we may in the future issue preferred stock and/or other securities that provides for preferences over holders of common stock in the payment of dividends.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information regarding securities authorized for issuance under our equity compensation plans as of June 30, 2011.

	Number of securities to be issued upon exercise of outstanding options		Weighted average exercise price of outstanding options		Number of securities remaining, available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders (1)		1,692,498	$	.194		3,307,502	(2)
Equity compensation plans not approved by security holders (3)		438,456		.228		-0-

Total		2,130,954	$	.201		3,307,502

(1)	Includes option awards outstanding under our 2009 Stock Option Plan.

(2)	Includes shares remaining available for future issuance under our 2009 Stock Option Plan.

(3)	Non-qualified stock option issued to the Company’s Chief Financial Officer, Ronald Scott.

Recent Sales of Unregistered Securities

None.

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion summarizes the significant factors affecting the results of operations and financial condition of the Company during the fiscal years ended June 30, 2011 and 2010 and should be read in conjunction with our financial statements and accompanying notes thereto included elsewhere herein. Certain information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are “forward-looking statements.” Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Our actual results may differ materially from the results discussed in this section because of various factors, including those set forth elsewhere herein. See “Forward-Looking Statements” included in this report.

See Recent Developments – Entry Into a Material Definitive Agreement , above, regarding information on the signing of a definitive agreement for the sale of WMI.

Critical Accounting Policies and Estimates

Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). Our significant accounting policies are described in the notes to our consolidated financial statements. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions. Our critical accounting policies include those listed below.

Revenue Recognition

To recognize revenue, four basic criteria must be met: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (3) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (6) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

Net sales are comprised of the total product sales billed during the period plus amounts paid for shipping and handling, less the actual returns, customer allowances, and customer discounts.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts is based upon our assessment of the collectability of specific customer accounts, the aging of accounts receivable and our history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions. However, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and an additional allowance may be required.

Inventories

We value inventory at the lower of cost or market on an item-by-item basis and establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reserve amount in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand, the estimated time required to sell such inventory, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer demand or other factors differ from expectations. Finished goods and goods in process include a provision for manufacturing overhead, including depreciation.

Accounting for Income Taxes

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2011, we carried a valuation allowance of $2 million against our net deferred tax assets.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flows the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.

In fiscal year 2011, we did not generate positive cash flows from operations. If our long-term future plans do not yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.

Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates.

New Accounting Pronouncements

Please refer to Note C, “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” to our financial statements included in this report for a discussion on the impact of the adoption of new accounting pronouncements.

Results of Operations

Overview

Comparisons of selected consolidated statements of operations data as reported herein follow for the periods indicated:

	Year Ended June 30, 2011			Year Ended June 30, 2010			% Change
Total Company:
Net sales	$	17,323,689		$	11,079,760			56	%
Gross profit	$	5,708,722		$	3,680,399			55	%
Loss from operations	$	(304,318	)	$	(624,258	)		—
Diluted (loss) per share	$	(0.01	)	$	(0.02	)		—

	Year Ended June 30, 2011		Year Ended June 30, 2010		% Change
Net Sales by Channel:
Direct	$	9,737,660	$	5,354,622		82	%
Wholesale	$	6,449,701	$	4,735,789		36	%
Other	$	1,136,328	$	989,349		15	%
Total Net Sales	$	17,323,689	$	11,079,760		56	%

Other revenues consist principally of shipping and handling fees derived from our Direct business.

	Year Ended			Margin			Year Ended			Margin			%
	June 30, 2011			%			June 30, 2010			%			Change
Gross Profit by Channel:
Direct	$	5,173,444			53	%	$	2,601,700			49	%		99	%
Wholesale	$	1,440,421			22	%	$	1,177,732			25	%		22	%
Other	$	(905,143	)		(80	)%	$	(99,033	)		(10	)%		(814	)%
Total Gross Profit	$	5,708,722			33	%	$	3,680,399			33	%		55	%

Fiscal Year ended June 30, 2011 Compared to the Fiscal Year Ended June 30, 2010

Net sales for the twelve months ended June 30, 2011 increased from the comparable prior year period by $6.2 million, or 56%. The increase in total net sales was substantially due to an increase in sales through the Direct channel which resulted from the inclusion of WMI revenues from January 27, 2011 (the “Acquisition Date”) and, to a lesser extent, higher sales of Tenga products through the Wholesale channel. The Direct sales channel, which consists of consumer sales through our three websites and, to a lesser extent, our single retail store, increased from approximately $5.4 million in the twelve months ended June 30, 2010 to approximately $9.7 million in the twelve months ended June 30, 2011, an increase of approximately 82%. As previously discussed, this increase resulted primarily from the inclusion of WMI revenues from the Acquisition Date and was partially offset by slightly lower aggregate sales through the OneUp Innovations websites. As a result of an ongoing focus on our Wholesale business, sales to wholesale customers increased approximately 36% from the prior year to approximately $6.4 million. The Wholesale sales channel includes products sold under exclusive distribution agreements (like the Tenga product line), Liberator products sold to distributors and retailers, and private label items sold to other resellers. The Wholesale sales channel also includes contract manufacturing services which consists of specialty items that are manufactured in small quantities for certain customers, and which, to date, has not been a material part of our business. The Other sales channel increased 15% to $1.1 million in the twelve months ended June 30, 2011. The Other sales channel consists principally of shipping and handling fees derived from our Direct sales channel. The percentage increase in the Other sales channel was significantly less than the percentage increase in the Direct sales channel for the year ended June 30, 2011, because the majority of the WMI shipments are sold with free shipping and handling.

Gross profit, derived from net sales less the cost of product sales, includes the cost of materials, direct labor, manufacturing overhead and depreciation. Total gross profit as a percentage of sales for the year ended June 30, 2011 was unchanged from the prior year at 33%. During the year ended June 30, 2011, the gross profit on sales through the Direct sales channel increased to 53% from 49% in the prior year. This increase is primarily due to the inclusion of the higher margin WMI sales from the Acquisition Date. The gross profit from the Wholesale sales channel during the year ended June 30, 2011 decreased to 22% from 25% in the prior year. This decrease during fiscal 2011was due to a change in product mix to a greater percentage of non-Liberator products sold during the year. The gross profit from the Other sales channel decreased to a negative $905,143 during the year ended June 30, 2011 from the prior year due to the inclusion of the WMI results from the Acquisition Date and the fact that most of their shipments are sent with “free” or significantly reduced shipping and handling. Because product gross profit margins for all products in a given distribution channel are comparable, we analyze and manage our business based on changes in distribution channels and not by product mix.

Total operating expenses for the year ended June 30, 2011 were 35% of net sales, or $6,013,040, compared to 39% of sales, or $4,304,656, for the year ended June 30, 2010. Operating expenses increased 40% from fiscal 2010 to fiscal 2011 and was primarily the result of the inclusion of the WMI operating expenses from the Acquisition Date through June 30, 2011. Total operating expenses for WMI during the period totaled $1,736,491. Advertising and promotion expense increased by $321,614 to $1,003,946 during the year ended June 30, 2011, with $611,193 attributable to WMI. Other selling and marketing expense increased by $797,581, with $603,485 attributable to WMI and the remaining increase being attributable to higher personnel related costs including salaries, commission expense and travel expense. General and administrative expense increased by $510,978, with $501,040 being WMI general and administrative expense. Total legal expense during the year ended June 30, 2011, excluding acquisition related legal expense, was $258,689.

Other income (expense) increased from expense of ($409,695) in fiscal 2010 to expense of ($496,934) in fiscal 2011. Interest expense and financing costs in the current year included $49,028 from the amortization of the debt discount on the convertible notes, additional interest expense on higher debt balances, and $96,000 relating to the up-front finance charges on the two credit card advances. Expenses related to merger ($52,500) in the current year consist of the fair market value of the 350,000 shares issued to Belmont Partners, LLC in connection with a Settlement Agreement and General Release we entered into on October 13, 2010. Expenses related to merger in the prior year consists of $192,167 for the discounted face value of the $250,000 convertible note payable to Hope Capital, Inc., a shareholder of the Company.

No expense or benefit from income taxes was recorded in the twelve months ended June 30, 2011 or 2010. We do not expect any U.S. federal or state income taxes to be recorded for the current fiscal year because of available net operating loss carry-forwards.

We had a net loss of $801,252, or ($0.01) per diluted share, for the twelve months ended June 30, 2011 compared with a net loss of $1,033,952, or $(0.02) per diluted share, for the twelve months ended June 30, 2010.

Variability of Results

We have experienced significant quarterly fluctuations in operating results and anticipate that these fluctuations may continue in future periods. As described in previous paragraphs, operating results have fluctuated as a result of changes in sales levels to consumers and wholesalers, competition, costs associated with new product introductions, and increases in raw material costs. In addition, future operating results may fluctuate as a result of factors beyond our control such as foreign exchange fluctuation, changes in government regulations, and economic changes in the regions in which we operate and sell. A portion of our operating expenses are relatively fixed and the timing of increases in expense levels is based in large part on forecasts of future sales. Therefore, if net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to meaningfully adjust spending in certain areas, or the inability to adjust spending quickly enough, as in personnel and administrative costs, to compensate for a sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, and these decisions may have a material adverse effect on financial condition and results of operations.

Liquidity and Capital Resources

	Year Ended
The following table summarizes our cash flows:	June 30,
	2011			2010
Cash flow data:
Cash used in operating activities	$	(564,339	)	$	(1,661,640	)
Cash provided by (used in) investing activities		35,518			(189,178	)
Cash provided by financing activities	$	654,210		$	423,844

As of June 30, 2011, our cash and cash equivalents totaled $514,048, compared to $388,659 in cash and cash equivalents as of June 30, 2010.

Operating Activities

Net cash used in operating activities primarily consists of net loss adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation, expenses related to the merger, and the effect of changes in working capital. Net cash used in operating activities was $564,339 and $1,661,640 in the years ended June 30, 2011 and 2010, respectively.

Investing Activities

Cash provided by investing activities in the year ended June 30, 2011 of $35,518 was attributable to capital expenditures of $94,635 for the purchase of production equipment, leasehold improvements and computer equipment, less the net cash acquired of $130,153 in Web Merchants, Inc.

Cash used in investing activities in the year ended June 30, 2010 of $189,178 was primarily attributable to the purchase of production equipment, computer equipment and capitalized software development costs.

Financing Activities

Cash provided by financing activities in the year ended June 30, 2011 of $654,210 was primarily attributable to borrowings from unsecured notes payable, proceeds from the credit card advances, and net borrowings under our line of credit, partially offset by the repayment of the notes and lease payable and the credit card advances.

Cash provided financing activities in the year ended June 30, 2010 of $423,844 was primarily attributable to the sale of common stock, net borrowings under the line of credit and borrowings from unsecured notes payable, partially offset by the repayment of the line of credit and other obligations.

Sufficiency of Liquidity

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. We incurred a net loss of $801,252 for the year ended June 30, 2011 and a net loss of $1,033,952 for the year ended June 30, 2010. As of June 30, 2011, we have an accumulated deficit of $6,976,783 and a working capital deficit of $984,937.

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon our ability to meet our financing requirements, and the success of our future operations. Management believes that actions presently being taken to revise our operating and financial requirements provide the opportunity for the Company to continue as a going concern.

These actions include an ongoing initiative to increase gross profit margins through improved production controls and reporting. To that end, the Company implemented a new Enterprise Resource Planning (ERP) software system during the first quarter of fiscal 2010. We also plan to manage discretionary expense levels to be better aligned with current and expected revenue levels. Furthermore, our plan of operation during the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational and strategic growth plans we have identified will require approximately $1,800,000 of funding. We expect to invest approximately $1,800,000 on sales and marketing programs, primarily sexual wellness advertising in magazines, on the internet and on cable television. We will also be exploring the opportunity to acquire other compatible businesses.

We plan to finance the required $1,800,000 with a combination of cash flow from operations as well as cash on hand and cash raised through equity and debt financings.

Capital Resources

We do not currently have any material commitments for capital expenditures. We expect total capital expenditures for fiscal 2012 to be under $75,000 and to be funded by capital leases and, to a lesser extent, anticipated operating cash flows and borrowings under the line of credit. This includes capital expenditures in support of our normal operations and the integration of Web Merchants, Inc., a Delaware corporation that we acquired on January 27, 2011 and expenditures that we may incur in conjunction with initiatives to further upgrade our e-commerce platform, ERP system and computer infrastructure.

If our business plans and cost estimates are inaccurate and our operations require additional cash or if we deviate from our current plans, we could be required to seek additional debt financing for particular projects or for ongoing operational needs. This indebtedness could harm our business if we are unable to obtain additional financing on reasonable terms. In addition, any indebtedness we incur in the future could subject us to restrictive covenants limiting our flexibility in planning for, or reacting to changes in, our business. If we do not comply with such covenants, our lenders could accelerate repayment of our debt or restrict our access to further borrowings, which in turn could restrict our operating flexibility and endanger our ability to continue operations.

At June 30, 2011, we had $460,758 outstanding on our line of credit, compared to an outstanding balance of $320,184 at June 30, 2010.

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), and OneUp’s wholly owned subsidiary, Foam Labs, Inc. (“Foam Labs”) entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital. The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable. Advances under the agreement bear interest at a rate of 2.5% over the lenders Index Rate (as of June 30, 2011 the lenders Index Rate was 4.75%.) In addition there is a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month. The Company’s CEO, Louis Friedman, and the Company’s Executive Vice President, Fred Petrenko, have personally guaranteed the repayment of the loan obligation. In addition, the loan has a corporate guarantee from the parent, Liberator, Inc., and Web Merchants, Inc. On June 30, 2011, the balance owed under this line of credit was $460,758. On June 30, 2011, we were in substantial compliance with all of the material financial and other covenants required under this credit facility.

On May 19, 2011, OneUp and Foam Labs entered into a receivable advance agreement with CC Funding, LLC (“Credit Cash”), a division of Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, by March 19, 2012. This will be accomplished by Credit Cash withholding a fixed amount each business day of $2,074 from OneUp’s credit card receipts until full repayment is made. The loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman, and the Company’s CFO, Ronald P. Scott.

On November 4, 2010, OneUp and Foam Labs entered into a receivable advance agreement with Credit Cash, whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, by May 4, 2011. This will be accomplished by Credit Cash withholding a fixed amount each business day of $3,446 from OneUp’s credit card receipts until full repayment is made. The loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman, and the Company’s CFO, Ronald P. Scott. On May 5, 2011 this advance was repaid.

On May 17, 2010, OneUp and Foam Labs entered into a financing agreement with an “asset-based” lender, Summit Financial Resources LLC, for the purpose of improving working capital. The agreement provided for up to $600,000 and was secured primarily by accounts receivable, inventory, equipment, and all general intangibles. Under the financing agreement, the lender agreed to make loans at our request and in the lender’s discretion (a) based on purchases of our Accounts by the lender, with recourse against us and an advance rate of 80% (or such other percentage determined by the lender in its discretion), and (b) based on Acceptable Inventory not to exceed certain amounts, including an aggregate maximum of $200,000, not to exceed 50% of the aggregate amount of outstanding Accounts on which an Advance has been made. The inventory component of the financing agreement is available to the Company, at the discretion of the lender and based upon Acceptable Inventory, from October 1 through November 30 of each year. The term of the agreement was one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 60 days prior to the end of the current financing period. Advances under the agreement bear interest at a rate of 2% over the prime rate (as published in the Wall Street Journal) for the accounts receivable portion of the advances and the inventory portion of the borrowings. The prime rate (3.25% as of June 30, 2010) adjusts with changes to the rate. In addition there are collateral management fees of 0.4% for each 10-day period that an advance on an accounts receivable invoice remains outstanding and a 1.9% collateral management fee on the average monthly loan outstanding on the inventory portion of any advance. The agreement provided that no change in control concerning us or any of our active subsidiaries shall occur except with the prior written consent of the lender. Events of default include, but are not limited to, the failure to make a payment when due or a default occurring on any indebtedness of ours. The financing agreement was personally guaranteed by the Company’s CEO and majority shareholder, Louis Friedman and by the Company. The balance owed under this line of credit was repaid on May 27, 2011.

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of June 30, 2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases primarily for certain equipment and our facilities in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. Future minimum lease payments under our operating leases as of June 30, 2011 are detailed in section entitled “Contractual Obligations.”

Inflation

During fiscal 2011, we experienced increases in various raw material costs, and increases in costs impacted by increases in fuel prices, such as freight and transportation costs. We believe these pricing pressures have not stabilized and will continue to increase throughout fiscal 2012, although there is no assurance this will occur. Inflation can harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base. Furthermore, if our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues and our profit margins may decrease.

Non-GAAP Financial Measures

Reconciliation of net loss to Adjusted EBITDA loss for the years ended June 30, 2011 and 2010:

	Year ended June 30,
	2011			2010
Net loss	$	(801,252	)	$	(1,033,952	)

Less interest income		(752	)		(4,543	)

Plus interest expense		396,158			176,256

Plus income tax expense		-			-

Plus depreciation and amortization expense		246,405			249,380

Plus merger related non-cash expense		52,500			192,167

Plus common stock issued for services		5,600			-

Plus stock-based compensation		18,310			9,955

Plus amortization of debt issuance costs		49,028			45,815

Adjusted EBITDA loss	$	(34,003	)	$	(364,922	)

As used herein, Adjusted EBITDA represents net loss before interest income, interest expense, income taxes, depreciation, amortization, amortization of debt issuance costs, stock-based compensation expense and common stock issued for services. We have excluded the non-operating item, amortization of debt issuance costs, because it represents a non-cash charge that is not related to the Company’s operations. We have excluded the non-cash expenses, stock-based compensation and common stock issued for services, as they do not reflect the cash-based operations of the Company. Adjusted EBITDA is a non-GAAP financial measure which is not required by or defined under GAAP (Generally Accepted Accounting Principles). The presentation of this financial measure is not intended to be considered in isolation or as a substitute for the financial measures prepared and presented in accordance with GAAP, including the net loss of the Company or net cash used in operating activities. Management recognizes that non-GAAP financial measures have limitations in that they do not reflect all of the items associated with the Company’s net income or net loss as determined in accordance with GAAP, and are not a substitute for or a measure of the Company’s profitability or net earnings. Adjusted EBITDA is presented because we believe it is useful to investors as a measure of comparative operating performance and liquidity, and because it is less susceptible to variances in actual performance resulting from depreciation and amortization and non-cash charges for amortization of debt issuance costs, stock-based compensation expense and common stock issued for services.

ITEM 8.

Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets as of June 30, 2011 and 2010	F-2

Consolidated Statements of Operations for the years ended June 30, 2011 and 2010	F-3

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) from July 1, 2009 to June 30, 2011	F-4

Consolidated Statements of Cash Flows for the years ended June 30, 2011 and 2010	F-5

Notes to Consolidated Financial Statements	F-6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Liberator, Inc.

We have audited the accompanying consolidated balance sheets of Liberator, Inc. as of June 30, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the years in the two year period ended June 30, 2011. Liberator, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Liberator, Inc. as of June 30, 2011 and 2010, and the results of its consolidated operations and its consolidated cash flows for each of the years in the two year period ended June 30, 2011, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, conditions exist which raise substantial doubt about the Company’s ability to continue as a going concern unless it is able to generate sufficient cash flows to meet its financing requirements and attain profitable operations. Management’s plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Gruber & Company, LLC

/s/ Gruber & Company, LLC

Lake Saint Louis, Missouri

September 26, 2011

F-1

Liberator, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30, 2011			June 30, 2010
Assets:
Current assets:
Cash and cash equivalents	$	514,048		$	388,659
Accounts receivable, net of allowance for doubtful accounts of $14,055 in 2011 and $14,143 in 2010		761,380			562,872
Inventories, net		2,068,735			908,851
Prepaid expenses		77,728			212,438
Total current assets		3,421,891			2,072,820

Equipment and leasehold improvements, net		981,499			1,075,315
Intangible Assets, net		847,082			–
Goodwill		1,633,592			–
Other Assets		5,341			–
Total assets	$	6,889,405		$	3,148,135
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	2,391,339		$	1,579,138
Accrued compensation		243,155			284,796
Accrued expenses and interest		187,716			125,869
Line of credit		460,758			320,184
Short-term unsecured notes payable		699,961			362,812
Current portion of lease payable		33,973			77,010
Credit card advance		389,926			–
Total current liabilities		4,406,828			2,749,809
Long-term liabilities:
Note payable – equipment		–			12,136
Leases payable		63,739			140,749
Notes payable – related party		145,948			105,948
Convertible notes payable – shareholder (net)		572,759			523,731
Unsecured lines of credit		71,393			99,664
Deferred rent payable		296,192			331,570
Less: current portion of leases payable		(33,973	)		(77,010	)
Total long-term liabilities		1,116,058			1,136,788
Total Liabilities		5,522,886			3,886,597
Commitments and contingencies
Stockholders’ equity (deficit):
Series A Convertible Preferred stock, 10,000,000 shares authorized, 4,300,000 shares issued and outstanding with a liquidation preference of $1,000,000 as of June 30, 2011 and 4,300,000 shares obligated to be issued as of June 30, 2010		430			–
Common stock, $0.01 par value, 175,000,000 shares authorized, 91,947,047 and 63,182,647 shares issued and outstanding in 2011 and 2010, respectively		919,470			631,826
Additional paid-in capital		7,423,401			4,805,243
Retained deficit		(6,976,783	)		(6,175,531	)
Total stockholders’ equity (deficit)		1,366,518			(738,462	)
Total liabilities and stockholders’ equity	$	6,889,405		$	3,148,135

The accompanying notes are an integral part of these consolidated financial statements.

F-2

Liberator, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended June 30, 2011 and 2010

	2011			2010

Net Sales	$	17,323,689		$	11,079,760
Cost of goods sold		11,614,967			7,399,361
Gross profit		5,708,722			3,680,399
Operating expenses
Advertising and promotion		1,003,946			682,332
Other selling and marketing		1,981,972			1,184,391
General and administrative		2,699,532			2,188,554
Depreciation		246,405			249,380
Acquisition-related costs		81,185			–
Total operating expenses		6,013,040			4,304,657
Loss from operations		(304,318	)		(624,258	)

Other Income (Expense):
Debt issuance costs		(49,028	)		(45,815	)
Interest income		752			4,543
Interest expense and financing costs		(396,158	)		(176,256	)
Expenses related to merger		(52,500	)		(192,167	)
Total Other Income (Expense)		(496,934	)		(409,695	)
Net Loss Before Income taxes		(801,252	)		(1,033,952	)
Provision for Income Taxes		–			–
Net Loss	$	(801,252	)	$	(1,033,952	)
Loss per share:
Basic	$	(0.01	)	$	(0.02	)
Diluted	$	(0.01	)	$	(0.02	)
Weighted-average number of common shares outstanding:
Basic		75,396,312			62,103,434
Diluted		75,396,312			62,103,434

The accompanying notes are an integral part of these consolidated financial statements.

F-3

Liberator, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

From July 1, 2009 to June 30, 2011

																	Total
	Series A Preferred										Additional						Stockholders’
	Stock						Common Stock				Paid-in			Accumulated			Equity
	Shares			$			Shares		$		Capital			Deficit			(Deficit)

Balance, July 1, 2009		4,300,000		$	430			60,932,981	$	609,330	$	4,515,854		$	(5,141,579	)	$	(15,965	)

Obligation to issue preferred stock		(4,300,000	)		(430	)						430			-
Recapitalization in connection with merger with Old Liberator, Inc.		-			-			983,000		9,830		(9,830	)		-			-
Common stock issued in private placement, net of $48,500 in issuance costs, fees and expenses		-			-			1,000,000		10,000		241,500			-			251,500
Shares issued for services in connection with the private placement		-			-			100,000		1,000		(1,000	)		-			-
Common stock issued in private placement		-			-			166,666		1,666		48,334						50,000
Stock-based compensation		-			-			-		-		9,955			-			9,955
Net loss		-			-			-		-		-			(1,033,952	)		(1,033,952	)
Ending balance, June 30, 2010		-		$	-			63,182,647	$	631,826	$	4,805,243		$	(6,175,531	)	$	(738,462	)

Settlement of obligation to issue preferred stock		4,300,000			430							(430	)
Stock issuance in connection with merger with Old Liberator, Inc.		-			-			350,000		3,500		49,000						52,500
Common stock issued for acquisition of Web Merchants, Inc.		-			-			28,394,400		283,944		2,545,878			-			2,829,822
Shares issued for services		-			-			20,000		200		5,400			-			5,600
Stock-based compensation		-			-			-		-		18,310			-			18,310
Net loss		-			-			-		-		-			(801,252	)		(801,252	)
Ending balance, June 30, 2011		4,300,000		$	430			91,947,047	$	919,470	$	7,423,401		$	(6,976,783	)	$	1,366,518

The accompanying notes are an integral part of these consolidated financial statements.

F-4

Liberator, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended June 30, 2011 and 2010

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(801,252	)	$	(1,033,952	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		246,405			249,380
Stock-based compensation expense		18,310			9,955
Expenses related to merger		52,500			192,167
Common stock issued for services		5,600			-
Amortization of debt issuance costs		49,028			45,815
Change in operating assets and liabilities:
Accounts receivable		(198,420	)		(216,442	)
Provision for (reduction of) allowance for doubtful accounts		(88	)		-
Inventory		(537,572	)		(208,448	)
Provision for inventory reserve		139,931			-
Prepaid expenses		136,470			(116,547	)
Accounts payable		339,921			(668,707	)
Accrued expenses		61,847			(19,924	)
Accrued payroll and related		(41,641	)		129,802
Deferred rent payable		(35,378	)		(24,738	)
Net cash used in operating activities from continuing operations		(564,339	)		(1,661,640	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash investment in Web Merchants, Inc., net of cash acquired		130,153			-
Investment in equipment and leasehold improvements		(94,635	)		(189,178	)
Net cash provided by (used in) investing		35,518			(189,178	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock		-			301,500
Borrowings under line of credit		5,076,351			2,056,071
Repayment of line of credit		(4,935,777	)		(1,907,320	)
Borrowings from related party loans		160,000			-
Repayment of related party loans		(79,000	)		(20,000	)
Repayment of unsecured line of credit		(85,294	)		-
Proceeds from credit card advance		896,000			-
Repayment of credit card advance		(506,074	)		(198,935	)
Proceeds from unsecured notes payable		530,000			465,000
Repayment of unsecured notes payable		(312,850	)		(127,513	)
Principle payments on note payable and capital leases		(89,146	)		(144,959	)
Net cash provided by financing		654,210			423,844
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS		125,389			(1,426,974	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		388,659			1,815,633
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	514,048		$	388,659

Supplemental Disclosure of Cash Flow Information:
Non cash items:
Note payable issued in acquisition of majority control	$	–		$	192,167
Stock issuance in the acquisition of Web Merchants, Inc.		2,839,440			–
Stock issuance in connection with the Merger of Old Liberator, Inc.		52,500			–
Cash paid during the year for:
Interest	$	295,646		$	153,763

The accompanying notes are an integral part of these consolidated financial statements.

F-5

Liberator, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

NOTE A – ORGANIZATION AND NATURE OF BUSINESS

Overview – Liberator, Inc. (the “Company”) was incorporated in the State of Florida on February 25, 1999, under the name of WES Consulting, Inc. to provide consulting and commercial property management services. On October 19, 2009, the Company entered into a Merger and Recapitalization Agreement (the “Merger Agreement”) with Liberator, Inc. (fka Remark Enterprises Inc.), a Nevada corporation (“Old Liberator”). Pursuant to the Merger Agreement, Old Liberator merged with and into the Company, with the Company surviving as the sole remaining entity (the “Merger”). References to the “Company” in these notes include the Company and its wholly owned subsidiaries, Web Merchants, Inc, OneUp Innovations, Inc. and Foam Labs, Inc.

As a result of the Merger, each issued and outstanding share of the common stock of Old Liberator (the “Old Liberator Common Shares”) were converted into one share of the Company’s common stock, $0.01 par value, which, after giving effect to the Merger, equaled, in the aggregate, 98.4% of the total issued and outstanding common stock of the Company (the “Liberator Common Stock”). Pursuant to the Merger Agreement, each issued and outstanding share of preferred stock of Old Liberator (the “Liberator Preferred Shares”) was to be converted into one share of the Company’s preferred stock with the provisions, rights, and designations set forth in the Merger Agreement (the “Liberator Preferred Stock”). On the execution date of the Merger Agreement, the Company was not authorized to issue any preferred stock. The parties agreed that the Company will file an amendment to its Articles of Incorporation authorizing the issuance of the Liberator Preferred Stock, and at such time the Liberator Preferred Stock will be exchanged pursuant to the terms of the Merger Agreement. On February 18, 2011, the Company filed an Article of Amendment to its Articles of Incorporation, effective February 9, 2011, to increase the number of shares of capital stock to 185,000,000 of which 10,000,000 shares shall be designated Preferred Stock, $0.0001 par value. In addition, the Company filed a Certificate of Designation to create a class of preferred stock titled Series A Convertible Preferred Stock. These actions were both approved by the Board of Directors and a majority vote of the shareholders on October 20, 2009. As of the execution date of the Merger Agreement, Old Liberator owned 80.7% of the issued and outstanding shares of the Company’s common stock. Upon the consummation of the Merger, the shares of Liberator Common Stock owned by Old Liberator prior to the Merger were cancelled.

On January 27, 2011,the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Web Merchants, Inc., a Delaware corporation (“WMI”) and Fyodor Petrenko and Dmitrii Spetetchii, the holders of 100% of WMI’s capital stock (the “WMI Shareholders”), to acquire 100% of WMI’s issued and outstanding equity ownership in exchange for 28,394,400 shares of our common stock to the WMI Shareholders. Dmitrii Spetetchii also received $100,000 in cash, which represented $79,000 for the repayment of a loan to WMI and $21,000 in consideration for signing a non-compete agreement with the Company. Pursuant to the Purchase Agreement, WMI will continue to operate as a wholly owned subsidiary of the Company. The foregoing summary of the acquisition of WMI does not purport to be complete and is qualified in its entirety by reference to the Current Report on Form 8-K filed on February 2, 2011. In connection with the acquisition of WMI, the board of directors appointed Fyodor Petrenko, the President of WMI, as Executive Vice President of the Company and to the board of directors, filling a vacancy. See Recent Developments – Entry Into a Material Definitive Agreement , above, regarding information on the signing of a definitive agreement for the sale of WMI.

Effective February 28, 2011, the Company changed its name to “Liberator, Inc.” by filing an Articles of Amendment to its Articles of Incorporation with the Florida Department of State. A copy of the Articles of Amendment were included as an exhibit to the Company’s Current Report on Form 8-K filed on March 3, 2011.

The Company is a designer and manufacturer of various specialty furnishings for the sexual wellness market. Since the acquisition of WMI, the Company has also become an online retailer offering a full range of products for the sexual wellness market. The Company’s sales and manufacturing operation are located in the same facility in Atlanta, Georgia. Sales are generated through internet and print advertisements. We have a diversified customer base with no one customer accounting for 10% or more of consolidated net sales in the most recently completed quarter and no particular concentration of credit risk in one economic sector. Foreign operations and foreign net sales are not material.

NOTE B – GOING CONCERN

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company incurred a net loss of $801,252 and $1,033,952 for the years ended June 30, 2011 and 2010, respectively, and as of June 30, 2011 the Company has an accumulated deficit of $6,976,783 and a working capital deficit of $984,937.

In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide the opportunity for the Company to continue as a going concern.

F-6

These actions include initiatives to increase gross profit margins through improved production controls and reporting. To that end, the Company recently implemented a new Enterprise Resource Planning (ERP) software system. We also plan to reduce discretionary expense levels to be better in line with current revenue levels. Furthermore, our plan of operation in the next twelve months continues a strategy for growth within our existing lines of business with an on-going focus on growing domestic sales. We estimate that the operational and strategic development plans we have identified will require approximately $2,300,000 of funding. We expect to invest approximately $500,000 for additional inventory of sexual wellness products and $1,800,000 on sales and marketing programs, primarily sexual wellness advertising in magazines and on cable television. We will also be exploring the opportunity to acquire other compatible businesses.

We plan to finance the required $2,300,000 with a combination of cash flow from operations as well as cash on hand and cash raised through future equity and debt financings.

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. However, management cannot provide any assurances that the Company will be successful in accomplishing these plans. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE C – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These consolidated financial statements include the accounts and operations of our wholly owned operating subsidiaries, OneUp Innovations, Inc., Web Merchants, Inc. and Foam Labs, Inc. Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Significant estimates in these consolidated financial statements include estimates of: asset impairment; income taxes; tax valuation reserves; restructuring reserve; loss contingencies; allowances for doubtful accounts; share-based compensation; and useful lives for depreciation and amortization. Actual results could differ materially from these estimates.

Revenue Recognition

The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” (“SAB No. 104”). SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) title has transferred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. The Company uses contracts and customer purchase orders to determine the existence of an arrangement. The Company uses shipping documents and third-party proof of delivery to verify that title has transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of the agreement associated with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If the Company determines that collection is not reasonably assured, then the recognition of revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of payment.

The Company records product sales net of estimated product returns and discounts from the list prices for its products. The amounts of product returns and the discount amounts have not been material to date. The Company includes shipping and handling costs in cost of product sales.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

F-7

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management’s best estimate of probable credit losses inherent in the accounts receivable balance. The Company determines the allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence. The Company reviews its allowance for doubtful accounts monthly with a focus on significant individual past due balances over 90 days. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. At June 30, 2011, accounts receivable totaled $761,380 net of $14,055 in the allowance for doubtful accounts.

Inventories and Inventory Reserves

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include materials, labor, depreciation and overhead. The company establishes reserves for excess and obsolete inventory, based on prevailing circumstances and judgment for consideration of current events, such as economic conditions, that may affect inventory. The reserve required to record inventory at lower of cost or market may be adjusted in response to changing conditions.

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents, and accounts receivable. As of June 30, 2011, substantially all of our cash and cash equivalents were held at a single financial institution. As of June 30, 2011 none of our cash and cash equivalents exceeded the FDIC insured limits. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in the United States and Europe.

Fair Value of Financial Instruments

At June 30, 2011, our financial instruments included cash and cash equivalents, accounts receivable, accounts payable, and other long-term debt.

The fair values of these financial instruments approximated their carrying values based on either their short maturity or current terms for similar instruments.

Advertising Costs

Advertising costs are expensed in the period when the advertisements are first aired or distributed to the public. Prepaid advertising (included in prepaid expenses) was $13,635 at June 30, 2011 and $60,427 at June 30, 2010. Advertising expense for the years ended June 30, 2011 and 2010 was $1,003,946 and $682,332, respectively.

Research and Development

Research and development expenses for new products are expensed as they are incurred. Expenses for new product development totaled $132,638 for the year ended June 30, 2011 and $143,736 for the year ended June 30, 2010.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over estimated service lives for financial reporting purposes.

Expenditures for major renewals and betterments which extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are disposed of, the related costs and accumulated depreciation are removed from the respective accounts, and any gain or loss is recognized currently.

Operating Leases

The Company leases its facility under a ten year operating lease which was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability and the balance in this account at June 30, 2011 is $296,192. The rent expense under this lease for each of the years ended June 30, 2011 and 2010 was $323,722.

F-8

Segment Information

During fiscal 2011 and 2010, the Company only operated in one segment; therefore, segment information has not been presented.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” an amendment to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” The standard requires disclosure for transfers in and out of Level 1 and Level 2, as well as the disclosure of Level 3 activity on a gross, rather than net, basis. The guidance also requires enhancements to certain existing disclosures. The amendments are effective as of the beginning of our fiscal year 2011, or July 1, 2010, except for the new requirements regarding Level 3 activity, which is deferred until the beginning of fiscal year 2012. The guidance is not expected to have an impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued guidance to clarify disclosure requirements for pro-forma information on revenues and earnings for business combinations. This guidance clarifies that where comparative financial statements are presented, revenue and earnings of the combined entity should be disclosed as though the business combination(s) that occurred during the current reporting period had occurred as of the beginning of the comparable prior annual reporting period. This guidance also expands disclosure requirements to include a description of the nature and amount of material, non-recurring pro-forma adjustments directly attributable to the business combination included in the reported pro-forma revenue and earnings. The Company adopted the provisions of this guidance effective January 1, 2011 and there was no impact on the consolidated condensed financial statements resulting from the adoption of this guidance.

In December 2010, the FASB issued amended goodwill impairment testing guidance for reporting units with an overall nil or negative carrying amount, but a positive goodwill balance. This amended guidance requires that for these reporting units, the second stage of goodwill impairment testing should be performed when it is considered more likely than not that goodwill impairment exists. This assessment should be made by considering whether there are any adverse qualitative factors indicating impairment of the goodwill. The standard is effective for our fiscal year beginning July 1, 2011 and is not expected to have an impact on the Company’s consolidated financial statements.

We have determined that all other recently issued accounting standards will not have a material impact on our Consolidated Financial Statements, or do not apply to our operations.

Basic and Diluted Earnings Per Share

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of outstanding options and warrants, using the treasury stock method and the average market price of our common stock during the applicable period. All outstanding stock options and warrants were excluded from the computation of diluted earnings per share because they were antidilutive in the periods presented, but could be dilutive in the future.

	Years Ended June 30,
	2011			2010
Basic
Net Loss	$	(801,252	)	$	(1,033,952	)
Weighted-average common shares outstanding		75,396,312			62,103,434
Loss per share, basic	$	(0.01	)	$	(0.02	)
Diluted
Net Loss	$	(801,252	)	$	(1,033,952	)
Weighted-average common shares outstanding, basic		75,396,312			62,103,434
Weighted-average effect of dilutive securities:
Stock options		-			-
Warrants		-			-
Effect of assumed exercise of stock options and warrants		-			-
Weighted-average common shares outstanding, diluted		75,396,312			62,103,434
Loss per share, diluted	$	(0.01	)	$	(0.02	)
Outstanding options and warrants excluded as impact would be antidilutive		2,943,239			3,337,849

F-9

Basic and diluted earnings per share are the same in periods of a net loss thus there is no effect of dilutive securities when a net loss is recorded.

Income Taxes

Stock Based Compensation

We account for stock-based compensation in accordance with FASB ASC 718, Compensation – Stock Compensation. We measure the cost of each stock option and restricted stock award at its fair value on the grant date. Each award vests over the subsequent period during which the recipient is required to provide service in exchange for the award (the vesting period). The cost of each award is recognized as expense in the financial statements over the respective vesting period. The expense recognized reflects an estimated forfeiture rate for unvested awards of 25%.

NOTE D – ACQUISITION

On January 27, 2011, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Web Merchants, Inc., a privately-held company organized under the laws of Delaware (“WMI”) and Fyodor Petrenko and Dmitrii Spetetchii, the holders of 100% of WMI’s capital stock (the “WMI Shareholders”), to acquire 100% of WMI’s issued and outstanding equity ownership in exchange for 28,394,400 shares of our common stock to the WMI Shareholders. One of the WMI Shareholders also received $100,000 in cash, which represented $79,000 for the repayment of a loan to WMI and $21,000 in consideration for signing a non-compete agreement with the Company. Pursuant to the Purchase Agreement, WMI will continue to operate as a wholly owned subsidiary of the Company.

The total purchase price of $2,860,440 consisted of 28,394,400 shares of the Company’s common stock at a fair value of $2,839,000 and $21,000 in cash.

The purchase price allocation is not finalized and the valuations of all tangible and intangible assets, including customer relationships, trade name and intellectual property, have not been completed. Management’s estimates and assumptions are subject to change upon the finalization of the valuation and may be adjusted in accordance with FASB ASC Topic 805, Business Combinations.

F-10

The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values on January 27, 2011, the date of acquisition:

	Provisional Purchase Price Allocation
Current assets	$	863,819
Fixed assets		56,755
Goodwill		1,633,592
Intangible assets:
Customer list		300,000
Trade names		500,000
Proprietary technology		65,000
Total assets acquired		3,419,166
Acquired liabilities		(841,743	)
Acquired additional paid in capital		283,017
Net assets acquired		2,860,440
Less cash acquired		(128,577	)
Purchase price at closing, net of cash acquired	$	2,731,863

The preliminary valuation of the acquired assets and liabilities resulted in goodwill of $1,916,609 and identifiable intangible assets of $865,000. We identified and valued intangible assets related to trade names, customer relationships, and certain other intangible assets. The detail by category of identifiable intangible assets is as follows:

Category	Amount		Average Life (Years)
Trade names	$	500,000	Indefinite
Customer relationships		300,000	4-15
Proprietary technology		65,000	5

Total intangible assets acquired	$	865,000

Acquisition Related Costs

We classify costs incurred in connection with acquisitions as acquisition related costs. These costs consist primarily of transaction costs and integration costs. Transaction costs are incurred during the initial evaluation of a potential targeted acquisition and primarily relate to costs to analyze, negotiate and consummate the transaction as well as financial and legal due diligence activities. Integration costs relate to activities needed to combine the operations of an acquired enterprise into our operations. Expenses of $81,185 were recognized in connection with this acquisition and are included in Operating Expenses for the fiscal year ended June 30, 2011.

See Recent Developments – Entry Into a Material Definitive Agreement, above, regarding information on the signing of a definitive agreement for the sale of WMI.

NOTE E – GOODWILL AND OTHER INTANGIBLE ASSETS

The Company acquired goodwill and certain identifiable intangible assets as part of the acquisition in January 2011.

The changes in the carrying amount of goodwill for the six months ended June 30, 2011 were as follows:

Balance as of December 31, 2010	$	-
Goodwill acquired		1,633,592
Balance as of June 30, 2011	$	1,633,592

F-11

A summary of intangible assets as of June 30, 2011:

	June 30, 2011
	Weighted Average	Gross Carrying		Accumulated			Net Carrying
	Amortization Period	Amount		Amortization			Amount
Acquired technology	5 years	$	65,000	$	(5,418	)	$	59,582
Customer relationships	10 years		300,000		(12,500	)		287,500
Trade names			500,000		-			500,000

Total		$	865,000	$	(17,918	)	$	847,082

Amortization expense of intangible assets was $17,918 for the six months ended June 30, 2011.

The Company estimates the following amortization expense related to its intangible assets for the years ended June 30:

2012	$	43,002
2013		43,002
2014		43,002
2015		43,002
Thereafter		175,074
	$	347,082

See Recent Developments – Entry Into a Material Definitive Agreement , above, regarding information on the signing of a definitive agreement for the sale of WMI.

NOTE F – IMPAIRMENT OF LONG-LIVED ASSETS

We follow Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 360, Property, Plant, and Equipment, regarding impairment of our other long-lived assets (property, plant and equipment). Our policy is to assess our long-lived assets for impairment annually in the fourth quarter of each year or more frequently if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.

An impairment loss is recognized only if the carrying value of a long-lived asset is not recoverable and is measured as the excess of its carrying value over its fair value. The carrying amount of a long-lived asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of long-lived asset.

Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would not be depreciated. There was no impairment as of June 30, 2011 or 2010.

NOTE G – INVENTORIES

All inventories are stated at the lower of cost or market using the first-in, first-out method of valuation.

The Company’s inventories consist of the following components at June 30, 2011 and 2010:

	2011		2010
Raw materials	$	416,675	$	443,043
Work in Process		165,054		170,996
Finished Goods		1,487,006		294,812
	$	2,068,735	$	908,851

At June 30, 2011 and 2010 our inventory reserves were $139,931 and $0, respectively.

F-12

NOTE H – PROPERTY AND EQUIPMENT, NET

Property and equipment at June 30, 2011 and 2010 consisted of the following:

	2011				2010				Estimated Useful Life
Factory Equipment		$	1,782,969			$	1,531,734		7-10 years
Computer Equipment and Software			842,852				819,870		5-7 years
Office Equipment and Furniture			166,996				166,996		5-7 years
Automobile			24,320				-		5-7 years
Leasehold Improvements			330,961				321,288		15 years
Subtotal			3,148,098				2,839,888
Accumulated Depreciation			(2,166,599	)			(1,764,573	)
		$	981,499			$	1,075,315

Depreciation expense was $228,343 and $249,380 for the years ended June 30, 2011 and 2010, respectively.

NOTE I– SHORT TERM UNSECURED NOTES PAYABLE

Unsecured notes payable at June 30, 2011 and 2010 consisted of the following:

	2011		2010
Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing July 22, 2011	$	4,210	$	-

Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing July 22, 2011		1,258		-

Unsecured note payable to an individual, with interest at %, principal and interest paid bi-weekly, maturing February 17, 2012		34,000		-

Unsecured note payable to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing December 23, 2011		62,986		-

Unsecured note payable to Hope Capital, Inc. with interest at 20%, principal and interest paid bi-weekly, maturing March 16, 2012		97,507		-

Unsecured note payable to an individual, with interest at 16%, principal and interest originally due on January 3, 2011, extended to May 1, 2012. Beginning May 31, 2011, the interest rate is increased to 20%, with interest due monthly, and the principal due in full on May 1, 2012		200,000		200,000

Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing April 16, 2011		-		78,659

Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing January 19, 2011		-		60,109

Unsecured note payable to an individual, with interest at 20%, principal and interest paid bi-weekly, maturing January 13, 2011		-		24,044

Unsecured note payable to an individual, with interest at 20%, principal and interest due in full on January 3, 2012		300,000		-

Total Short Term Unsecured Notes Payable	$	699,961	$	362,812

F-13

NOTE J– NOTE PAYABLE – EQUIPMENT

Note payable – equipment, at June 30, 2011 and 2010 consisted of the following:

	2011		2010
Note payable to Fidelity Bank in monthly installments of $5,364 including
Interest at 8%, maturing October 25, 2010, secured by equipment	$	-	$	12,136
Long term debt portion	$	-	$	-

NOTE K – LINE OF CREDIT

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), and OneUp’s wholly owned subsidiary, Foam Labs, Inc. (“Foam Labs”) entered into a credit facility with a finance company, Advance Financial Corporation, to provide it with an asset based line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the agreement) for the purpose of improving working capital. The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The credit facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable. Advances under the agreement bear interest at a rate of 2.5% over the lenders Index Rate (as of June 30, 2011 the lenders Index Rate was 4.75%). In addition there is a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month. The Company’s CEO, Louis Friedman, and the Company’s Executive Vice President, Fred Petrenko, have personally guaranteed the repayment of the facility. In addition, Liberator, Inc., and Web Merchants, Inc. have provided their corporate guarantees of the credit facility. On June 30, 2011, the balance owed under this line of credit was $460,758. On June 30, 2011, we were in substantial compliance with all of the material financial and other covenants required under this credit facility.

On May 17, 2010, our wholly owned subsidiary, OneUp Innovations, Inc., entered into a financing agreement with an “asset-based” lender, Summit Financial Resources LLC, for the purpose of improving working capital. The agreement provides for up to $600,000 and is secured primarily by accounts receivable, inventory, equipment, and all general intangibles. Under the financing agreement, the lender will make loans at our request and in the lender’s discretion (a) based on purchases of our Accounts by the lender, with recourse against us and an advance rate of 80% (or such other percentage determined by the lender in its discretion), and (b) based on Acceptable Inventory not to exceed certain amounts, including an aggregate maximum of $200,000, not to exceed 50% of the aggregate amount of outstanding Accounts on which an Advance has been made. The inventory component of the financing agreement is available to the Company, at the discretion of the lender and based upon Acceptable Inventory, from October 1 through November 30 of each year. The term of the agreement is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 60 days prior to the end of the current financing period. Advances under the agreement bear interest at a rate of 2% over the prime rate (as published in the Wall Street Journal) for the accounts receivable portion of the advances and the inventory portion of the borrowings. The prime rate (3.25% as of June 30, 2010) adjusts with changes to the rate. In addition there are collateral management fees of 0.4% for each 10-day period that an advance on an accounts receivable invoice remains outstanding and a 1.9% collateral management fee on the average monthly loan outstanding on the inventory portion of any advance. The agreement provides that no change in control concerning us or any of our active subsidiaries shall occur except with the prior written consent of the lender. Events of default include, but are not limited to, the failure to make a payment when due or a default occurring on any indebtedness of ours. The financing agreement was personally guaranteed by the Company’s CEO and majority shareholder, Louis Friedman and Liberator, Inc. has provided its corporate guarantee of the credit facility. The balance owed under this line of credit was repaid on May 27, 2011.

Management believes cash flows generated from operations, along with current cash and investments as well as borrowing capacity under the line of credit should be sufficient to finance capital requirements required by operations. If new business opportunities do arise, additional outside funding may be required.

NOTE L – CREDIT CARD ADVANCE

On May 19, 2011, the Company’s wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), and OneUp’s wholly owned subsidiary, Foam Labs, Inc. (“Foam Labs”) entered into a receivable advance agreement with CC Funding, LLC (“Credit Cash”), a division of Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, by March 19, 2012. This will be accomplished by Credit Cash withholding a fixed amount each business day of $2,074 from OneUp’s credit card receipts until full repayment is made. The loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman, and the Company’s CFO, Ronald P. Scott. As of June 30, 2011, $389,926 was owed under this agreement.

F-14

On November 4, 2010, the Company’s wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), and OneUp’s wholly owned subsidiary, Foam Labs, Inc. (“Foam Labs”) entered into a receivable advance agreement with CC Funding, LLC (“Credit Cash”), a division of Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, by May 4, 2011. This will be accomplished by Credit Cash withholding a fixed amount each business day of $3,446 from OneUp’s credit card receipts until full repayment is made. The loan is guaranteed by the Company and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman, and the Company’s CFO, Ronald P. Scott. On May 5, 2011 this advance was repaid.

NOTE M – CONVERTIBLE NOTES PAYABLE – SHAREHOLDER

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of August 15, 2012. Upon maturity, the issuer has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.25 per share. As of June 30, 2011, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $29,750. This amount will be amortized over the remaining life of the note as additional interest expense.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $250,000. The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of September 2, 2012. As of June 30, 2011, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $22,491. This amount will be amortized over the life of the note as additional interest expense.

NOTE N – UNSECURED LINES OF CREDIT

The Company has drawn cash advances on three unsecured lines of credit that are in the name of the Company and Louis S. Friedman. The terms of these unsecured lines of credit call for monthly payments of principal and interest, with interest rates ranging from 12% to 18%. The aggregate amount owed on the three unsecured lines of credit was $71,393 at June 30, 2011 and $99,664 at June 30, 2010.

NOTE O – COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its facility under a ten year operating lease which was signed in September 2005 and expires December 31, 2015. The lease is on an escalating schedule with the final year on the lease at $34,358 per month. The liability for this difference in the monthly payments is accounted for as a deferred rent liability and the balance in this account at June 30, 2011 and 2010 is $296,192 and $331,570. The rent expense under this lease for the years ended June 30, 2011 and 2010 was $323,722.

The Company leases certain material handling equipment under an operating lease. The monthly lease amount is $4,082 per month and expires September 2012.

The Company also leases certain postage equipment under an operating lease. The monthly lease is $144 per month and expires January 2013.

The Company entered into an operating lease for certain material handling equipment in September 2010. The monthly lease amount is $1,587 per month and expires in September 2015.

Future minimum lease payments under non-cancelable operating leases at June 30, 2011 are as follows:

Year ending June 30,
2012	$	439,492
2013		415,013
2014		410,729
2015		424,029
2016		209,324
Thereafter through 2017		-
Total minimum lease payments	$	1,898,587

F-15

Capital Leases

The Company has acquired equipment under the provisions of long-term leases. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The leased properties under these capital leases have a total cost of $349,205. These assets are included in the fixed assets listed in Note 1 and include computers, software, furniture, and equipment. The capital leases have stated or imputed interest rates ranging from 7% to 21%.

The following is an analysis of the minimum future lease payments subsequent to the year ended June 30, 2011:

Year ending June 30,
2012	$	43,843
2013		27,178
2014		7,601
2015		-
Future Minimum Lease Payments	$	78,622
Less Amount Representing Interest		(14,883	)
Present Value of Minimum Lease Payments		63,739
Less Current Portion		(33,973	)
Long-Term Obligations under Leases Payable	$	29,766

Employment Agreements

The Company has entered into employment agreements with Louis Friedman, President and Chief Executive Officer and Fred Petrenko, Executive Vice President and President, Web Merchants, Inc. Each of the agreements provide for an annual base salary of $150,000 and eligibility to receive a bonus. Under the agreements, these executive employees may be terminated at any time with or without cause, or by reason of death or disability. In certain termination situations, the Company is liable to pay severance compensation to these executives for up to 9 months at their current salary.

Legal Proceedings

NOTE P – RELATED PARTY TRANSACTIONS

The Company’s CEO, Louis Friedman, and the Company’s Executive Vice President, Fred Petrenko, have personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Note K – Line of Credit). In addition, Liberator, Inc., and Web Merchants, Inc. have provided their corporate guarantees of the credit facility. On June 30, 2011, the balance owed under this line of credit was $460,758. On June 30, 2011, we were in substantial compliance with all of the material financial and other covenants required under this credit facility.

F-16

The loan from Credit Cash (see Note L – Credit Card Advance) is guaranteed by the Company (including OneUp, Foam Labs, and WMI) and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman, and the Company’s CFO, Ronald P. Scott. As of June 30, 2011, $389,926 was owed under this agreement.

On March 17, 2011, the Company issued an unsecured promissory note to Hope Capital, Inc. for $130,000. Terms of the note call for bi-weekly principal and interest payments of $5,536 with the note due in full on March 16, 2012. Mr. Friedman and Mr. Petrenko personally guaranteed the repayment of the loan obligation.

On December 23, 2010, the Company issued an unsecured promissory note to Hope Capital, Inc. for $120,000. Terms of the note call for bi-weekly principal and interest payments of $5,110 with the note due in full on December 23, 2011. Mr. Friedman personally guaranteed the repayment of the loan obligation.

On October 30, 2010, Mr. Friedman, loaned the Company $40,000. Interest on the loan will accrue at the prevailing prime rate (which was 3.25% on June 30, 2011) until paid and totaled $925 as of June 30, 2011.

On September 2, 2009, the Company issued a 3% convertible note payable to Hope Capital. The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of September 2, 2012. As of June 30, 2011, the 3% Convertible Note Payable is carried net of the fair market value of the embedded conversion feature of $22,491. This amount will be amortized over the life of the note as additional interest expense.

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. Hope Capital is a shareholder of the Company and was the majority shareholder of the Company before the merger with OneUp Innovations. The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of August 15, 2012. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.25 per share. At June 30, 2011, the 3% convertible note payable is carried net of the fair market value of the embedded conversion feature of $29,750. This amount will be amortized over the life of the note as additional interest.

On June 30, 2008, the Company had a subordinated note payable to the majority shareholder and CEO in the amount of $310,000 and the majority shareholder’s wife in the amount of $395,000. During fiscal 2009, the majority shareholder loaned the Company an additional $91,000 and a director loaned the Company $29,948. In connection with the Company’s June 26, 2009 merger, the majority shareholder and his wife agreed to convert $700,000 of principal balance and $132,120 of accrued but unpaid interest to Series A Convertible Preferred Stock. Interest on the notes during fiscal 2010 and 2011 was accrued by the Company at the prevailing prime rate (which is currently at 3.25%) and totaled $3,607 and $3,443, respectively. The accrued interest balance on these notes, as of June 30, 2011 and 2010, was $7,954 and $4,511, respectively. These notes are subordinate to all other credit facilities currently in place.

NOTE Q – STOCK OPTIONS, WARRANTS AND COMMON STOCK ISSUANCES

Options

As of June 30, 2011, the Company had one shareholder approved plan, the 2009 Stock Option Plan (the “Plan”), under which shares were available for equity based awards. Under the Plan, 5,000,000 shares of common stock are reserved for issuance until the Plan terminates on October 19, 2019.

Under the Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market. As of June 30, 2011, there were 3,307,500 options available for grant under the Plan.

All stock option grants made under the Plan were at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the Plan were determined by the board of directors in accordance with the provisions of the plan. The terms of each option grant include vesting, exercise, and other conditions are set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of ten (10) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The Company has no awards with market or performance conditions.

F-17

The following table summarizes stock-based compensation expense by line item in the consolidated statements of operations, all relating to employee stock plans:

	Twelve Months Ended June 30,
	2011		2010

Cost of Goods Sold	$	4,675	$	3,189
Other Selling and Marketing		7,616		3,317
General and Administrative		6,019		3,449
Total	$	18,310	$	9,955

Stock-based compensation expense recognized in the consolidated statements of operations for each of the twelve month period ended June 30, 2011 and 2010 is based on awards ultimately expected to vest, and is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures are estimated to be approximately 25%, based on historical experience.

A summary of option activity under the Company’s stock plan for the year ended June 30, 2011 and 2010 is presented below:

Option Activity	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value as of 6/30/11
Outstanding at June 30, 2009		438,456		$	.228	3.3 years	$	.001	$
Granted		1,077,000		$	.25		$	.06	$
Exercised		-		$			$		$
Forfeited or Expired		(205,000	)	$	.25		$	.06	$
Outstanding at June 30, 2010		1,310,456		$	.243	3.6 years	$	.06	$
Granted		1,101,000		$	.15		$	.06	$
Exercised		-		$	-		$		$
Forfeited or Expired		(280,500	)	$	.20		$	.06	$
Outstanding at June 30, 2011		2,130,956		$	.201	3.4 years	$	.06	$
Exercisable at June 30, 2011		625,456		$	.235	1.9 years	$	.06	$

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $.15 for such day. The total intrinsic value of stock options exercised during fiscal years 2011 and 2010 was $0 and $0, respectively.

A summary of the Company’s non-vested options for the year ended June 30, 2011 is presented below:

Non-vested Options	Shares			Weighted Average Grant-Date Fair Value
Non-vested at June 30, 2010		872,000		$	.06
Granted		1,101,000			.06
Vested		(201,000	)		.06
Forfeited		(266,500	)		.06
Non-vested at June 30, 2011		1,505,500		$	.06

The weighted average grant-date fair value of stock options granted during fiscal years 2011 and 2010 were $63,308 and $59,774, respectively. The total grant-date fair values of stock options that vested during fiscal years 2011 and 2010 were $11,156 and $0, respectively.

The following table summarizes the weighted average characteristics of outstanding stock options as of June 30, 2011:

		Outstanding Options						Exercisable Options
Exercise Prices		Number of Shares		Remaining Life (Years)		Weighted Average Price		Number of Shares		Weighted Average Price
$	.15		944,500		4.5	$	.15	-		$	-
$	.228 to $.25		1,186,456		2.5		.24		625,456		.24
Total stock options			2,130,954		3.4	$	.20		49,610	$	.19

F-18

The range of fair value assumptions related to options granted during the years ended June 30, 2011 and 2010 were as follows:

	2011			2010
Exercise Price:		.15		$	.25
Volatility:		45	%		25	%
Risk Free Rate:		2.4	%		2.5	%
Vesting Period:	4 years			4 years
Forfeiture Rate:		25	%		25	%
Expected Life	4.1 years			3.5 years
Dividend Rate		0	%		0	%

As of June 30, 2011, total unrecognized stock-based compensation expense related to all unvested stock options was $99,355, which is expected to be expensed over a weighted average period of 2.9 years.

Share Purchase Warrants

As of June 30, 2011, the following share purchase warrants were outstanding:

Number of Warrants		Exercise Price		Expiration Date

	250,000	$	.25	September 2, 2012
	292,479	$	.50	June 26, 2014
	1,292,479	$	.75	June 26, 2014
	877,435	$	1.00	June 26, 2014

	2,712,393

The flowing table summarizes the continuity of the Company’s share purchase warrants:

	Shares		Weighted Average Exercise Price
Balance June 30, 2009		2,462,393	$	.81
Issued		250,000		.25
Balance June 30, 2010		2,712,393		.76

Balance June 30, 2011		2,712,393	$	.76

Common Stock Issued

On September 2, 2009, Old Liberator acquired the majority of the issued and outstanding common stock of the Company in accordance with a common stock purchase agreement (the “Stock Purchase Agreement”) by and among Old Liberator and Belmont Partners, LLC, a Virginia limited liability company (“Belmont”), and the Company. At closing, Old Liberator acquired 972,000 shares (80.7%) of the Company from Belmont for a total of $240,500 in addition to the issuance by the Company of 250,000 warrants to Belmont exercisable for an equal number of shares of the Company’s common stock with an exercise price of $0.25, and the issuance by the Company to Belmont of a total of 1,500,000 shares of the Company’s common stock with 750,000 shares delivered at closing and the balance of 750,000 shares to be delivered on September 2, 2010, the one (1) year anniversary of the closing.

On October 14, 2010, Belmont and the Company executed a Settlement Agreement and General Release dated October 13, 2010 regarding the remaining 750,000 shares of our common stock that were owed to Belmont on September 2, 2010. Without admitting that it violated the short swing profit rules enacted under Section 16(b) of the Securities Exchange Act of 1934, as amended, and wishing to reach an amicable solution in order to avoid the costs and uncertainties of protracted and time consuming litigation, the parties agreed that the obligation to issue 750,000 shares of our common stock to Belmont will be considered as satisfied in full by Belmont with the issuance of three hundred fifty thousand (350,000) restricted shares of our common stock. Such shares were issued to Belmont on November 5, 2010. The Company recorded an expense of $52,500 related to this issuance and it was included in other income (expense) on the Statement of Operations.

F-19

NOTE R – INCOME TAXES

Deferred tax assets and liabilities are computed by applying the effective U.S. federal income tax rate to the gross amounts of temporary differences and other tax attributes. Deferred tax assets and liabilities relating to state income taxes are not material. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of June 30, 2011 and 2010, the Company believed it was more likely than not that future tax benefits from net operating loss carryforwards and other deferred tax assets would not be realizable through generation of future taxable income; therefore, they were fully reserved.

The components of deferred tax assets and liabilities at June 30, 2011 and 2010 are approximately as follows:

	2011			2010
Deferred tax assets:
Net operating loss carry-forwards	$	1,978,580		$	1,663,704
Valuation allowance		(1,978,580	)		(1,663,704	)
Net deferred tax assets	$	-		$	-

The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 45% to pretax loss from continuing operations for the years ended June 30, 2011 and 2010 due to the following:

	2011			2010

Book loss from operations	$	314,876		$	358,187
Valuation (allowance)		(314,876	)		(358,187	)
Net tax benefit	$	-		$	-

At June 30, 2011, the Company had net operating loss (NOL) carryforwards of approximately $4.2 million that may be offset against future taxable income. The Company’s ability to use its NOL carryforwards may be substantially limited due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50.0% of the outstanding stock of a company by certain stockholders or public groups.

The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” under the definition of Section 382. If the Company has experienced an ownership change, utilization of the NOL carryforwards would be subject to an annual limitation under Section 382 of the Code, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL carryforwards before utilization. Further, until a study is completed and any limitation known, no positions related to limitations are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit. Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company. The NOL carryforwards expire in the years 2024 through 2031.

The tax years that remain subject to examination by major taxing jurisdictions are those for the years ended June 30, 2008 through 2011.

F-20

NOTE S – SUBSEQUENT EVENTS

Divestiture of WMI

On October 6, 2011, the Company announced the signing of a definitive Stock Purchase Agreement (the “WMI Sale Agreement”) for the sale of our subsidiary, Web Merchants, Inc. (“WMI”) to Web Merchants Atlanta, LLC (“WMA”), an entity controlled by the President and former majority shareholder of WMI, Fred Petrenko. Under the WMI Sale Agreement, the Company will receive the 25.4 million shares of Liberator common stock held by Mr. Petrenko and a cash payment of $700,000 in exchange for the issued and outstanding stock of WMI currently owned by the Company. Upon the closing of the transaction, Fred Petrenko will resign as a director and Executive Vice President of the Company, and Rufina Bulatova will resign as Vice President – Online Marketing of the Company. The above descriptions of the Stock Purchase Agreement are qualified in their entirety by the terms and conditions of the Stock Purchase Agreement, a copy of which is filed as Exhibits 10.30 hereto.

As part of the WMI Sale Agreement, the Company will also enter into an Escrow Agreement with WMA (the “WMA Escrow Agreement”) covering the 25.4 million shares of Liberator common stock that will be transferred as part of the WMI Sale Agreement. Under the WMA Escrow Agreement, the 25.4 million shares of Liberator common stock will be held in escrow until the outstanding loans from Advance Financial Corporation and Credit Cash LLC (see Notes to Consolidated Financial Statements – Note K-Line of Credit and Note L-Credit Card Advance ) are satisfied and WMI or Petrenko have been provided with a written release of any liability as a guarantor. Under the agreement, the Company shall obtain such release no later than August 1, 2012, at which time the Liberator common stock shall be released to the Company. If by August 1, 2012, the Company has not satisfied the loans from Advance Financial Corporation and Credit Cash LLC and WMI and Mr. Petrenko have not been provided with written releases of liability, then the 25.4 million shares of Liberator common stock will be delivered from escrow to WMA. The above descriptions of the WMA Escrow Agreement are qualified in their entirety by the terms and conditions of the Escrow Agreement, a copy of which is filed as Exhibit 10.31 hereto.

The Company also entered into a month-to-month Lease Agreement whereby WMI will rent space in the Company’s facility for $12,000 per month. This Lease Agreement can be cancelled by either party with 30 days written notice. The above descriptions of the Lease Agreement are qualified in their entirety by the terms and conditions of the Lease Agreement, a copy of which is filed as Exhibit 10.32 hereto.

The transaction is expected to close no later than October 21, 2011 and will be effective October 1, 2011, the first day of the Company’s second fiscal quarter.

From the acquisition date through June 30, 2011, WMI had net sales of $4.5 million and net income of approximately $76,000.

Note Payable

On July 20, 2011, the Company issued an unsecured promissory note to an individual for $100,000. Terms of the promissory note call for monthly interest payments of $1,667 (equal to interest at 20% per annum), with the principal amount due in full on July 31, 2012. The promissory note is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman.

[End of Consolidated financial statements.]

F-21

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

There are no events required to be disclosed under this Item.

ITEM 9A. Controls and Procedures

Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on those evaluations, as of June 30, 2011, our CEO and CFO believe that:

(i)

our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure; and

(ii)

our disclosure controls and procedures are effective.

Internal Control over Financial Reporting

(a) Management’s annual report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

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

Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework . Based on our assessment, management believes that, as of June 30, 2011, our internal control over financial reporting is effective based on those criteria.

(b) Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or Rule15d-15(d) promulgated under the Exchange Act that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. Other Information

On May 24, 2011, the Company’s wholly owned subsidiary, OneUp Innovations, Inc. (“OneUp”), and OneUp’s wholly owned subsidiary, Foam Labs, Inc. (“Foam Labs”) entered into a Receivable Financing Agreement (the “Credit Facility”) with a finance company, Advance Financial Corporation (“Advance”), to provide it with a line of credit of up to $750,000 against 85% of eligible accounts receivable (as defined in the Credit Facility) for the purpose of improving working capital. The term of the Credit Facility is one year, renewable for additional one-year terms unless either party provides written notice of non-renewal at least 90 days prior to the end of the current financing period. The Credit Facility is secured by our accounts receivable and other rights to payment, general intangibles, inventory and equipment, and are subject to eligibility requirements for current accounts receivable. Advances under the agreement bear interest at a rate of 2.5% over the lenders Index Rate (as of June 30, 2011 the lenders Index Rate was 4.75%). In addition there is a Monthly Service Fee (as defined in the agreement) of up to 1.25% per month. The Company’s CEO, Louis Friedman, and the Company’s Executive Vice President, Fred Petrenko, have personally guaranteed the repayment of the Credit Facility. In addition, the Credit Facility has a corporate guarantee from the parent, Liberator, Inc., and Web Merchants, Inc. On June 30, 2011, the balance owed under the Credit Facility was $460,758. On June 30, 2011, we were in substantial compliance with all of the material financial and other covenants required under this Credit Facility.

Events of default under the Credit Facility are (a) failure by OneUp and Foam Labs to pay any amount to Advance when due, (b) failure to pay or perform any obligation, covenant, agreement, or liability created by the agreement, (c) the proving materially false or materially misleading when made or furnished of any representation, warranty, or financial statement made by or on behalf of OneUp or Foam Labs, (d) the occurrence of any default or event on any indebtedness of OneUp or Foam Labs, or a guarantor of their obligations under the Credit Facility, that, with the giving of notice or the passage of time or both, would constitute a default; (e) the dissolution or termination, death, or business failure of OneUp or Foam Labs; (f) the appointment of a receiver, trustee, or custodian for any part of property of OneUp or Foam Labs, or a guarantor of their obligations under the Credit Facility, assigned for the benefit of creditors; (g) the commencement of a proceeding or filing of a petition under any bankruptcy or insolvency law by or against OneUp or Foam Labs, or a guarantor of their obligations under the Credit Facility; (h) the entering of a judgment against OneUp or Foam Labs, or a guarantor of their obligations under the Credit Facility, that materially affects any of their financial condition; (i) the insolvency or inability to pay debts as they mature of OneUp or Foam Labs, or a guarantor of their obligations under the Credit Facility; and (j) if Advance reasonably deems itself insecure for any other reason whatsoever. Upon a default event, at Advance’s election and without notice, Advance may terminate OneUp and Foam Lab’s right to request an advance, treat all outstanding purchased accounts as being past due or no longer an acceptable account, and accelerate, and make immediately due and payable, all obligations of OneUp and Foam Labs to Advance. Advance will also have all the rights and remedies created by or arising from the Credit Facility.

OneUp, Foam Labs, and all guarantors of their obligations under the Credit Facility are jointly and severally liable for OneUp’s and Foam Labs’ obligations under the Credit Facility.

The above descriptions of the Credit Facility are qualified in their entirety by the terms and conditions of the Receivables Financing Agreement, a copy of which is filed as Exhibits 10.17 hereto.

Liberator, Inc. issued a guarantee to Advance on May 24, 2011 guaranteeing the prompt and full performance, payment, and discharge of any and all of OneUp and Foam Labs owing to Advance arising from or relating to the Credit Facility. Our guarantee is secured in accordance with the terms of the Credit Facility described above. Our Chairman of the Board and Chief Executive Officer, Louis Friedman, also personally guaranteed OneUp’s and Foam Lab’s obligations under the Credit Facility. In addition, our Executive Vice President, Fred Petrenko, also personally guaranteed OneUp’s and Foam Lab’s obligations under the Credit Facility. We, Mr. Friedman, and Mr. Petrenko agreed to pay any indebtedness from the Credit Facility that OneUp and Foam Labs fails to pay when due. This description of our guarantees, Mr. Friedman’s guarantee, and Mr. Petrenko’s guarantee is qualified in its entirety by a copy of the guarantees, which are attached hereto as Exhibits 10.18, 10.19, 10.20, 10.21 and 10.22.

On May 19, 2011, OneUp and Foam Labs entered into Advance Schedule No. 2 to a receivable advance agreement with CC Funding, LLC (“Credit Cash”), a division of Credit Cash NJ, LLC whereby Credit Cash agreed to loan OneUp and Foam Labs a total of $400,000. The loan is secured by OneUp’s and Foam Lab’s existing and future credit card collections. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, by March 19, 2012. This will be accomplished by Credit Cash withholding a fixed amount each business day of $2,074 from OneUp’s credit card receipts until full repayment is made. The loan is guaranteed by the Company (including Web Merchants, Inc.) and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman, and the Company’s CFO, Ronald P. Scott. The above description of the Credit Cash agreement and guarantee are qualified in their entirety by a copy of the agreement and guarantees, which are attached hereto as Exhibits 10.23, 10.24 and 10.25.

PART III.

ITEM 10. Directors. Executive Officers and Corporate Governance.

The following table sets forth certain information with respect to our directors and executive officers.

Name	Age	Position
Louis S. Friedman	59	Chief Executive Officer, President, Director
Ronald P. Scott	56	Chief Financial Officer, Secretary, Director
Fyodor “Fred” Petrenko	43	Executive Vice President, Director
Leslie Vogelman	59	Treasurer
Rufina Bulatova	33	Vice President, Online Marketing

All directors serve for one-year terms until their successors are elected or they are re-elected at the annual shareholders’ meeting. Officers hold their positions at the pleasure of the board of directors.

There is no arrangement, agreement or understanding between any of the directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer. Also, there is no arrangement, agreement or understanding between management and non-management shareholders under which non-management shareholders may directly or indirectly participate in or influence the management of our affairs.

Directors are not presently compensated for their service on the board, other than the repayment of actual expenses incurred. There are no present plans to compensate directors for their service on the board.

Background of Executive Officers and Directors

The business experience of each of the persons listed above during the past five years is as follows:

Louis S. Friedman, President, Chief Executive Officer and Director. Mr. Friedman has served as President, Chief Executive Officer, and director since our merger with Old Liberator, Inc. in October 2009. Prior to that, he served as Old Liberator’s Chief Executive Officer and a director since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Mr. Friedman founded OneUp in 2000. Before starting OneUp, Mr. Friedman was in business consulting, venture capital and private investing from 1990 to 2000. Earlier in his career, Mr. Friedman was Executive Vice President of Chemtronics, Inc., until its sale to Morgan Crucible in 1990.

Ronald Scott, Chief Financial Officer, Secretary and Director. Mr. Scott joined the Company in October 2009 in connection with our merger with Old Liberator, Inc. Prior to that, he served as Old Liberator’s Chief Financial Officer, Secretary, and a director since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Mr. Scott joined OneUp Innovations as a part-time consultant in July, 2006 and as a full-time consultant in October, 2007, serving as its Chief Financial Officer. From 2004 to 2009, Mr. Scott was president of Impact Business Solutions, LLC, a consulting business that provides financial management services. Mr. Scott holds a B.S. degree in Finance and Management from San Jose State University and an M.B.A. degree with a concentration in Accounting from Santa Clara University.

Fyodor “Fred” Petrenko, Executive Vice President and Director . Mr. Petrenko joined the Company in January, 2011 in connection with our acquisition of WMI. Mr. Petrenko co-founded WMI in 2002 and has served as its President since then. Prior to then, Mr. Petrenko was the head of investment banking with Media-Most, an international multimedia holding company based in Russia. Mr. Petrenko holds a PhD in Physics from Moscow State University and MS degree in Finance from CUNY (Baruch).

Leslie Vogelman, Treasurer. Ms. Vogelman joined the Company in October 2009 in connection with our merger with Old Liberator, Inc. Prior to that, she served as Old Liberator’s Treasurer since June 2009, when OneUp Innovations, Inc. merged with Old Liberator in June 2009. Ms. Vogelman joined OneUp at its inception in 2000 as Secretary and Treasurer. Ms. Vogelman holds a B.A. from the State University of New York in Binghamton and an M.B.A. from Adelphi University.

Rufina Bulatova, Vice President, Online Marketing . Ms. Bulatova joined the Company in January, 2011 in connection with our acquisition of WMI and is currently the Vice President of WMI, a position she has held since 2007, overseeing online marketing, product catalog, direct marketing, and co-op advertising programs. Ms. Bulatova joined WMI in 2003 as a .NET developer and became the Lead Project Manager responsible for website user experience in 2004. Ms. Bulatova holds a Master Degree in Computer Science from Ufa State Technical University (Russia).

The experience and background of each of the directors, as summarized above, were significant factors in their previously being nominated as directors of the Company.

Family Relationships

Louis Friedman, our President, Chief Executive Officer and Chairman, and Leslie Vogelman, our Treasurer, are husband and wife.

Fred Petrenko, Executive Vice President, and Rufina Bulatova, Vice President, are domestic partners.

There are no other relationships between the officers or directors of the Company.

Committees

As of June 30, 2011, we have not established an audit committee or any other committee of the board of directors and, therefore, the responsibilities of such committees have been conducted by our board of directors as a whole.

An audit committee’s primary functions are to: (i) serve as an independent and objective party to monitor our financial reporting process and internal control system; (ii) review and appraise the audit efforts of our independent accountants; (iii) evaluate our Annual financial performance as well as our compliance with laws and regulations; (iv) oversee management’s establishment and enforcement of financial policies and business practices; and (v) provide an open avenue of communication among the independent accountants, management and our board of directors.

We may, in the future, establish an audit committee and/or other committees of the board of directors.

Audit Committee Financial Expert

In general, an “audit committee financial expert” is an individual who:

understands generally accepted accounting principles and financial statements,

is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,

has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to the our financial statements,

understands internal controls over financial reporting, and

understands audit committee functions.

While we do not currently have an audit committee, our board of directors has determined that Ronald Scott is an “audit committee financial expert” within the meaning of the foregoing definition.

Diversity

While the Company does not have a policy regarding diversity of its board members, diversity is one of a number of factors that is typically taken into account in identifying board nominees. We only have three members on our board of directors, but we hope to add more members for a diverse board in terms of previous business experience and educational and personal background of the members of our board.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our executive officers, directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership, and annual reports concerning their ownership of our common shares and other equity securities on Forms 3, 4, and 5 respectively. Executive officers, directors, and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based on a review of the copies of such forms received by us, and to the best of our knowledge, there were no reports untimely filed during the fiscal year ended June 30, 2011.

Code of Ethics

We have not yet adopted a Code of Business Conduct and Ethics. We are currently working towards developing a formal Code of Business Conduct and Ethics, which will apply to all of our employees, including our board of directors. When available, a copy of our Code of Business Conduct and Ethics may, upon request made to us in writing at the following address, be made available without charge: 2745 Bankers Industrial Drive, Atlanta, Georgia, 30360.

ITEM 11. Executive Compensation.

Summary Compensation Table

The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal years ended June 30, 2011 and 2010 by (i) our Chief Executive Officer (principal executive officer), (ii) the two most highly compensated executive officers other than our CEO who were serving as executive officers at the end of our last completed fiscal year, whose total compensation exceeded $100,000 during such fiscal year ends, and (iv) up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of our last completed fiscal year (collectively, the “Named Executive Officers”).

	Fiscal	Salary		Bonus		Stock Awards		Option Awards		Non-Equity Incentive Plan Compensation		All Other Comp- ensation		Total
Name and Principal Position	Year	($)		($)		($)		($)(1)		($)		($)		($)
Louis S. Friedman (2)	2011		149,994		—		—		—		—		—		149,994
President, Chief Executive	2010		152,994		—		—		—		—		—		152,994
Officer and Chairman of the Board
Ronald P. Scott	2011		125,008		—		—		—		—		—		125,008
Chief Financial Officer, Secretary	2010		124,527		—		—		—		—		—		124,527
and Director
Fred Petrenko (3)	2011		112,500		—		—		—		—		—		112,500
Executive Vice President and	2010		128,808		—		—		—		—		—		128,808
Director
William Seitz (4)	2011		104,998		—		—		4,315		—		—		109,313
Chief Technology Architect	2010		55,321		—		—		—		—		—		55,321

(1)

Effective February 28, 2010 for fiscal years ending on or after December 20, 2009, the SEC amended its rules related to the Summary Compensation and Director Compensation Tables. The new rules require issuers to report as compensation the aggregate grant date fair-value of stock and option awards issued during the fiscal year to NEOs, rather than the dollar amount recognized for financial statement purposes for that fiscal year under the previous rules. Amounts are computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. Prior year amounts have been restated.

(2)	Mr. Friedman’s current annual salary, effective July 1, 2009, is $150,000.

(3)	Mr. Petrenko joined the Company in connection with the acquisition of Web Merchants Inc. at an annual salary of $150,000.

(4)	Mr. Seitz joined the Company in December, 2009 at an annual salary of $105,000.

Outstanding Equity Awards at Fiscal Year End

The following table shows, for the fiscal year ended June 30, 2011, certain information regarding outstanding equity awards at fiscal year-end for our Named Executive Officers.

Outstanding Equity Awards at June 30, 2011

	Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date			Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)
Louis S. Friedman		—		—		—		—			—		—
Ronald P. Scott (1)		438,456		—	$	.23	10/1/2012				—		—
Fred Petrenko		—		—		—	—				—		—
William Seitz		—		75,000	$	.15	12/15/15		(2)		—		—

(1)	Options granted to the Named Executive Officers expire five years after the grant date. These options were not granted pursuant to a Section 16(b)(3) Plan.

(2)	The common stock option vests pro rata over a four-year period on each of December 15, 2011, December 15, 2012, December 15, 2013 and December 15, 2014.

Employment Agreement

The Company has entered into employment agreements with Louis Friedman, President and Chief Executive Officer and Fred Petrenko, Executive Vice President and President, Web Merchants, Inc. Each of the agreements provide for an annual base salary of $150,000 and eligibility to receive a bonus, should the Company implement a bonus plan for executives. Under the agreements, these executive employees may be terminated at any time with or without cause, or by reason of death or disability. In certain termination situations, the Company is liable to pay severance compensation to these executives for up to 9 months.

Directors’ Compensation

For the fiscal year ended June 30, 2011, our directors did not receive any compensation in their capacity as a director.

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

The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock by:

•

all persons who are beneficial owners of five percent (5%) or more of any class of our voting securities;

•

each of our directors;

•

each of our Named Executive Officers; and

•

all current directors and executive officers as a group.

Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them.

Applicable percentage ownership in the following table is based on 91,947,047 shares of common stock outstanding as of September 27, 2011. The table does not give effect to changes in beneficial ownership that may occur in the event we consummate the sale of WMI, including the surrender and cancellation of 25.4 million shares of our common stock, See Recent Developments – Entry Into a Material Definitive Agreement , above, regarding information on the signing of a definitive agreement for the sale of WMI.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of September 27, 2011, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership			Percent of Class
Executive Officers and Directors
Common	Louis S. Friedman (1)		32,694,376	(8)		34.0	%
Common	Ronald P. Scott (1)		438,456	(2)		0.5	%
Common	Fred Petrenko (1)		25,394,400			27.6	%
Common	Leslie Vogelman (1)(7)		35,000			0.0	%
Common	Rufina Bulatova (1)		—			—	%

Common	All directors and executive officers as a group (5 persons)		58,562,232			60.5	%
5% Shareholders
Common	Hope Capital, Inc. (4)		8,878,001	(5)		9.3	%
Common	Donald Cohen (3)		13,022,127			14.2	%

Executive Officers and Directors
Series A Convertible Preferred Stock	Louis S. Friedman (1) (6)		4,300,000			100.0	%
Series A Convertible Preferred Stock	Ronald P. Scott (1)		0			0.0	%
Series A Convertible Preferred Stock	Fred Petrenko (1)		0			0.0	%
Series A Convertible Preferred Stock	Leslie Vogelman (1)		0			0.0	%
Series A Convertible Preferred Stock	Rufina Bulatova (1)		0			0.0	%
Series A Convertible Preferred Stock	All directors and executive officers as a group (5 persons)		4,300,000			100.0	%

(1)	This person’s address is c/o Liberator, Inc., 2745 Bankers Industrial Drive, Atlanta, GA 30360.

(2)	Includes options to purchase 438,456 shares of common stock, exercisable at $.228 until October 1, 2012.

(3)	This person’s address is c/o Paul M. Spizzirri, Esq., 1170 Peachtree Street NE, Suite 1200, Atlanta, GA 30309.

(4)	This person’s address is 1 Linden Place, Suite 207, Great Neck, NY 11021. Curt Kramer is the sole shareholder of Hope Capital, Inc. and the natural control person over these securities.

(5)

Includes 1,500,000 shares that are issuable upon conversion of the $375,000 convertible note payable held by Hope Capital, Inc. Such note is convertible only to the extent that Hope Capital’s total ownership does not exceed 9.9% of the total shares issued and outstanding. The reported amount also includes shares issuable upon exercise of a warrant to purchase 1,000,000 shares of common stock to Hope Capital. Such warrant is exercisable at the holder’s option until June 26, 2014 and allows the holder to purchase shares of the Company at $.75 per share. The warrant is only exercisable to the extent that Hope Capital’s total share ownership does not exceed 9.9% of the total shares issued and outstanding. The reported amount also includes 1,000,000 shares that are issuable upon conversion of the $250,000 convertible note payable held by Hope Capital, Inc. Such note is convertible only to the extent that Hope Capital’s total ownership does not exceed 9.9% of the total shares issued and outstanding.

(6)

Consists of 4,300,000 shares of common stock issuable upon conversion of 4,300,000 shares of Series A Convertible Preferred Stock, at the discretion of the holder. Mr. Friedman owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes equal to the result of: (i) the number of shares of Common Stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Stock issued and outstanding at the time of such vote. Accordingly, Mr. Friedman will own 65.6 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Friedman may differ from the interests of the other shareholders.

(7)	Includes options to purchase 35,000 shares of common stock exercisable at $.25 until October 16, 2009.

(8)

Includes 4,300,000 shares of common stock issuable upon conversion of 4,300,000 shares of Series A Convertible Preferred stock at the discretion of the holder. Mr. Friedman owns 100% of the Series A Convertible Preferred Stock, each share of which has the number of votes equal to the result of: (i) the number of shares of Common Stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Convertible Preferred Stock issued and outstanding at the time of such vote. Accordingly, Mr. Friedman will own 65.6 % of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of Mr. Friedman may differ from the interests of the other shareholders.

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

Related Party Transactions

The Company’s CEO, Louis Friedman, and the Company’s Executive Vice President, Fred Petrenko, have personally guaranteed the repayment of the loan obligation to Advance Financial Corporation (see Consolidated Financial Statements – Note K – Line of Credit). In addition, Liberator, Inc., and Web Merchants, Inc. have provided their corporate guarantees of the credit facility. On June 30, 2011, the balance owed under this line of credit was $460,758. On June 30, 2011, we were in substantial compliance with all of the material financial and other covenants required under this credit facility.

The loan from Credit Cash (see Note L – Credit Card Advance) is guaranteed by the Company (including OneUp, Foam Labs, and WMI) and is personally guaranteed by the Company’s CEO and controlling shareholder, Louis S. Friedman, and the Company’s CFO, Ronald P. Scott. Terms of the loan call for a repayment of $448,000, which includes a one-time finance charge of $48,000, by March 19, 2012. As of June 30, 2011, $389,926 was owed under this agreement.

On March 17, 2011, the Company issued an unsecured promissory note to Hope Capital, Inc. for $130,000. Hope Capital is a shareholder of the Company and was the majority shareholder of Old Liberator before the merger with OneUp Innovations. Terms of the note call for bi-weekly principal and interest payments of $5,536 with the note due in full on March 16, 2012. Mr. Friedman and Mr. Petrenko personally guaranteed the repayment of the loan obligation. On October 3, 2011, Hope Capital released Mr. Petrenko from his personal guarantee.

On October 30, 2010, Mr. Friedman, loaned the Company $40,000. Interest on the loan will accrue at the prevailing prime rate (3.25% as of June 30, 2011) until paid and totaled $925 as of June 30, 2011.

On June 24, 2009, the Company issued a 3% convertible note payable to Hope Capital with a face amount of $375,000. The note is convertible, at the holder’s option, into common stock at $.25 per share and may be converted at any time prior to the maturity date of August 15, 2012. Upon maturity, the Company has the option to either repay the note plus accrued interest in cash or issue the equivalent number of shares of common stock at $.25 per share. At June 30, 2011, the 3% convertible note payable is carried net of the fair market value of the embedded conversion feature of $29,750. This amount will be amortized over the life of the note as additional interest.

Director Independence

Our board of directors has determined that none of its current members qualifies as “independent” as the term is used in Item 407 of Regulation S-K as promulgated by the SEC or under Nasdaq’s Marketplace Rule 5605(a)(2).

ITEM 14. Principal Accounting Fees and Services.

The aggregate fees billed by our principal accountant for each of the last two fiscal years for Audit Fees, Audit-Related Fees, Tax Fees and All Other Fees are as follows:

	Fiscal Year Ended June 30,
	2010		2011
Audit Fees(1)	$	23,000	$	37,750
Audit-Related Fees(2)	$	-	$	-
Tax Fees(3)	$	-	$	-
All Other Fees(4)	$	-	$	-

(1)

Audit Fees – This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with the engagement for fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

(2)

Audit-Related Fees – This category consists of assurance and related services by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC.

(3)	Tax Fees – This category consists of professional services rendered by our independent auditors for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

(4)	All Other Fees – This category consists of fees for other miscellaneous items.

Our board of directors reviews and approves audit and permissible non-audit services performed by its independent accountants, as well as the fees charged for such services. In its review of non-audit service fees and its appointment of Gruber & Company LLC as our independent accountants, the Board considered whether the provision of such services is compatible with maintaining independence. All of the services provided and fees charged by Gruber & Company LLC were approved by the Board.

PART IV.

ITEM 15. Exhibits, Financial Statement Schedules.

Financial Statements; Schedules

Our consolidated financial statements for the fiscal years ended June 30, 2011 and 2010 begin on page F-1 of this annual report. We are not required to file any financial statement schedules.

Exhibit Table

Exhibit No.		Description
2.1		Merger and Recapitalization Agreement between WES Consulting, Inc., the majority shareholder of WES Consulting, Inc., Liberator, Inc., and the majority shareholder of Liberator, Inc., dated as of October 19, 2009 (2)
2.2		Stock Purchase and Recapitalization Agreement between OneUp Acquisition, Inc., Remark Enterprises, Inc., OneUp Innovations, Inc., and Louis S. Friedman, dated March 31, 2009 and fully executed on April 3, 2009 (3)
2.3		Amendment No. 1 to Stock Purchase and Recapitalization Agreement, dated June 22, 2009 (3)
2.4		Stock Purchase Agreement by and among WES Consulting, Inc., Web Merchants Inc., Fyodor Petrenko and Dmitrii Spetetchii, dated January 27, 2011 (6)
3.1		Articles of Incorporation for WES Consulting, Inc. (1)
3.2		Bylaws of WES Consulting, Inc. (1)
3.3		Articles of Amendment to the Articles of Incorporation of WES Consulting, Inc. (7)
3.4		Articles of Amendment to the Articles of Incorporation of WES Consulting, Inc., effective February 28, 2011 (8)
4.1		3% Convertible Note Due August 15, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on June 24, 2009 (3)
4.2		3% Convertible Note Due September 2, 2012 issued by Liberator, Inc. to Hope Capital, Inc. on September 2, 2009 (3)
4.3		Designation of Rights and Preferences of Series A Convertible Preferred Stock of WES Consulting, Inc. (7)
10.1		Distribution Agreement between OneUp Innovations, Inc. and InJoy Innovations Pty Ltd., dated May 12, 2008 (3)
10.2		Distribution Agreement between OneUp Innovations, Inc. and Ong S.C. Ian, dated May 21, 2008 (3)
10.3		Distribution Agreement between OneUp Innovations, Inc. and UpOne Trading B.V., dated May 31, 2008 (3)
10.4		Distribution Agreement between OneUp Innovations, Inc. and Freedom Worldwide Limited, dated June 2, 2008 (3)
10.5		Distribution Agreement between OneUp Innovations, Inc. and Dahlab Pascal, dated October 20, 2008 (3)
10.6		Distribution Agreement between OneUp Innovations, Inc. and TRE PI SRL, dated January 12, 2009 (3)
10.7		Lease Agreement between Bedford Realty Company, LLC and OneUp Innovations, Inc., dated September 26, 2005 (3)
10.8		Common Stock Purchase Agreement dated September 2, 2009 by and between Liberator, Inc., Belmont Partners, LLC, and WES Consulting, Inc. (3)
10.9		Written Description of Oral Agreement between OneUp Innovations, Inc. and Leslie Vogelman, dated June 23, 2006 (3)
10.10		Written Description of Oral Agreement between OneUp Innovations, Inc. and Don Cohen, dated July 25, 2008 (3)
10.11		Guaranty by Louis Friedman, dated June 25, 2008 (3)
10.12		Engagement Letter between WES Consulting, Inc. and New Castle Financial Services LLC, dated December 14, 2009 (3)
10.13		Form of WES Subscription Agreement (3)
10.14		Loan and Security Agreement between Entrepreneur Growth Capital LLC and OneUp Innovations, Inc and Foam Labs, Inc., dated November 10, 2009 (3)
10.15		Common Stock Purchase Agreement between Belmont Partners, LLC, Sanford H. Barber, Carol B. Barber, and WES Consulting, Inc., dated July 24, 2009 (4)
10.16		Distributorship Agreement between OneUp Innovations, Inc. and TENGA Co. Ltd., date February 17, 2010 (5)
10.17		Receivables Financing Agreement between One Up Innovations, Inc. and Advance Financial Corporation, dated May 24, 2011 *
10.18		Guarantee between Liberator, Inc. and Advance Financial Corporation, dated May 24, 2011 *
10.19		Guarantee between Web Merchants, Inc. and Advance Financial Corporation, dated May 24, 2011 *

10.20	Guarantee between Foam Labs, Inc. and Advance Financial Corporation, dated May 24, 2011 *
10.21		Guarantee between Louis S. Friedman and Advance Financial Corporation, dated May 24, 2011 *
10.22		Guarantee between Fyodor Petrenko and Advance Financial Corporation, dated May 24, 2011 *
10.23		Credit Card Receivables Advance Agreement between Credit Cash NJ, LLC, OneUp Innovations, Inc. and Foam Labs, Inc., dated November 4, 2010 (9)
10.24		Advance Schedule No. 2 to Credit Card Receivables Advance Agreement between Credit Cash NJ, LLC, OneUp Innovations, Inc. and Foam Labs, Inc., dated May 19, 2011 *
10.25		Guarantee between Web Merchants, Inc. and Credit Cash NJ, LLC dated May 19, 2011 *
10.26		Stock Purchase Agreement by and among Web Merchants Atlanta, LLC, Liberator, Inc., Web Merchants, Inc., Louis S. Friedman and Fyodor Petrenko, dated October 6, 2011 and effective October 1, 2011 *
10.27		Escrow Agreement by and among Web Merchants Atlanta, LLC, Liberator, Inc. and Transfer Online, Inc., dated October 6, 2011. *
10.28		Lease Agreement by and among OneUp Innovations, Inc. and Web Merchants, Inc., dated October 6, 2011 and effective October 1, 2011. *
10.29		Registration Rights Agreement between the Company and Dmitrii Spetetchii, dated January 27, 2011 (6)
10.30		Voting Agreement between the Company, Louis S. Friedman and Fyodor Petrenko, dated January 27, 2011 (6)
10.31		Employment Agreement between the Company and Louis S. Friedman dated January 27, 2011 (6)
10.32		Employment Agreement between the Company and Fyodor Petrenko dated January 27, 2011 (6)
10.33		Advance Schedule No. 01 to Credit Card Receivables Advance Agreement between OneUp Innovations, Inc., Foam Labs, Inc. and CC Funding, a division of Credit Cash NJ, LLC, dated November 4, 2010. (9)
10.34		Corporate Guaranty between WES Consulting, Inc. and Credit Cash NJ, LLC, dated November 3, 2010. (9)
10.35		Guaranty between Louis Friedman and Credit Cash NJ, LLC, dated November 3, 2010. (9)
10.36		Guaranty between Ronald Scott and Credit Cash NJ, LLC, dated November 3, 2010. (9)
10.37		Control Account Agreement between OneUp Innovations, Inc., Credit Cash NJ, LLC, and Signature Bank, dated November 3, 2010. (9)
16.1		Letter from Randall N. Drake, CPA PA (2)
21.1		Subsidiaries *
31.1		Section 302 Certificate of Chief Executive Officer *
31.2		Section 302 Certificate of Chief Financial Officer *
32.1		Section 906 Certificate of Chief Executive Officer *
32.2		Section 906 Certificate of Chief Financial Officer *

___________________

* Filed herewith.

(1)	Filed on March 2, 2007 as an exhibit to our Registration Statement on Form SB-2, and incorporated herein by reference.

(2)	Filed on October 22, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(3)	Filed on March 24, 2010 as an exhibit to Amendment No. 1 to our Current Report on Form 8-K, and incorporated herein by reference.

(4)	Filed on August 5, 2010 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(5)	Filed on February 19, 2010 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(6)	Filed on February 2, 2011 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(7)	Filed on February 23, 2011 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(8)	Filed on March 3, 2011 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(9)	Filed on November 9, 2010 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

SIGNATURES

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

	LIBERATOR, INC.

Date: October 12, 2011	/s/ Louis S. Friedman
	Louis S. Friedman, Chief Executive Officer and President

In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NAME	TITLE	DATE

/s/ Louis S. Friedman	Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)	October 12, 2011
Louis S. Friedman

/s/ Ronald P. Scott	Chief Financial Officer (Principal Financial and Accounting Officer), Secretary, and Director	October 12, 2011
Ronald P. Scott

	President, Web Merchants Inc. and Executive Vice President, Liberator, Inc., and Director
Fred Petrenko

EXHIBIT 10.17

RECEIVABLES FINANCING AGREEMENT

ENTERED INTO BETWEEN

ADVANCE FINANCIAL CORPORATION

and

ONE UP INNOVATIONS, INC.

Date: May 24, 2011

Advance Financial Corporation

3700 Mansell Road, Suite 550

Alpharetta, Georgia 30022

Gentlemen:

We are pleased to confirm the following agreement by which you are to finance receivables arising from sales made by us.

1. To induce you to accept this agreement and to make loans and advances to us from time to time pursuant to these terms, we hereby assign and transfer to you all of our interest in, full title to, and the proceeds of: all accounts, instruments, contract rights, chattel paper, documents, and general intangibles (hereafter called "receivables") now existing and those hereafter created. Such assignment and transfer is made for the purpose of securing, and as collateral for, any and all loans and advances made to us under this agreement, together with all other Obligations of ours to you. As additional security for all our Obligations to you, we hereby grant to you a security interest in and lien upon all of our inventory and other Collateral (as said term is defined on Exhibit B attached hereto and made a part hereof) all of our books and records relating to receivables, all our title and/or interest in the goods represented by receivables and in all such goods that may be returned by or replevied or reclaimed from customers. You hereby have the right to stop goods in transit or to replevy or to reclaim such goods. All returned, replevied and reclaimed goods (unless released by you) coming into our possession shall be held by us in trust for you. We shall notify you promptly of all such returned, replevied or reclaimed goods. The receivables, the books and records relating thereto, the goods represented by receivables and all such goods that may be returned by or replevied or reclaimed from customers along with the Collateral as said term is defined in Exhibit B attached hereto and made a part hereof are hereinafter collectively referred to as the "collateral".

2. We will provide you with listings of receivables created in form satisfactory to you, together with copies of customer invoices and conclusive evidence of shipment and such other documents and proof of delivery/rendition as you may at any time require. You may lend against these receivables, provided, however, that there shall be no obligation on your part to make loans and advances against any of our receivables. Whether or not you choose to make any loans and advances to us based upon our receivables, we represent and warrant that each receivable meets and will continue to meet the following requirements:

(i) it is genuine and in all respects what it purports to be;

(ii) it is owned by us and we have the right to subject it to a security interest in favor of you or assign it to you;

(iii) it arises from (A) the performance of services by us and such services have been fully performed and acknowledged and accepted by the account debtor thereunder; or (B) the sale or lease of goods by us, and such goods have been completed in accordance with the account debtor's specifications (if any) and delivered to and accepted by the account debtor, such account debtor has not refused to accept and has not returned or offered to return any of the goods, or has not refused to accept any of the services, which are the subject of such account, and we have possession of, or have delivered to you at your request, shipping and delivery receipts evidencing delivery of such goods;

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(iv) it is evidenced by an invoice rendered to the account debtor thereunder, is due and payable within thirty (30) days after the date of the invoice and does not remain unpaid past the due date thereof; provided, however, that notwithstanding your having made prior loans and advances against the receivables of an account debtor, if more than fifty (50%) percent of the aggregate dollar amount of invoices owing by a particular account debtor remain unpaid more than 90 days past the invoice date after the respective due dates thereof, then all accounts owing by that account debtor shall not be deemed acceptable for loans or advances;

(v) it is not subject to any prior assignment, claim, lien, security interest or encumbrance whatsoever, other than the security interest granted to you hereunder;

(vi) it is a valid, legally enforceable and unconditional obligation of the account debtor thereunder, and is not subject to setoff, counterclaim, credit, allowance, deduction or adjustment by such account debtor, or to any claim by such account debtor denying liability thereunder in whole or in part;

(vii) it does not arise out of a contract or order which fails in any material respect to comply with the requirements of applicable law;

(viii) the account debtor thereunder is not a director, officer, employee or agent of ours or a Subsidiary, Parent or Affiliate;

(ix) it is not an account with respect to which the account debtor is the United States of America or any department, agency or instrumentality thereof, unless we assign our right to payment of such account to you pursuant to, and in full compliance with, the Assignment of Claims Act of 1940, as amended;

(x) it is not an account with respect to which the account debtor is located in a state which requires us as a precondition to commencing or maintaining an action in the courts of that state, either to (A) receive a certificate of authority to do business and be in good standing in such state, or (B) file a notice of business activities report or similar report with such state's taxing authority, unless (x) we have taken one of the actions described in clauses (A) or (B), (y) the failure to take one of the actions described in either clause (A) or (B) may be cured retroactively by Borrower at its election, or (z) we have proven, to your satisfaction, that it is exempt from any such requirements under any such state's laws;

(xi) it is an account which arises out of a sale made in the ordinary course of our business;

(xii) the account debtor is a resident or citizen of, and is located within, the United States of America;

(xiii) it is not an account with respect to which the account debtor's obligation to pay is conditional upon the account debtor's approval of the goods or services or is otherwise subject to any repurchase obligation or return right, as with sales made on a bill-and-hold, guaranteed sale, sale on approval, sale or return or consignment basis;

(xiv) it is not an (A) account with respect to which any representation or warranty contained in this agreement is untrue or (B) which violates any of our covenants contained in this agreement;

(xv) it is not an account which, when added to a particular account debtor's other indebtedness to us, exceeds a credit limit determined by you in your sole discretion for that account debtor; and

(xvi) it is not an account with respect to which the prospect of payment or performance by the account debtor is or will be impaired, as determined by you in your sole discretion.

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The term "Affiliate" as used herein shall mean any Person directly or indirectly controlling, controlled by or under common control with Borrower.

The term “Business Day” as used herein shall mean any day which is not a Saturday, Sunday, or other day on which banks in the State of Georgia are authorized or required to close.

The term "Parent" as used herein shall mean any Person now or at any time or times hereafter owning or controlling (alone or with any other Person) at least a majority of our issued and outstanding stock or any Subsidiary of ours.

The term "Person" as used herein shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party or foreign or United States government (whether federal, state, county, city, municipal or otherwise), including, without limitation, any instrumentality, division, agency, body or department thereof.

The term "Subsidiary" as used herein shall mean any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time stock of any other class of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned by Borrower or by any partnership or joint venture of which more than fifty percent (50%) of the outstanding equity interests are at the time, directly or indirectly, owned by Borrower.

3. Notwithstanding any of the foregoing, and without limiting your discretion, there shall be no obligation on your part to make loans and advances to us and from time to time at our request you may at your discretion lend to us up to 85% of the face value of each invoice (said percentage is hereinafter referred to as the "advance rate") acceptable to you, but the total of such loans and advances shall not exceed $750,000 at any one time outstanding. The amounts of such loans shall be determined by you with consideration for the value of the collateral, taking into account all fluctuations of the value thereof in light of your experience and sound business principles. Such determinations by you shall be subject to the requirements of good faith on your part, our undertakings hereunder, and especially our assignment and transfer of all our receivables as security for the loans and our other Obligations to you, which will, of necessity, fluctuate in amount, and to the condition that you be at all times fully secured. At your option you may prepare and mail all customers' invoices. Billing on invoices by whomever done shall be conclusive evidence of assignment and transfer hereunder to you of the receivables represented thereby, whether or not we execute any other instrument with regard to any specific receivable.

All loans and advances shall, in your sole discretion, be evidenced by one or more promissory notes in form and substance satisfactory to you. However, if such loans and advances are not so evidenced, such loans and advances may be evidenced solely by entries upon the books and records maintained by you.

Any and all accrued interest, charges or fees which are not paid when due, shall become Obligations, shall be treated as such and shall be taken into consideration in your determination of the amount of the loans and advances which you may make to us; provided, however, that all such accrued and unpaid interest, charges and fees shall not be treated as an Obligation until the first day of the month immediately proceeding the month in which they accrued. You shall calculate the principal balance each day prior to our receiving credit for any collections received by you on that day. If at any time and for any reason, the aggregate amount of the outstanding advances made pursuant to Paragraph 2 exceeds the dollar or percentage limitations contained in Paragraph 2 (an “Overadvance”), then we shall, upon demand by you, immediately pay to you in cash, the amount of such excess. Any and all advances hereunder shall be added to and deemed part of the Obligations when made.

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4. We shall pay you interest monthly, on the first (1st) day of each month, at the AFC Index Rate (as defined herein) plus two and one half percent (2.50 %) per annum, on the average daily principal balance of all loans made hereunder. As used herein, the term "AFC Index Rate" shall mean the highest of the following: (i) the Federal Funds Rate plus One Hundred and Fifty Basis Points (1.50%), as in effect from time to time, (ii) the LIBOR Rate plus Three Hundred and Sixty basis points (3.60%); provided, however, that in no event shall the AFC Index Rate be less than four and three quarters percent (4.75%). We understand that the AFC Index Rate is not necessarily the lowest interest rate available on loans made by you, which loans may be priced at, above or below the AFC Index Rate. The AFC Index Rate as of the date hereof is four and seventy five one hundredths percent (4.75%) per annum; accordingly, the interest rate hereunder expressed in simple interest terms as of the date hereof is seven and one quarter percent (7.25 % ) per annum. If at any time or from time to time the AFC Index Rate increases or decreases, then the AFC Index Rate then in effect shall be correspondingly increased or decreased effective no later than the first day of the month immediately following the day on which there is any such increase or decrease in the AFC Index Rate. Interest hereunder shall be computed on a 360-day year simple interest basis. In addition, we shall pay you monthly, on the first (1st) day of each month, (a) as compensation for underwriting, administrative services, costs, and other services performed or incurred by you in connection with this agreement, a service fee equal to the Monthly Service Fee (expressed as a percentage) as figured in accordance with the Service Fee Schedule attached hereto and made a part of hereof as if fully set forth herein, marked Schedule “A” (the “Monthly Service Fees”) (Monthly Service Fees shall be calculated on the basis of a 360-day year) and (b) as compensation for delays in collection and clearance of checks and other remittances, an amount equal to two (2) Business Days on interest and service fees computed at the rate set forth above in effect on the last day of the previous month on the total amount of all remittances delivered to you in payment of our Obligations during the previous month. In the event of an Overadvance that remains unpaid to you (irrespective of any demand for the repayment thereof which may be made by you), we shall pay to you, in addition to the Monthly Service Fee, a surcharge of 25% of the Monthly Service Fee for each day that an Overadvance exists. You will render a statement of account monthly, and such statement shall be deemed binding upon us unless you are notified in writing to the contrary within thirty (30) days after the date of each statement rendered.

For purposes of this paragraph:

The term “LIBOR Rate” shall mean, for the then current calendar month relating thereto, the rate per annum equal to the quotient of (a) Base LIBOR Rate, divided by (b) if then applicable (and the following is not applicable on the Closing Date) a number equal to 1.00 minus the aggregate of the rate(s) (expressed as a decimal) of reserve requirements current on the date that is two (2) Business Days prior to the beginning of the calendar month (including without limitation basic, supplemental, marginal and emergency reserves) under any regulation promulgated by the Board of Governors of the Federal Reserve System (or any other governmental authority having jurisdiction over the Bank) as in effect from time to time, dealing with reserve requirements prescribed for Eurocurrency funding including any reserve requirements with respect to “eurocurrency liabilities” under Regulation D of the Board of Governors of the Federal Reserve System.

The term “Base Libor Rate” shall mean, for any calendar month, the rate per annum, determined by AFC in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/16%), to be the rate at which Dollar deposits (for delivery on the first day of such calendar month) in the amount of $1,000,000 are offered to major banks in the London interbank market on or about 11:00 a.m. (New York time) two (2) Business Days prior to the commencement of such calendar month, for a term comparable to such calendar month, which determination shall be conclusive in the absence of manifest error.

The term “Federal Funds Rate” shall mean, for any period, a fluctuating interest rate per annum equal to, for each day during such period, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by you from three Federal Funds brokers of recognized standing selected by you.

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5. We shall direct all of our account debtors, as well as any other obligor, to make all payments on the accounts as directed by, exclusively and directly to a post office box or any other address designated by you (the "Lock Box"), and under your exclusive control. Any and all payments received by us shall be held in trust for the benefit of you and shall be immediately remitted, by us in the identical form in which such payments were made, whether by cash or check to such account as you may direct, however, nothing herein shall be interpreted or construed as consent or authorization by you to our receipt of payments made by account debtors or obligors on the accounts. If we, any Affiliate or Subsidiary, or any shareholder, officer, director, employee or agent of ours or any Affiliate or Subsidiary, or any other Person acting for or in concert with us shall receive any monies, checks, notes, drafts or other payments relating to or as proceeds of accounts, we and each such Person shall receive all such items in trust for, and as your sole and exclusive property and, immediately upon receipt thereof, shall remit the same (or cause the same to be remitted) in kind to you. These remittances shall be listed and certified on a form satisfactory to you. In the event any payments or remittances, received by us are not delivered to you in kind, per the terms and conditions set forth in this Agreement, we shall pay to you a fee of fifteen percent of the face amount of any such payment or remittance. You will apply (conditioned upon final collection) each payment deposited, which payment has been made by any account debtor on a receivable represented by any invoice on which you have based any loan made to us hereunder, to such loan and any other Obligations which are due and payable, on the first day after receipt by you. You may, at any time and from time to time, whether before or after the maturity of any of the Obligations, (i) enforce collection of any of our accounts or contract rights by suit or otherwise; (ii) exercise all of our rights and remedies with respect to proceedings brought to collect any accounts; (iii) surrender, release or exchange all or any part of any accounts, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (iv) sell or assign any account of ours upon such terms, for such amount and at such time or times as you deem advisable; (v) prepare, file and sign our name on any proof of claim in bankruptcy or other similar document against any account debtor; and (vi) do all other acts and things which are necessary, in your sole discretion, to fulfill our Obligations under this agreement and to allow you to collect the accounts. In addition to any other provision hereof, you may at any time, whether before or after the occurrence of a default, at our expense, notify any parties obligated on any of the accounts to make payment directly to you of any amounts due or to become due thereunder.

6. We hereby appoint and constitute you as our attorney-in- fact: to receive, open, and dispose of all mail addressed to us and to notify the postal authorities to change the address and delivery of mail addressed to us to such address as you may designate (provided that you shall return to us all mail not pertaining to receivables); to endorse our name upon any notes, acceptances, checks, drafts, money orders and other evidences of payment of receivables that may come into your possession and to deposit or otherwise collect the same; to sign our name on any bill of lading relating to any receivable, on drafts against customers; to verify accounts with communications to customers; to execute in our name any affidavits and notices with regard to any and all lien rights; and to do all other acts and things necessary to carry out this agreement. All acts of said attorney-in-fact are hereby ratified and approved, and said attorney-in-fact shall not be liable for any errors of commission or omission, nor for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable while we are indebted to you.

7. We make the following warranties, representations and covenants with and to you, understanding that you have relied upon each of them and will continue to rely upon each of them in making loans and advances to us:

(a) the financial statements delivered or to be delivered by us to you at or prior to the date of this agreement and at all times subsequent thereto accurately reflect our financial condition, and there has been no adverse change in the financial condition, the operations or any other of our status since the date of the financial statements delivered to you most recently prior to the date of this agreement;

(b) the office where we keep our books, records and accounts (or copies thereof) concerning the collateral, our principal place of business and all of our other places of business, locations of collateral and post office boxes are as set forth in Exhibit A of this agreement; we shall promptly (but in no event less than ten (10) days prior thereto) advise you in writing of the proposed opening of any new place of business, the closing of any existing place of business, any change in the location of our books, records and accounts (or copies thereof) or the opening or closing of any post office box by us;

(c) the collateral is and shall be kept, or based, only at the addresses set forth on Exhibit A of this agreement, and at other locations within the continental United States of which you have been advised by us in writing;

(d) if any of the collateral consists of goods of a type normally used in more than one state, whether or not actually so used, we shall immediately give written notice to you of any use of any such goods in any state other than a state in which we have previously advised you such goods shall be used, and such goods shall not, unless you shall otherwise consent in writing, be used outside of the continental United States;

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(e) no security agreement, financing statement or analogous instrument exists or shall exist with respect to any of the collateral other than any security agreement, financing statement or analogous instrument evidencing security interests in your favor;

(f) we are and shall at all times during the Original Term or any Renewal Term be the lawful owner of all collateral now purportedly owned or hereafter purportedly acquired by us, free from all liens, claims, security interests and encumbrances whatsoever, whether voluntarily or involuntarily created and whether or not perfected;

(g) we have the right and power and are duly authorized and empowered to enter into, execute and deliver this agreement and perform our obligations hereunder and thereunder; our execution, delivery and performance of this agreement does not and shall not conflict with the provisions of any statute, regulation, ordinance or rule of law, or any agreement, contract or other document which may now or hereafter be binding on us, and our execution, delivery and performance of this agreement shall not result in the imposition of any lien or other encumbrance upon any of our property under any existing indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument by which we or any of our property may be bound or affected;

(h) there are no actions or proceedings which are pending or threatened against us which might result in any material adverse change in our financial condition or materially adversely affect the collateral and we shall, promptly upon becoming aware of any such pending or threatened action or proceeding, give written notice thereof to you;

(i) we have obtained all licenses, authorizations, approvals and permits, the lack of which would have a material adverse effect on the operation of our business, and we are and shall remain in compliance in all material respects with all applicable federal, state, local and foreign statutes, orders, regulations, rules and ordinances (including, without limitation, statutes, orders, regulations, rules and ordinances relating to taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health and safety or environmental matters), the failure to comply with which would have a material adverse effect on our business, property, assets, operations or condition, financial or otherwise;

(j) all written information now, heretofore or hereafter furnished by us to you is and shall be true and correct as of the date with respect to which such information was or is furnished;

(k) we are not conducting, permitting or suffering to be conducted, nor shall we conduct, permit or suffer to be conducted, any activities pursuant to or in connection with which any of the collateral is now, or will (while any Obligations remain outstanding) be owned by any Affiliate; provided, however, that we may enter into transactions with Affiliates in the ordinary course of business pursuant to terms that are no less favorable to us than the terms upon which such transfers or transactions would have been made had they been made to or with a Person that is not an Affiliate and, in connection therewith, may transfer cash or property to Affiliates for fair value;

(l) our name has always been as set forth on Exhibit A of this agreement and we use no tradenames or division names in the operation of our business, except as otherwise disclosed in writing to you; we shall notify you in writing within ten (10) days of the change of our name or the use of any tradenames or division names not previously disclosed to you in writing;

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(m) this agreement to which we are a party are our the legal, valid and binding obligations and are enforceable against us in accordance with their respective terms;

(n) we are solvent, are able to pay our debts as they become due and have capital sufficient to carry on our business, now own property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay our debts, and will not be rendered insolvent by the execution and delivery of this agreement or by completion of the transactions contemplated hereunder;

(o) other than the loans disclosed to you on the Loan Schedule, we are not now obligated, nor shall we create, incur, assume or become obligated (directly or indirectly), for any loans or other indebtedness for borrowed money other than the loans made hereunder and pursuant hereto, except that we may (i) borrow money from a Person other than you on an unsecured and subordinated basis if a subordination agreement in favor of you and in form and substance satisfactory to you is executed and delivered to you relative thereto; (ii) maintain any present indebtedness to any Person which has been disclosed to you in writing and consented to in writing by you; and (iii) incur unsecured indebtedness to trade creditors in the ordinary course of our business;

(p) except as otherwise disclosed in writing to you, we have no Parents, Subsidiaries or divisions, nor are we engaged in any joint venture or partnership with any other Person;

(q) we are duly organized and in good standing in our state of our organization and we are duly qualified and in good standing in all states where the nature and extent of the business transacted by us or the ownership of our assets makes such qualification necessary;

(r) we are not in default under any material contract, lease or commitment to which it is a party or by which it is bound, nor do we know of any dispute regarding any contract, lease or commitment which is material to our continued financial success and well-being;

(s) there are no controversies pending or threatened between us and any of our employees, other than employee grievances arising in the ordinary course of business which are not, in the aggregate, material to our continued financial success and well-being and we are in compliance in all material respects with all federal and state laws respecting employment and employment terms, conditions and practices; and

(t) we possess, and shall continue to possess, adequate licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, tradestyles and tradenames to continue to conduct our business as heretofore conducted by us.

(u) we will notify you promptly of and shall settle all customer disputes, but, if you so elect, you are to have the right at all times to settle, compromise, adjust or litigate all customer disputes directly with the customer or other complainant upon such terms and conditions as you deem advisable, without incurring liability to us for your performance of any such acts.

(v) our Federal Employment Identification Number is 20-2635129 .

8. We represent, warrant and covenant to you that all of our representations, warranties and covenants contained in this Agreement (whenever appearing herein) shall be true at the time of our execution of this agreement, shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto, shall remain true until the repayment in full of all of the Obligations and termination of this agreement, and shall be remade by us at the time each loan or advance is made pursuant to this agreement.

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9. Until payment or satisfaction in full of all Obligations and termination of this agreement, unless we obtain your prior written consent waiving or modifying any of our covenants hereunder in any specific instance, we agree as follows:

(a) we shall at all times keep accurate and complete books, records and accounts with respect to all of our business activities, in accordance with sound accounting practices and generally accepted accounting principles consistently applied from period to period, and shall keep such books, records and accounts, and any copies thereof, only at the addresses indicated for such purpose on Exhibit A of this agreement;

(b) we shall promptly advise you in writing of any material adverse change in our business, assets or condition, financial or otherwise, the occurrence of any default hereunder or the occurrence of any event which, if uncured, will become an default hereunder after notice or lapse of time (or both);

(i) keep the collateral properly housed and shall keep the collateral insured for the full insurable value thereof against loss or damage by fire, theft, explosion, sprinklers, and such other risks as are customarily insured against by Persons engaged in businesses similar to ours with such companies, in such amounts and under policies in such form as shall be satisfactory to you. Original (or certified) copies of such policies of insurance have been or shall be delivered to you within fifteen (15) days after the date hereof, together with evidence of payment of all premiums therefor, and shall contain an endorsement, in form and substance acceptable to you, showing loss under such insurance policies payable to you. Such endorsement, or an independent instrument furnished to you, shall provide that the insurance company shall give you at least thirty (30) days written notice before any such policy of insurance is altered or canceled and that no act of ours, whether willful or negligent, or default or any other Person shall affect you right to recover under such policy of insurance in case of loss or damage. We hereby direct all insurers under such policies of insurance to pay all proceeds payable thereunder directly to you. We irrevocably, make, constitute and appoint you (and all officers, employees or agents designated by you) as our true and lawful attorney (and agent-in-fact) for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing our name on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and making all determinations and decisions with respect to such policies of insurance; and

(ii) maintain, at our expense, such public liability and third party property damage insurance as is customary for Persons engaged in businesses similar to ours with such companies and in such amounts, with such deductibles and under policies in such form as shall be satisfactory to you and original (or certified) copies of such policies have been or shall be delivered to you within fifteen (15) days after the date hereof, together with evidence of payment of all premiums therefor; each such policy shall contain an endorsement showing you as additional insured thereunder and providing that the insurance company shall give you at least thirty (30) days written notice before any such policy shall be altered or canceled. If we at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then you, without waiving or releasing any obligation or default by us hereunder, may (but shall be under no obligation to) obtain and maintain such policies of insurance and pay such premiums and take such other actions with respect thereto as you deem advisable. All sums disbursed by you in connection with any such actions, including, without limitation, court costs, expenses, other charges relating thereto and reasonable attorneys' fees, shall constitute loans hereunder and shall be payable on demand by us to you and, until paid, shall bear interest at the highest rate then applicable to loans hereunder;

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(d) all monies and other property obtained by us from you pursuant to this agreement will be used solely for business purposes;

(e) we shall, at your request, indicate on our records concerning the Collateral a notation, in form satisfactory to you, of your security interest hereunder, and we shall not maintain duplicates or copies of such records at any address other than our principal place of business set forth on Exhibit “A” of this agreement;

(f) we shall file all required tax returns and pay all of our taxes when due, including, without limitation, taxes imposed by federal, state or municipal agencies, and shall cause any liens for taxes to be promptly released; provided, that we shall have the right to contest the payment of such taxes in good faith by appropriate proceedings so long as (i) the amount so contested is shown on our financial statements, (ii) the contesting of any such payment does not give rise to a lien for taxes, (iii) we keep on deposit with you (such deposit to be held without interest) an amount of money which, in your sole judgment, is sufficient to pay such taxes and any interest or penalties that may accrue thereon, and (iv) if we fail to prosecute such contest with reasonable diligence, you may apply the money so deposited in payment of such taxes. If we fail to pay any such taxes and in the absence of any such contest by us, you may (but shall be under no obligation to) advance and pay any sums required to pay any such taxes and/or to secure the release of any lien therefore, and any sums so advanced by you shall constitute loans hereunder, shall be payable by us to you on demand, and, until paid, shall bear interest at the highest rate then applicable to loans hereunder;

(g) we shall not assume, guarantee or endorse, or otherwise become liable in connection with, the obligations of any Person, except by endorsement of instruments for deposit or collection or similar transactions in the ordinary course of business;

(h) we shall not enter into any merger or consolidation, or sell, lease or otherwise dispose of all or substantially all of our assets, or enter into any transaction outside the ordinary course of our business, including, without limitation, any purchase, redemption or retirement of any shares of any class of our stock, and any issuance of any shares of, or warrants or other rights to receive or purchase any shares of, any class of our stock;

(i) we shall not amend our organizational documents or change our fiscal year;

(j) we shall reimburse you for all costs and expenses, including, without limitation, legal expenses and reasonable attorneys' fees, incurred by you in connection with documentation and consummation of this transaction and any other transactions between us and you, including, without limitation, Uniform Commercial Code and other public record searches, lien filings, Federal Express or similar express or messenger delivery, appraisal costs, surveys, title insurance and environmental audit or review costs, and in seeking to collect, protect or enforce any rights in or to the collateral or incurred by you in seeking to collect any obligations and to administer and enforce any of your rights under this agreement. All such costs, expenses and charges shall constitute loans hereunder, shall be payable by us to you on demand, and, until paid, shall bear interest at the highest rate then applicable to loans hereunder.

10. You or your representatives at all reasonable times shall have the right to examine all of our books and records pertaining to receivables and goods affected by this agreement or any other future agreement between us. We have agreed to pay any field audit fees deemed necessary by AFC; but said fees shall not exceed $3,000 per year, plus expenses. We will submit to you an aging of receivables and accounts payable as of the end of each month, in form and manner satisfactory to you, by the 10th of the following month, and we agree to have prepared and to furnish to you quarterly within 30 days after the close of each quarter's financial statements, which shall include a balance sheet, a statement of profit and loss and a statement of cash flow and shall be prepared in a uniform manner consistent with prior years, in such form, substance and detail as you may reasonably require. We also agree to have prepared and to furnish to you within sixty days after the close of our fiscal year, similar annual financial statements in such form, substance and detail as you may reasonably require. You may, at any time during which this agreement or any provision contained herein is in force, contact any account debtor of ours in order to ascertain any details regarding that account debtor or any account which may be owed to us by that account debtor. You are authorized to contact and discuss our affairs, finances and business with any officer, employee or director of ours or with any Affiliate or the officers, employees or directors of any Affiliate, and to discuss our financial condition with our independent public accountants.

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11. You shall be entitled to hold or set off all sums and all other property of ours, at any time to our credit or in your possession by pledge or otherwise or upon or in which you may have a lien or security interest, as security for any and all obligations of ours owing to you. “Obligations” as said term is used in this Agreement shall mean all obligations hereunder, and under all notes, contracts of suretyship, guaranty or accommodation made by us in your favor, and all our other obligations to you, however created, arising or evidenced, whether direct or indirect, whether through assignment from third persons, whether absolute or contingent, or otherwise, now or hereafter existing, or due or to become due. You shall have the right and are hereby irrevocably authorized and directed to apply all payments received from the collateral account to the amounts of any and all Obligations. Recourse to security shall not at any time be required. We shall at all times remain liable for the repayment to you on demand of all Obligations. In any case we shall remain liable to you for any deficiencies arising upon the liquidation of any security held by you. If any receivable is not paid when due or if any customer raises any claim of non-conformity of goods, total or partial failure of delivery, set-off, counterclaim, or breach of warranty, or any other claim inconsistent with our warranties of receivables, or there is otherwise non-compliance with our warranties and representations regarding our receivables as made above, we will, upon demand, pay you for application to the Obligations the gross amount of the receivable so affected or unpaid, together with any damages or loss sustained by you, but such payment shall not be deemed a reassignment thereof, and title thereto and to the goods represented thereby shall remain in you until and unless you execute a reassignment. Before or after default hereunder you shall be entitled to notify any or all account debtors or other obligors on the receivables to pay you directly, and we agree that while assigned to you, you may take such action with regard to the custody and collection of receivables as you may deem necessary. We agree that failure to take any action with regard to any given receivable shall not be unreasonable until and unless you receive a request for specific action from us with regard thereto. You may also apply all payments received from the collateral account to, or at your option we will pay you on demand, all costs and expenses, including fifteen percent (15%) of the total amount involved as attorneys' fees, incurred upon the liquidation of any collateral, to obtain or enforce payment of any Obligations, in the settlement, adjustment, compromise or litigation of customer disputes or in the prosecution or defense of any action or proceeding either against you or against us concerning any matter growing out of or connected with this Agreement and/or any receivables and/or any Obligations. In the event of any breach by us of any provision herein, we will repay upon demand all of our Obligations to you. If at any time you pay any state, city, local, federal or other tax or levy arising from sales hereunder, we will repay to you the amount of tax so paid by you.

12. This Agreement shall be in effect from the date hereof until May 24, 2012 , (the "Original Term") and shall automatically renew itself from year to year thereafter (each such one-year renewal being referred to herein as a "Renewal Term") unless (a) you make demand for repayment prior to the end of the Original Term or the then current Renewal Term; (b) the due date of the Obligations is accelerated; or (c) we elect to terminate this Agreement at the end of the Original Term or at the end of any Renewal Term by giving you written notice of such election at least ninety (90) days prior to the end of the Original Term or the then current Renewal Term and by paying all of the Obligations in full on the last day of such term. If one or more of the events specified in clauses (a), (b) and (c) occurs, this Agreement shall terminate on the date thereafter that the Obligations are paid in full, provided, however, that the security interests and liens created under this Agreement shall survive such termination until the payment of the Obligations have become indefeasible. At such time as we have repaid all of the Obligations and this Agreement has terminated, we shall deliver to you a release, in form and substance satisfactory to you, of all Obligations and liabilities of you and your officers, directors, employees, agents, parents, subsidiaries and affiliates to us, and if we obtain new financing from another lender, we shall deliver such lender's indemnification of you, in form and substance satisfactory to you, for checks which you have credited to our account, but which subsequently are dishonored for any reason. Notice of termination shall be given either personally or by registered or certified mail to the addresses shown herein, or to any other address designated in writing by either of us to the other. Notwithstanding the foregoing, should either party breach this Agreement or become insolvent or unable to pay our debts as they mature, or should we make an assignment for the benefit of creditors, or should a petition under any chapter of the Federal Bankruptcy Code, as amended, be filed by or against us, or should any guarantor of the Obligations hereunder terminate or revoke or attempt to terminate or revoke such guaranty, or should you deem yourselves insecure, or should we fail to pay promptly any amount due hereunder, or should we be in default under any of the terms or conditions of this Agreement, of any other agreement or agreements now or hereafter effective between us, then, and in any of the aforesaid events, the party aggrieved shall have the right to terminate this Agreement at any time without notice. Upon termination, all of our Obligations to you shall become immediately due and payable. Notwithstanding such termination, all the terms, conditions and provisions hereof shall continue to be fully operative until all transactions entered into, rights created or obligations incurred hereunder prior to termination and all our Obligations have been fully disposed of, concluded, paid, satisfied and liquidated. No delay or failure on your part in exercising any right, privilege or option hereunder shall operate as a waiver of such or of any other right, privilege or option, and no waiver shall be valid unless in writing signed by you and then only to the extent therein stated.

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13. This Agreement is submitted by us to you for your acceptance or rejection at your principal place of business as an offer by us to borrow monies from you now and from time to time hereafter and shall not be binding upon you or become effective until accepted by you, in writing, at said place of business. If accepted by you, this Agreement shall be deemed to have been made in the State of Georgia. We hereby waive demand, presentment, protest and notice of nonpayment, and further waive the benefit of all valuation, appraisal and exemption laws. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or remaining provisions of this Agreement. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. If this Agreement is accepted by you, it shall be effective on the date set forth above, and shall continue in full force and effect until one year from such effective date, and from year to year thereafter, unless terminated, on any such anniversary date, or otherwise by reason of default, by either of us giving to the other not less than sixty (60) days prior written notice. You may terminate this Agreement at any time without notice to us should we breach any of our Obligations hereunder or under any other agreement or document evidencing financial arrangements between us, or should you deem yourself insecure. If any Obligation of ours to you is collected by or through an attorney, we agree to pay all costs and expenses of collection, including fifteen (15%) percent of the total amount involved as attorneys' fees. No termination of this Agreement shall terminate or adversely affect your rights hereunder or under any other agreement or document evidencing financial arrangements between us.

14. Disputes regarding the nonpayment of any amount due under this Agreement to you or any of your affiliates which arise from, result from or relate to a counterclaim, offset, recoupment, claim or defense of us which is founded upon, arises out of or is related to, any theory of lender liability or other similar theory, and all disputes and claims relating to any provision hereof or relating to or arising out of the parties relationship or creation or termination hereof (including, without limitation, any claim that any provision of this Agreement is illegal, unenforceable or voidable under any law, ordinance or ruling) shall be settled by arbitration at the Office of the American Arbitration Association in Atlanta, Georgia, in accordance with the United States Arbitration Act (9 U.S.C. Section 1 et seq. ) and the Rules of the American Arbitration Association . Suits to compel arbitration or to determine arbitrability shall be brought in the United States District Court for the Northern District of Georgia. All awards of the arbitration shall be binding and non-appealable except as otherwise provided in the United States Arbitration Act. Judgment upon the award of the arbitrator may be entered in any court having jurisdiction thereof. PROVIDED, HOWEVER, that nothing contained in this Paragraph shall be interpreted or construed so as to make claims by you to enforce your rights in the Collateral or for the payment of sums due to you or to others by you (whether prior or subsequent to an event of default), subject to arbitration, even though counterclaims, offsets, recoupments, and other defenses and claims by us are subject to arbitration.

15. THE VALIDITY OF THIS AGREEMENT, AND ALL OTHER AGREEMENTS BETWEEN THE PARTIES, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF COBB, STATE OF GEORGIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF COBB, STATE OF GEORGIA, OR, AT YOUR SOLE OPTION, IN ANY OTHER COURT IN WHICH YOU SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF THE PARTIES HERETO WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, THE RIGHT TO A TRIAL BY JURY AND ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS AGREEMENT. We represent and warrant that no representative or agent of yours has represented, expressly or otherwise, that you will not, in the event of litigation, seek to enforce this right to jury waiver. Undersigned acknowledges that you have been induced and enter into this Agreement by, among other things, the provisions of this paragraph.

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16. WE HEREBY WAIVE ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY YOU OF YOUR RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.

Your failure, at any time or times hereafter, to require strict performance by us of any provision of this Agreement shall not waive, affect or diminish any of your rights thereafter to demand strict compliance and performance therewith. Any suspension or waiver by you a default under this Agreement shall not suspend, waive or affect any other default under this Agreement, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. No delay on your part in the exercise of any right or remedy under this Agreement shall preclude other or further exercise thereof or the exercise of any right or remedy. None of our undertakings, agreements, warranties, covenants and representations contained in this Agreement and no default under this Agreement shall be deemed to have been suspended or waived by you unless such suspension or waiver is in writing, signed by your duly authorized officer and directed to us specifying such suspension or waiver.

		ONE UP INNOVATIONS, INC.

BY:	/s/ Ronald P. Scott	BY:	/s/ Louis S. Friedman
	Ronald P. Scott		Louis S. Friedman
Its:	Secretary	Its:	President

ACCEPTANCE

The foregoing Receivables Financing Agreement is accepted in Atlanta, Georgia, this 25th day of May , 2011.

	ADVANCE FINANCIAL CORPORATION

	BY:	/s/ A. James Perry
		A. James Perry
	Its:	President

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EXHIBIT A

SCHEDULE OF COLLATERAL LOCATION

Street	City	State	Zip

2745 Bankers Industrial Drive	Atlanta	Georgia	30360

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Exhibit B

SECURITY AGREEMENT

(ACCOUNTS RECEIVABLE, INVENTORY AND EQUIPMENT)

STATE OF:

GEORGIA

COUNTY OF:

DEKALB

DATE:

May 24, 2011

FOR VALUE RECEIVED One Up Innovations, Inc. , a Georgia corporation (hereinafter called the "Borrower") hereby conveys to Advance Financial Corp., a Georgia corporation (hereinafter called the "Secured Party") and hereby grants to the Secured Party security title to and a security interest in and lien upon the goods held by the Borrower for sale or lease or furnished or to be furnished by the Borrower under any contract of service or held by the Borrower as raw materials or work in process and made a part hereof to be used or consumed in Borrower's business (such goods being referred to herein as ("Inventory") all equipment, tools, furniture and fixtures (“Equipment”) and all rights of the Borrower now owned or hereafter acquired in payment for Inventory sold or leased or for services rendered ("Accounts")' and to all rights of the Borrower pursuant to a writing or writings which evidences both a monetary obligation and a security interest in or lease of Inventory ("Chattel Paper") and all rights of the Borrower to payment under a contract for the sale or lease of Inventory or the rendering of services which right is at the time not yet earned by performance ("Contract Rights") (said Inventory, Accounts, Chattel Paper and Contract Rights being referred to herein collectively as "Collateral", and said Equipment, Accounts, Contract Rights and Chattel Paper being referred to herein collectively as "Non-Inventory Collateral") and all proceeds thereof whether cash, negotiable instruments or otherwise to secure the payment of the principal of, interest on and satisfaction of all Obligations of Borrower under that certain Accounts Receivable Financing Agreement (hereafter referred to as the "Agreement") dated on or about the date hereof, between the Borrower and the Secured Party, satisfaction of all obligations of the Borrower hereunder, and satisfaction of all other obligations of the Borrower to the Secured Party, its successors and assigns, however created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, due or to become due. The obligations under the Agreement and all other obligations secured hereby are herein collectively called the "Obligations."

Until Default (as defined herein) the Borrower: (a) may in the ordinary course of its business, at its own expense, sell, lease or furnish under contract of service any of the Inventory normally held by the Borrower for such purpose and use and consume in the ordinary course of its business any raw material, work in process, or materials normally held by Borrower for such purpose, (b) will at its own expense endeavor to collect as, and when due, all amounts due with respect to any of the Accounts, Chattel Paper, Contract Rights or proceeds therefore, or any of the proceeds of the Inventory, including the taking of such action with respect to such collection as the Secured Party may reasonably request, or in the absence of such request, as the Borrower may deem advisable, and (c) may grant in the ordinary course of business to any party obligated on any of the Non-Inventory Collateral any rebate, refund or adjustment to which such party may be lawfully entitled, and may accept in connection therewith, the return of such goods, the sale or lease of which shall have given rise to such Non-Inventory Collateral.

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The Borrower hereby warrants and agrees that: (a) to the extent, if any, it shall have advised the Secured Party that any of the Collateral is being acquired with the proceeds of any loan from Secured Party to the Borrower, such proceeds may be disbursed by the Secured Party directly to the seller of such Collateral; (b) the principal place of business of the Borrower is located at 2745 Bankers Industrial Drive, Atlanta, Georgia 30360 and the Borrower will notify Secured Party in advance of any change in such principal place of business; (c) the Collateral and all records relating to the Collateral as appropriate will be kept at the Borrower's principal place of business set forth above, unless the Secured Party shall otherwise consent in writing; (d) the Borrower will continuously operate its business as now conducted and according to the customary and usual business practices (including business hours) as similar types of business; (e) the Secured Party or any person designated by it shall have the right to call at the Borrower's various places of business at any time and without notice to inspect, audit, check and make extracts from the Borrower's books, records, journals, orders, receipts and other correspondence and other data relating to the Borrower's business and any other transaction between the Borrower and Secured Party without hindrance or delay, and Secured Party shall have the right to make direct verification from any persons obligated on any of the Non-Inventory Collateral with respect to any or all of the Non-Inventory Collateral assigned to the Secured Party hereunder; (f) the Borrower has full power and authority to enter into this agreement, and the execution of this agreement shall not constitute a default under or be in violation of any contract, agreement, debenture, note or similar document or any public law, rule, regulation or ordinance by which the Borrower is bound; (g) the Borrower will, upon request of Secured Party, indicate by notation, signs or otherwise upon any of the Collateral or records relating thereto, a notation in form and content satisfactory to the Secured Party of the security interest of the Secured Party hereunder; (h) the Borrower will furnish to the Secured Party such information concerning the Borrower, the Collateral and any persons obligated on Non-Inventory Collateral as the Secured Party may from time to time reasonably request; (i) the Borrower has, or forthwith will acquire, full title to the Collateral, and will at all times keep the Collateral free of all liens and claims whatsoever, other than the security interest hereunder; (j) no financing statement covering any of the Collateral is on file in any public office other than financing statement in favor of Secured Party and it will from time to time, on request of the Secured Party, execute such financing statements and other documents (and pay the cost of filing or recording the same in all offices deemed necessary or desirable by the Secured Party) and do such other acts and things, all as the Secured Party may request to establish and maintain a valid security title and interest in the Collateral (free of all other liens and claims whatsoever) to secure the payment of the Obligations, including, without limitation, deposit with the Secured Party any negotiable instruments covered by this agreement as proceeds or otherwise, any documents constituting chattel paper or any contracts, the proceeds of which are included in Collateral; (k) except for the sale or lease of any of the Inventory in the ordinary course of its business, the Borrower will not sell, transfer, lease, abandon or otherwise dispose of any of the Collateral or any interest therein except with the prior written consent of the Secured Party; (l) the Borrower will at all times keep the Collateral in first class order and repair, excepting any loss, damage or destruction which is fully covered by proceeds of insurance; (m) the Borrower will at all times keep the Collateral insured against loss, damage, theft and other risks, in such amounts and companies and under such policies and in such form, all as shall be satisfactory to the Secured Party, which policies shall, among other things, provide for 30 days' notice of cancellation or non-renewal to Secured Party and that loss thereunder shall be payable to the Secured Party as its interest may appear (and the Secured Party may apply any proceeds of such insurance which may be received by it toward payment of the Obligations, whether or not due, in such order of application as the Secured Party may determine) and such policies or certificates thereof shall, if the Secured Party so requests, be deposited with the Secured Party; and (n) none of the Inventory will be delivered to a warehouseman or other bailee.

The Secured Party may from time to time, at its option, perform any agreement of the Borrower hereunder which the Borrower shall fail to perform and take any other action which the Secured Party deems necessary for the maintenance or preservation of any of the Collateral or its interest therein, and the Borrower agrees to forthwith reimburse the Secured Party for all expenses of the Secured Party in connection with the foregoing, together with interest thereon at the rate of 12% per annum.

The occurrence of any of the following events shall constitute a Default (as such term is used herein): (a) non-payment, when due, of any amount payable on any of the Obligations or failure to perform any agreement of the Undersigned contained herein; (b) if any statement, representation or warranty of the Borrower herein or in any other writing at any time furnished by the Borrower to the Secured Party is untrue in any material respect as of the date made; (c) if the Borrower becomes insolvent or unable to pay debts as they mature or makes an assignment for the benefit of creditors or an order for relief is entered against the Borrower following the filing of any petition by or against it pursuant to the Bankruptcy Code, as amended or voluntarily takes the benefit of any debtor's relief proceeding (including the appointment of a receiver or trustee) under Federal or state law; (d) if an involuntary petition pursuant to the Bankruptcy Code is filed against the Borrower and is not dismissed for thirty (30) days or if a receiver is appointed for any of the property of the Borrower and is not dismissed for a period of thirty (30) days after such appointment or if a judgment is entered against the Borrower pursuant to which a sale of any part of the assets of the Borrower is scheduled for enforcement of said judgment or if a sale of any of the assets of the Borrower is scheduled pursuant to any other form of legal proceeding (including without limitation enforcement pursuant to the Georgia Uniform Commercial Code or exercise of a power of attorney contained in any deed to secure debt, trust deed or mortgage) instituted against the Borrower. Provided, that no such judgment, sale or enforcement shall be deemed a default pursuant to this sub-section (d) in the event the Borrower furnishes a surety company bond from a company acceptable to Secured Party in lieu of discharge, judgment, lien or foreclosure at the earlier of (i) five (5) days prior to the date upon which such enforcement or sale is scheduled, or (ii) ten (10) days after such judgment, enforcement, lien, sale or foreclosure is first entered, scheduled or instituted; (e) the dissolution, merger or consolidation, or transfer of a substantial part of the property of the Borrower; (f) the sale, transfer or exchange, either directly or indirectly, of a controlling stock interest of the Borrower; or (g) if Secured Party reasonably deems itself insecure for any other reason whatsoever.

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Whenever a Default shall exist, all Obligations may (notwithstanding any provisions thereof), at the option of Secured Party, and without demand or notice of any kind, be declared, and thereupon immediately shall become in default and due and payable; and the Secured Party may exercise from time to time any rights and remedies available to it under applicable law. The Borrower agrees, in case of Default, to assemble, at its expense, all the Collateral at a convenient place acceptable to the Secured Party and to pay all costs of the Secured Party of collection of all of the Obligations, and enforcement of rights hereunder (including 15% of amounts due as attorneys' fees) and legal expenses and expenses of any repairs to any realty or other property to which any of the Collateral may be affixed or be a part.

In the event of Default, the Borrower will (except as the Secured Party may otherwise consent in writing) forthwith upon receipt, transmit and deliver to the Secured Party in the form received all cash, checks, draft items, chattel paper and other instruments for the payment of money (properly endorsed where required) so that such items may be collected by the Secured Party which may be received by the Borrower at any time in full or partial payment or otherwise as proceeds of any of the Collateral. Except as the Secured Party may otherwise consent in writing, upon default such proceeds which may be received by the Borrower will not be commingled with any other of its funds or property but will be held separate and apart from its own funds or property and upon express trust for the Secured Party until delivery is made to the Secured Party. The Borrower will comply with the terms and conditions of any consent given by the Secured Party pursuant to the provisions of this paragraph.

In the event of default as defined herein or in the Agreement, the Borrower agrees that the actual amount of damages by Secured Party shall be difficult and impossible to determine, and that the remedies of Secured Party to recover such damages may be inadequate; therefore, Secured Party is authorized to enforce its rights hereunder by injunctive or other equitable relief without regard to the existence of actual damages. The Borrower hereby constitutes and appoints, upon Default, any officer of the Secured Party its true and lawful agent and attorney in fact for the purpose of filing any and all notices of lien and waivers thereof, actions, lawsuits and other appropriate documents to enforce the rights of Secured Party in and to any of the Non-Inventory Collateral.

If any notification of intended disposition of any of the Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if mailed at least five (5) days before such disposition, postage prepaid, addressed to the Borrower either at the address shown above, or at any other address of the Borrower which the Secured Party reasonably believes to be the Borrower's then current address. Any and all other notices given to the Borrower shall be deemed when personally delivered or when mailed registered or certified mail and addressed to the Borrower as provided in the preceding sentence.

Any proceeds of any disposition of any of the Collateral may be applied by the Secured Party to the payment of expenses in connection with the Collateral, (including 15% of amounts due as attorneys' fees) and legal expenses, and any balance of such proceeds may be applied by the Secured Party toward the payment of such of the Obligations, and in such order of application, as the Secured Party may from time to time elect.

The Secured Party may exercise any right or remedy provided herein in its discretion without exercising any other right or remedy provided herein. The Secured Party shall be under no duty to exercise any or all of the rights and remedies given by this agreement. No forbearance or indulgence shall operate as a waiver of any right or remedy of Secured Party or obligation of the Borrower and no single or partial exercise by the Secured Party of any rights or remedy shall preclude, as other or further exercise thereof or the exercise of any other right or remedy and unless Secured Party shall otherwise agree in writing, Secured Party shall be entitled to invoke any remedy available to Secured Party under any agreement or by law or in equity and enforce any covenant or condition against the Borrower despite said forbearance or indulgence.

The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if the Secured Party takes such action for that purpose as the Borrower shall request in writing, but failure of the Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care and no failure of the Secured Party to preserve or protect any rights with respect to the Collateral against prior parties or do any act with respect to the preservation of the Collateral not so requested by the Borrower shall be deemed a failure to exercise reasonable care in the custody or preservation of the Collateral.

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The delivery of any checks, drafts or other orders for the payment of money to Secured Party shall not constitute payment thereof until such checks, drafts or other items are finally paid.

Time is of the essence of this agreement.

If this agreement is not dated when executed by the Borrower, the Secured Party is authorized, without notice to the Borrower, to date this agreement.

This agreement has been delivered in the State of Georgia and shall be construed in accordance with the laws of the State. Wherever possible, each provision of this agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this agreement.

The rights and privileges of the Secured Party hereunder shall inure to the benefit of its heirs, legal representatives, successors and assigns.

IN WITNESS WHEREOF, this agreement has been duly executed under seal as of the 24th day of May, 2011.

(CORPORATE SEAL)

	ONE UP INNOVATIONS, INC.

	By:	/s/ Louis S. Friedman
		Louis S. Friedman
	Title:	President


	Attest:	/s/ Ronald P. Scott
		Ronald P. Scott
	Title:	Secretary

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EXHIBIT 10.18

CORPORATE

GUARANTY

Date: May 24, 2011

Advance Financial Corporation

4151 Ashford Dunwoody Road

Suite 275

Atlanta, Georgia 30319

Gentlemen:

We agree, and do hereby grant to you, as security for the full payment and performance of all of our Obligations under this Guaranty and under such other agreements or documents as may evidence financial arrangements between us, whether such obligations are direct or indirect, primary or secondary, absolute or contingent, due or become due, whenever and however arising, a continuing general lien on, and security interest in all Receivables, Instruments, Contingency Accounts ( as set forth herein), chattel paper , general intangibles and contract rights now or hereafter owned or acquired , now existing or hereafter arising, along with all proceeds thereof.

Further , we agree, from time to time, upon your request, to execute and file in filing offices, such financing statements, notices, amendments thereto, continuation statements and other documents in forms satisfactory to you to establish and maintain a valid security interest in all of the foregoing property.

The undersigned waives notice of creation of any of the Obligations, notice of non-payment or default by Obligor under any of the Obligations or any agreement now or hereafter existing between Obligor and you, presentment, demand, notice of dishonor, protest, and any other notices whatsoever, and agrees that no modification of any of the Obligations, and that no waiver, extension, renewal, indulgence, settlement, compromise, or failure to exercise due diligence in collection, for any period or periods whether or not longer than the original period or any surrender, substitution or release of Obligor or any other person directly or indirectly liable for any of the Obligations or any collateral or security given by Obligor to the undersigned, or any other person, shall release the undersigned from any of the indebtedness then accrued or thereafter to accrue to this agreement or any part hereof. The undersigned waives the right to require you to take action against Obligor as provided for in O.C.G.A. 10-7-24. The undersigned further consents to and waives notice of any arrangements or settlements in or out of court or in connection with any receivership, liquidation, readjustment, assignment for the benefit of creditors, or any proceeding under the Federal Bankruptcy Code, as amended. The undersigned further agrees that if any notification of intended disposition of collateral or of any other act by you is required by law and a specific time period is not stated therein, such notification, if mailed by first class mail at least five(5) days before such disposition or act, postage prepaid, addressed to the undersigned at the address shown below or any other address of the undersigned appearing on your records, shall be deemed reasonable and properly given. The undersigned further agrees to pay to you, as attorney fees, 15% of the sum of any indebtedness which shall become due to you by reason of this agreement.

Liberator, Inc.

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The liability hereunder may be considered by you either as a guaranty or agreement of surety. Any claim or demand may be made, or suit filed, against the undersigned before taking any action with regard to any collateral or security given to you by Obligor, the undersigned, or any other person and before making any demand or filing any suit, or taking any other action against Obligor, against any assignor of any of the Obligations, and whether or not you shall have proceeded against any other guarantor/surety thereof. Payment of any sum or sums due to you hereunder will be made by you, and the undersigned further agrees to indemnify you and hold you harmless from and against any losses you may sustain and expenses you may incur as a result of any breach or default by Obligor under any agreement with you. The liability of the undersigned shall be equal to the Obligations of Obligor from time to time as herein described. This guaranty is absolute, irrevocable, unconditional and continuing, regardless of the validity, regularity, or enforceability of any of the Obligations covered by this guaranty or the fact that a security interest or lien or any collateral or security therefore may not be enforceable by you or may otherwise be subject to equities or defenses or prior claims in favor of others or may be invalid or defective in any way and for any reason, including any action, or failure to act, on your part. This guaranty shall remain in force and effect, whether or not Obligor changes its status, ownership, composition, personnel, name or location.

This agreement shall bind the undersigned, its legal representatives, executors, administrators, successors and assigns and shall inure to the benefit of you, your successors and assigns as to all Obligations arising from transactions having their inception prior to termination; provided, however, that termination may be effected only by written notice by the undersigned to you by certified mail of the intention of the undersigned to terminate this agreement and provided further that such termination shall apply only as to Obligations arising subsequent to the receipt of such notice of termination. Nothing herein contained shall obligate you to grant credit to, or continue your financing arrangements with Obligor. This agreement shall bind and inure to the benefit of the respective heirs, legal representatives, successors and assigns of the undersigned, and to your successors and assigns.

The undersigned waives any provision of any homestead law and of any similar or other legislation as now or hereafter enacted or amended, which among other things, may extend the time for payment of, or impair any of the liability of the undersigned hereunder and waives notice of: the creation of any of the Obligations, notice of nonpayment or default by Obligor under any of the Obligations or under any agreement now or hereafter existing between Obligor and you; notice of presentment, demand, dishonor and protest; notice of acceptance of this guaranty or the creation or extension or renewal of any Obligation of the Obligor to which this agreement relates; and any other notices whatsoever; and agrees that no modification of any of the Obligations (including the release of any of the undersigned), or any collateral security given by Obligor shall affect, impair or release the undersigned from any of the indebtedness then accrued or thereafter to accrue under this agreement or any part hereof. The undersigned agrees that no delay or failure on your part in the exercise of any right or remedy shall preclude other or further exercises thereof or the exercise of any other right or remedy. Time is of the essence in this agreement.

Undersigned hereby subordinates any and all indebtedness of Obligor now or hereafter owed to any undersigned to all indebtedness of Obligor to you, and agrees with you that undersigned shall not demand or accept any payment of principal or interest from Obligor, shall not claim any offset or other reduction of undersigned's obligations hereunder because of any such indebtedness and shall not take any action to obtain any of the security described in and encumbered by the agreements and documents evidencing financing arrangements between us; provided, however, that, if you so request, such indebtedness shall be collected, enforced and received by undersigned as trustee for you and be paid over to you on account of the indebtedness of Obligor to you, but without reducing or affecting in any manner the liability of undersigned under the other provisions of this agreement.

This agreement is irrevocable and shall continue in full force and effect until the undersigned's Obligations are fully paid, performed and discharged and the undersigned receives written notice from you of that fact. The Obligations shall not be considered fully paid, performed and discharged unless and until all payments by Obligor to you are no longer subject to any right on the part of any person whomsoever, including but not limited to Obligor, Obligor as a Debtor in Possession and /or any Trustee in bankruptcy to set aside such payments, or to seek to recoup the amount of such payments or any part thereof. The foregoing shall include, by way of example and not by way of limitation, all rights to recover preferences voidable under Title 11 of the United States Code. In the event that any such payment by Obligor to you is set aside after the making thereof, in whole or in part or settled without litigation to the extent of such settlement, all of which is in the discretion of you, undersigned shall be liable for the full amount you are required to pay plus cost, interest, attorney's fees and any and all expenses which made or incurred in connection therewith.

The undersigned hereby expressly waives, renounces, and agrees not to assert, any right, claim or cause of action, including, without limitation, a claim for reimbursement, subrogation, indemnification or otherwise, against the Obligor arising out of or by reason of this instrument for the Obligations of the undersigned, including without limitation, the payment or securing or purchasing of any of the Obligations by the undersigned. The waiver, renunciation and agreement contained in the preceding sentence is for the benefit of you and also for the benefit of the Obligor, who may assert the benefits thereof as a third party beneficiary, and the undersigned may be released from such waiver, renunciation and agreement only by the execution and delivery, by the Obligor and use, of an instrument expressly releasing the undersigned therefrom.

Liberator, Inc.

______

(initial)

Page 2

This agreement is assignable by you, and any assignment of agreements or documents evidencing financial arrangements between the undersigned and you, or any transfer or assignment of any portions thereof, by you shall operate to vest in any such assignee all rights and powers herein conferred upon and granted to you.

If for any circumstances whatsoever fulfillment of any provisions of this agreement, at the time such provision shall be due, shall involve transcending the limit of validity presently prescribed by any applicable usury statute or any other applicable law, with regard to obligations of like character and amount, then ipso facto the obligations to be fulfilled shall be reduced to the limit of such validity, so that in no event shall any exaction be possible under this agreement that is in excess of the current limit of such validity, but such obligation shall be fulfilled to the limit of such validity. The provisions of this paragraph shall control every other provision of this agreement.

This agreement is made subject to all the terms, conditions, agreements, or stipulations contained in the agreements, deeds, notes, instruments and other documents evidencing the Obligations hereby guaranteed, which are hereby expressly incorporated herein, and the undersigned agrees that the terms, conditions and provisions of any agreements, deeds, notes, instruments or other documents which may be executed by the Obligor to evidence obligations in the future shall simultaneously with their execution, become a part of this agreement.

This agreement is executed under seal and shall be governed by, and construed and enforced in accordance with the laws of the State of Georgia. Wherever possible, each provision of this agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this agreement.

This agreement embodies the whole agreement of the undersigned and may not be modified except in writing, and no course of dealing between you and any of the undersigned shall be effective to change or modify this agreement. Your failure to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right and at any other time and from time to time thereafter, and such rights shall be considered as cumulative rather than alternative. No knowledge of any breach or other nonobservance by any of the undersigned of the terms and provisions of this agreement shall constitute a waiver thereof, nor a waiver of any obligations to be performed by the undersigned hereunder.

THE VALIDITY OF THIS AGREEMENT, AND ALL OTHER AGREEMENTS BETWEEN THE PARTIES, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE UNDERSIGNED AND YOU SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE UNDERSIGNED HEREBY SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF GEORGIA FOR THE ENFORCEMENT OF THIS GUARANTY. THE UNDERSIGNED AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT MAY BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF COBB, STATE OF GEORGIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF COBB, STATE OF GEORGIA, OR, AT YOUR SOLE OPTION OF, IN ANY OTHER COURT IN WHICH YOU SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF THE UNDERSIGNED WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, THE RIGHT TO A TRIAL BY JURY AND ANY RIGHT UNDERSIGNED MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS PARAGRAPH. Undersigned represents and warrants that no representative or agent of yours has represented, expressly or otherwise, that you will not, in the event of litigation, seek to enforce this right to jury waiver. Undersigned acknowledges that you have been induced and enter into this Agreement by, among other things, the provisions of this paragraph.

Where the Obligation of Obligor hereby guaranteed is an obligation of a corporation, this agreement is to cover all Obligations to you purporting to be made on behalf of Obligor by an officer or agent of Obligor without regard to the actual authority of such officer or agent. The term "corporation" or "obligor" shall include associations of all kinds and all purported corporations whether or not correctly and legally chartered and organized. Where the undersigned is a natural person, this agreement binds his heirs, administrators and executors, and where a corporation, its successors and assigns.

Liberator, Inc.

______

(initial)

Page 3

IN WITNESS WHEREOF, the undersigned has signed and sealed this agreement, this 24 th day of May , 20 11 .

		LIBERATOR, INC.
Witness:
		By:	/s/ Louis S. Friedman
/s/ Ronald P. Scott			Louis S. Friedman
Ronald P. Scott
		Its:	President
Title:	Secretary

		Address:	2745 Bankers Industrial Drive
			Atlanta, Georgia 30060

Liberator, Inc.

______

(initial)

Page 4

EXHIBIT 10.19

CORPORATE

GUARANTY

Date: May 24, 2011

Advance Financial Corporation

4151 Ashford Dunwoody Road

Suite 275

Atlanta, Georgia 30319

Gentlemen:

Web Merchants, Inc.

______

(initials)

Page 1

Web Merchants, Inc.

______

(initials)

Page 2

Web Merchants, Inc.

______

(initials)

Page 3

IN WITNESS WHEREOF, the undersigned has signed and sealed this agreement, this 24th day of May , 20 11 .

		WEB MERCHANTS, INC.

Witness:
		By:	/s/ Fyodor Petrenko
/s/ Ronald P. Scott			Fyodor Petrenko
Ronald P. Scott		Its:	President
Title:	Secretary

	Address:	2745 Bankers Industrial Drive
		Atlanta, Georgia 30360

Web Merchants, Inc.

______

(initials)

Page 4

EXHIBIT 10.20

CORPORATE

GUARANTY

Date: May 24, 2011

Advance Financial Corporation

4151 Ashford Dunwoody Road

Suite 275

Atlanta, Georgia 30319

Gentlemen:

Foan Labs, Inc.

______

(initials)

Page 1

Foan Labs, Inc.

______

(initials)

Page 2

Foan Labs, Inc.

______

(initials)

Page 3

IN WITNESS WHEREOF, the undersigned has signed and sealed this agreement, this 24 th day of May , 20 11 .

	FOAM LABS, INC.

Witness:
	By:	/s/ Louis S. Friedman
/s/Ronald P. Scot		Louis S. Friedman

Ronald P. Scott
		Its:	President
Title:	Secretary

	Address:	2745 Bankers Industrial Drive
		Atlanta, Georgia m 30360

Foan Labs, Inc.

______

(initials)

Page 4

EXHIBIT 10.21

GUARANTY

Date May 24, 2011

Advance Financial Corporation

4151 Ashford Dunwoody Road

Suite 275

Atlanta, Georgia 30319

Gentlemen:

For value received, and in order to induce you now or hereafter to enter into with One Up Innovations, Inc. , with offices located at 2745 Bankers Industrial Drive, Atlanta, Georgia 30360 , (hereafter together with its successors and assigns called "Obligor") any agreement with regard to the assignment from Obligor of any accounts receivable or to purchase or take by assignment any accounts receivable or other evidences of indebtedness owing by Obligor, or to make loans, advances or otherwise extend credit to Obligor, any or all of the foregoing being to the direct interest and advantage of the undersigned, the undersigned, jointly and severally if more than one, hereby absolutely, irrevocably and unconditionally guarantees to you the continuing performance and the full and prompt payment at maturity, whether by acceleration or otherwise, of any and all indebtedness and/or obligations of Obligor owing to you pursuant to the various agreements evidencing financial arrangements between Obligor and you (all of the various agreements between you and Obligor are hereinafter collectively referred as the “Agreement”) arising out of any such agreement or document, accounts receivable or other evidence of indebtedness owing by Obligor, extension of credit, loans, and all other obligations of Obligor to you, however and whenever incurred or evidenced by your records, the accuracy of which records is hereby expressly stipulated to be conclusive upon the undersigned or undersigneds if more than one (and if more than one hereinafter collectively referred to as "undersigned"); provided, however, that immediately upon the insolvency or dissolution of Obligor or the undersigned, appointment of a receiver for the assets of Obligor or the undersigned, filing by or against Obligor or the undersigned of any proceeding under the Federal Bankruptcy Code, as amended, assignment for the benefit of creditors by Obligor or the undersigned, breach or default by Obligor as to any term of any Agreement, or attachment or levy against or filing of a tax lien against any of the assets of Obligor or the undersigned, all obligations of Obligor to you shall be deemed to be immediately due and payable for purposes of this agreement regardless of whether matured or unmatured at such time. The term “indebtedness” and “obligations” (hereinafter referred to collectively as the “Obligations”) are used herein in their most comprehensive sense and include any and all advances, debts, obligations and liabilities of Obligor, heretofore, now or hereafter made, incurred or created, whether voluntarily or involuntarily and however arising whether or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether recovery upon such indebtedness hereafter becomes barred by any stature of limitations, discharged in bankruptcy or such indebtedness may be or hereafter becomes otherwise unenforceable, and includes Obligor’s prompt , full and faithful performance, observance and discharge of each and every term, condition, agreement, representation, warranty, undertaking and provision to be performed by Obligor arising or resulting from loans, advances and extensions of credit made by you to Obligor relating and pursuant to the Agreement.

The undersigned waives notice of creation of any of the Obligations, notice of non-payment or default by Obligor under any of the Obligations or any Agreement now or hereafter existing, presentment, demand, notice of dishonor, protest, and any other notices whatsoever, and agrees that no modification of any of the Obligations, and that no waiver, extension, renewal, restatement, extension, replacement, supplement, indulgence, settlement, compromise, or failure to exercise due diligence in collection, for any period or periods whether or not longer than the original period or any surrender, substitution or release of Obligor or any other person directly or indirectly liable for any of the Obligations or any collateral or security given by Obligor to the undersigned, or any other person, shall release the undersigned from any of the indebtedness then accrued or thereafter to accrue to this agreement or any part hereof. The undersigned waives the right to require you to take action against Obligor as provided for in O.C.G.A. 10-7-23 and 10-7-2. The undersigned further consents to and waives notice of any arrangements or settlements in or out of court or in connection with any receivership, liquidation, readjustment, assignment for the benefit of creditors, or any proceeding under the Federal Bankruptcy Code, as amended. The undersigned further agrees that if any notification of intended disposition of collateral or of any other act by you is required by law and a specific time period is not stated therein, such notification, if mailed by first class mail at least five (5) days before such disposition or act, postage prepaid, addressed to the undersigned at the address shown below or any other address of the undersigned appearing on your records, shall be deemed reasonable and properly given. The undersigned further agrees to pay to you, as attorney fees, 15% of the sum of any indebtedness which shall become due to you by reason of this agreement.

Louis S. Friedman

______

(Initials)

Page 1

The undersigned waives any provision of any homestead law and of any similar or other legislation as now or hereafter enacted or amended, which among other things, may extend the time for payment of, or impair any of the liability of the undersigned hereunder and waives notice of: the creation of any of the Obligations, notice of nonpayment or default by Obligor under any of the Obligations or under any Agreement now or hereafter existing; notice of presentment, demand, dishonor and protest; notice of acceptance of this guaranty or the creation or extension or renewal of any Obligation of the Obligor to which this agreement relates; and any other notices whatsoever; and agrees that no modification of any of the Obligations (including the release of any of the undersigned), or any collateral security given by Obligor shall affect, impair or release the undersigned from any of the indebtedness then accrued or thereafter to accrue under this agreement or any part hereof. The undersigned agrees that no delay or failure on your part in the exercise of any right or remedy shall preclude other or further exercises thereof or the exercise of any other right or remedy. Time is of the essence in this agreement.

This agreement is assignable by you, and any assignment of any Agreement, or any transfer or assignment of any portions thereof, by you shall operate to vest in any such assignee all rights and powers herein conferred upon and granted to you.

Louis S. Friedman

______

(Initials)

Page 2

THE VALIDITY OF THIS AGREEMENT, AND ALL OTHER AGREEMENTS BETWEEN THE PARTIES, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE UNDERSIGNED AND YOU SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE UNDERSIGNED HEREBY SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF GEORGIA FOR THE ENFORCEMENT OF THIS GUARANTY. THE UNDERSIGNED AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT MAY BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF COBB, STATE OF GEORGIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF COBB, STATE OF GEORGIA, OR, AT YOUR SOLE OPTION OF, IN ANY OTHER COURT IN WHICH YOU SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF THE UNDERSIGNED WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT UNDERSIGNED MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS PARAGRAPH. AND EACH OF THE UNDERSIGNED DOES HEREWITH SUBMIT TO THE JURISDICTION OF SAID COURTS. Undersigned acknowledges that you have been induced and enter into this Agreement by, among other things, the provisions of this paragraph.

IN WITNESS WHEREOF, the undersigned has signed and sealed this agreement, this 24 th day of May , 20 11.

	GUARANTOR:

	Louis S. Friedman

WITNESS/ Notary	Signature :	/s/ Louis S. Friedman

	Address:	2745 Bankers Industrial Drive
		Atlanta, Georgia 30360

My commission expires:__________________

[SEAL]

Louis S. Friedman

______

(Initials)

Page 3

EXHIBIT 10.22

GUARANTY

Date May 24, 2011

Advance Financial Corporation

4151 Ashford Dunwoody Road

Suite 275

Atlanta, Georgia 30319

Gentlemen:

Fyodor Petrenko

_______

(initials)

Page 1

The undersigned waives any provision of any homestead law and of any similar or other legislation as now or hereafter enacted or amended, which among other things, may extend the time for payment of, or impair any of the liability of the undersigned hereunder and waives notice of: the creation of any of the Obligations, notice of nonpayment or default by Obligor under any of the Obligations or under any Agreement now or hereafter existing; notice of presentment, demand, dishonor and protest; notice of acceptance of this guaranty or the creation or extension or renewal of any Obligation of the Obligor to which this agreement relates; and any other notices whatsoever; and agrees that no modification of any of the Obligations (including the release of any of the undersigned), or any collateral security given by Obligor shall affect, impair or release the undersigned from any of the indebtedness then accrued or thereafter to accrue under this agreement or any part hereof. The undersigned agrees that no delay or failure on your part in the exercise of any right or remedy shall preclude other or further exercises thereof or the exercise of any other right or remedy. Time is of the essence in this agreement.

Fyodor Petrenko

_______

(initials)

Page 2

THE VALIDITY OF THIS AGREEMENT, AND ALL OTHER AGREEMENTS BETWEEN THE PARTIES, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT AND THE RIGHTS OF THE UNDERSIGNED AND YOU SHALL BE DETERMINED UNDER, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE UNDERSIGNED HEREBY SUBMITS TO PERSONAL JURISDICTION IN THE STATE OF GEORGIA FOR THE ENFORCEMENT OF THIS GUARANTY. THE UNDERSIGNED AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT MAY BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF COBB, STATE OF GEORGIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE COUNTY OF COBB, STATE OF GEORGIA, OR, AT YOUR SOLE OPTION OF, IN ANY OTHER COURT IN WHICH YOU SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF THE UNDERSIGNED WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT UNDERSIGNED MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS PARAGRAPH. AND EACH OF THE UNDERSIGNED DOES HEREWITH SUBMIT TO THE JURISDICTION OF SAID COURTS. Undersigned acknowledges that you have been induced and enter into this Agreement by, among other things, the provisions of this paragraph.

IN WITNESS WHEREOF, the undersigned has signed and sealed this agreement, this 24 th day of May , 20 11.

	GUARANTOR:

	Fyodor Petrenko

WITNESS/ Notary	Signature :	/s/ Fyodor Petrenko
	Address:	2745 Bankers Industrial Drive
		Atlanta, Georgia 30360


My commission expires:__________________

[SEAL]

Fyodor Petrenko

_______

(initials)

Page 3

ADVANCE SCHEDULE

No. 02

ONE UP INNOVATIONS, INC.

FOAM LABS, INC.

Funding Date: May 23, 2011

This Advance Schedule (the “ Schedule ” ) is issued pursuant to and is subject to all terms and conditions of the Credit Card Receivables Advance Agreement, dated on or about November 2, 2010 (as amended from time to time in accordance with its terms, the “ Master Agreement ” ), between CC FUNDING a division of CREDIT CASH NJ, LLC (the “ Lender ” ) and ONE UP INNOVATIONS, INC. and FOAM LABS, INC., (individually and collectively, the " Merchant "). Capitalized terms used and not defined in this Schedule have the meanings given to them in the Master Agreement.

The Merchant has requested that the Lender make an Advance to the Merchant, and the Lender is willing to make such Advance, in each case subject to the following terms and conditions:

1.	The Advance Amount is:	$400,000.00

2.	The fee is:	$48,000.00

3.	The Collection Amount is:	$448,000.00

4.	The Fixed Daily payment is:	$2,074.08

5.	The Collection Date is March 23, 2012 [insert date that is 10 months from the funding date]

6.	The Collection Account Bank and Collection Account are as follows:

Bank name:	Signature Bank
	111 Broadway
	New York, NY 10006
Routing/ABA Number:	026013576
Account Name to credit:	One Up Innovations
Account Number to credit:	1500949747

The Merchant agrees to repay the Collection Amount (plus all Reimbursable Expenses) by remitting (or causing to be remitted) to the Lender, on or before the Collection Date, the Collection Amount plus all Reimbursable Expenses, by authorizing Lender to retain the Fixed Daily Payment from the Collection Account as provided in the Master Agreement. If the Collection Amount is remitted to the Lender before the Collection Date, the Merchant shall not be entitled to any refund or other compensation. If the Collection Amount is not remitted to the Lender by the Collection Date, Merchant may be subject to extension fees as set forth in the Master Agreement.

Page 1 of 2

The Merchant hereby reaffirms and further grants to the Lender a security interest in the Collection Account and Collateral (including, without limitation, all Credit Card Receivables and/or proceeds thereof at any time deposited therein) to secure the Merchant's obligation to pay the Collection Amount (plus all Reimbursable Expenses) and to secure all other existing and future obligations of the Merchant to the Lender

The Merchant understands and agrees that all Advances by Lender to Merchant under the Master Agreement, this Advance Schedule, and under any other Related Agreements constitute one loan, and all indebtedness and obligations of Merchant to Lender under the Master Agreement, this Advance Schedule and the Related Agreements, present and future, constitute one general obligation secured by the Collateral. Merchant further understands that they shall be jointly and severally liable for payment of all of the obligations owing to Lender under all Advance Schedules, the Master Agreement and the Related Agreements and under any other agreement between Lender and any Merchant.

10.

The Merchant reaffirms all terms, conditions and agreements set forth in the Master Agreement and any Related Agreements and further represents and warrants to the Lender that all representations and warranties made by the Merchant in the Master Agreement and any Related Agreements entered into on or before the date hereof are true and correct on the date hereof as if made on the date hereof.

This Schedule may be executed in counterparts. Each counterpart shall be deemed an original but all of which together shall constitute one and the same instrument. An executed facsimile of this Schedule shall be deemed to be a valid and binding agreement between the parties hereto.

Agreed to:

CC FUNDING, a division of		ONE UP INNOVATIONS, INC.
CREDIT CASH NJ, LLC		for itself and as Disbursing Agent

By:	/s/ Dean Landis	By:	/s/ Louis Friedman
Name: Dean Landis		Name: Louis Friedman
Title:		Title: President & CEO

STATE OF GEORGIA	)
	)ss.:
COUNTY OF FULTOV	)

On this 19 day of May, 2011 before me personally appeared Louis S. Friedman, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she is the President of ONE UP INNOVATIONS, INC. and FOAM LABS, INC., the corporations herein described and that he/she executed the same in his/her capacity as an officer of said corporations, and that he/she signed the instrument by order of the board of directors of said respective corporations.

	/s/ Corey Underhill
	Notary Public

	Corey Underhill
	Notary Public, Fulton County, Georgia
	My Commission Expires Jan. 12, 2014

Page 2 of 2

CORPORATE GUARANTY

(Web Merchants Inc.)

1. CREDIT CASH NJ, LLC ( “ Lender ” ) has entered into a Credit Card Advance Agreement ( “Loan Agreement ” ) dated on or about November 2, 2010 with ONE UP INNOVATIONS, INC. and FOAM LABS, INC. (collectively, the “ Merchant ” ) and in consideration of One ($1.00) Dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby duly acknowledged, the undersigned guarantor (hereinafter, whether one or more, called “ Guarantor ” , who, if two or more in number, shall be jointly and severally bound), jointly and severally unconditionally guaranty to Lender, its successors and assigns, Merchant ’ s full and prompt payment, performance and discharge of each and every obligation of Merchant under said Loan Agreement and under all instruments given or executed by Merchant in connection therewith, and the full and prompt payment of all other obligations of Merchant to Lender, wherever and however arising, direct or indirect, absolute or contingent, all whether presently existing or hereafter arising, including, without limitation, all costs of collection, including attorney’s fees. The liability of the undersigned under this Guaranty shall be direct, immediate, absolute, continuing, unconditional and unlimited and not conditional or contingent upon the pursuit by the Lender of whatever remedies it may have against the Merchant or the Merchant’s successors, executors, administrators or assigns, or the collateral or liens it may possess, and this Guaranty shall be a continuing guaranty of the payment of any and all obligations to Lender either made, endorsed or contracted by the Merchant, or any successor of the Merchant and of all extensions or renewals thereof in whole or in part.

2. As collateral security for the obligations or liability of undersigned Guarantor under this Guaranty, as well as for any other obligation or liability of the undersigned Guarantor to Lender, whether present or future, absolute or contingent, due or not due, the undersigned Guarantor hereby grants to Lender, the following:

a continuing general lien and security interest in and to substantially all of Guarantor’s assets, whether now existing or hereafter acquired or created, and wherever located, including but not limited to, (a) all accounts receivable, including, without limitation, all credit card receivables; (b) all rights to receive payments from Guarantor’s credit card processor and all other rights arising out of or otherwise relating to the processor agreement between Guarantor and its processor; (c) chattel paper; (d) commercial tort claims; (e) documents; (f) equipment, machinery, furniture, furnishings and fixtures and all parts, tools, accessories and accessions; (g) fixtures; (h) general intangibles, including but not limited to patents, trademarks and tradenames and the goodwill and inherent value associated therewith, tax refunds, customer lists, insurance claims and goodwill of Guarantor; (i) goods; (j) instruments; (k) inventory, merchandise, materials, whether raw, work in progress or finished goods, packaging and shipping materials and all other tangible property held for sale or lease; (1) investment property; (m) payment intangibles; (n) proceeds, including proceeds of any insurance policies covering any of the collateral; (o) promissory notes; (p) records, including all books, records and other property at any time evidencing or relating to any of the foregoing, and all electronic means of storing such records; (q) to the extent not otherwise included above, all collateral support and supporting obligations relating to any of the foregoing; and (r) to the extent not otherwise included above, all proceeds, products, accessions, rents and profits of or in respect of any of the foregoing. Guarantor hereby authorizes Lender to file such financing statements in Guarantor’s name signed by Lender, or a reproduction of this Guaranty to reflect the security interest granted hereunder.

Page 1 of 3

3. Notice of acceptance hereof, of default by Merchant or any other parties, of presentment, protest and demand, and of all other matters to which the undersigned might otherwise be entitled, is hereby waived by the undersigned. Lender may grant extensions, modifications and renewals to, and make compromises, amendments, settlements, compositions, releases, discharges and adjustments with, Merchant and other parties, and with respect to any collateral securing Merchant’s obligations to Lender or collateral securing this Guaranty without notice to any of the undersigned and without affecting the undersigned’s liability hereunder. The undersigned’s obligations hereunder shall be binding upon their respective administrators, executors, personal representatives, successors and assigns.

4. The undersigned guarantor agrees that, whenever an attorney is used to obtain payment under or otherwise enforce this guaranty or to enforce, declare or adjudicate any rights or obligations under this guaranty or with respect to collateral, whether by legal proceeding or by any other means whatsoever, Lender’s reasonable attorney’s fee plus costs and expenses shall be payable by each Guarantor against whom this guaranty or any obligation or right hereunder is sought to be enforced, declared or adjudicated. Guarantor, if more than one, shall be jointly and severally bound and liable hereunder and if any of the undersigned is a partnership, also the members thereof individually.

5. This Guaranty shall be governed by and construed and interpreted in accordance with the laws of the State of New Jersey and all actions and proceedings arising out of or in connection herewith shall be litigated in the federal or state courts of such State. The undersigned hereby submit to the personal jurisdiction of such courts.

EACH OF THE UNDERSIGNED WAIVES THE RIGHT TO TRIAL BY JURY IN ALL ACTIONS BROUGHT BY OR AGAINST LENDER.

IN WITNESS WHEREOF , the undersigned Guarantor has hereunto set his hand this 19 th day of May____,2011.

	WEB MERCHANTS INC.

	By:	/s/ Fyodor Petrenko
	Name:	Fyodor Petrenko
	Title:	President

STATE OF GEORGIA	)
	)ss.:
COUNTY OF FULTON	)

On this 19 day of May, 2011 before me personally appeared Fyodor Petrenko, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she is the President of WEB MERCHANTS, INC., the corporation herein described and that he/she executed the same in his/her capacity as an officer of said corporation, and that he/she signed the instrument by order of the board of directors of said corporation.

	/s/ Corey Underhill
	Notary Public
	Corey Underhill
	Notary Public, Fulton County, Georgia
	My Commission Expires Jan. 12, 2014

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SECRETARY’S CERTIFICATE

(Web Merchants Inc.)

WHEREAS, it is to the best interest of this corporation to make, execute and deliver to Credit Cash NJ, LLC the guarantee by this corporation of the obligations of ONE UP INNOVATIONS, INC. and FOAM LABS, INC. (collectively, the “ Borrower ’ ); and

WHEREAS, the making, execution and delivery of such guarantee has been authorized and approved by the written consent of a majority of the holders of all of the outstanding shares of the capital stock of this corporation:

NOW, THEREFORE, be it

RESOLVED, that the President, Secretary, Treasurer or other officer or any agent of this corporation, or any one or more of them, be and they are hereby authorized and empowered to make, execute and deliver in the name of this corporation to Credit Cash NJ, LLC the guarantee by this corporation of the obligations of the Borrower, said guarantee to be substantially in the form annexed to the aforementioned written consent of the holders of all of the outstanding shares of the capital stock of this corporation, hereby ratifying, approving and confirming all that any of said officers or agent have done or may do in the premises.

I, Ronald Phillip Scott, do hereby certify that I am the secretary of WEB MERCHANTS INC., a corporation organized and existing under and by virtue of the laws of the State of Delaware, having its principal place of business in the City of Atlanta, State of Georgia, that I am the keeper of the corporate records and the seal of said corporation; that the foregoing is a true and correct copy of the resolution duly adopted and ratified at a special meeting of the Board of Directors of said corporation duly convened and held in accordance with its by-laws and the laws of said State at the office of said corporation on the 19 th day of May, 2011 as taken and transcribed by me from the minutes of said meeting and compared by me with the original of said resolution recorded in said minutes, and that the same has not in any way been modified, repealed or rescinded but is in full force and effect.

WITNESS my hand and the seal of said corporation this 19 th day of May ______, 2011.

		WEB MERCHANTS INC.
(Seal)
	By:	/s/ Ronald Phillip Scott
		Ronald Phillip Scott, Secretary

STATE OF GEORGIA	)
	)ss.:
COUNTY OF FULTON	)

On this 19 day of May 2011 before me personally appeared Ronald Phillip Scott, personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies) and that by his/her their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument.

	/s/ Corey Underhill
	NOTARY PUBLIC
	Corey Underhill
	Notary Public, Fulton County, Georgia
	My Commission Expires Jan. 12, 2014

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EXHIBIT 10.26

STOCK PURCHASE AGREEMENT

BY AND AMONG

WEB MERCHANTS ATLANTA, LLC

a Georgia limited liability company

(“ Purchaser ”)

LIBERATOR, INC.

a Florida corporation

(“ Seller ”)

WEB MERCHANTS INC.

a Delaware corporation

(“ Company ”)

LOUIS S. FRIEDMAN

AND

FYODOR PETRENKO

October 6, 2011

STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this “Agreement”), is made and entered into this October 6, 2011, by and among Web Merchants Atlanta, LLC, a Georgia limited liability company (the “ Purchaser ”); Liberator, Inc. (f/k/a WES Consulting, Inc.), a Florida corporation (together with its corporate parents, subsidiaries other than the Company and affiliates, “ Seller ”); Web Merchants Inc., a Delaware corporation (the “ Company ”); Louis S. Friedman, a resident of the State of Georgia and a principal shareholder of Seller (“ Friedman ”); and Fyodor Petrenko, a resident of the State of Georgia and a principal owner of Purchaser (“ Petrenko ”). Purchaser, Seller, Company, Friedman and Petrenko are each a “ Party ” and referred to collectively herein as the “ Parties .”

WHEREAS, the Company owns and operates the online store www.EdenFantasys.com which was established in 2002 and features community-driven online adult novelty retailing (the “Business”).

WHEREAS, on January 27, 2011, Seller acquired all of the issued and outstanding shares of common stock of Company, totaling Six Hundred and Sixteen (616) shares (hereinafter the “ Company Stock ”) from Petrenko and Dmitrii Spetetchii, a resident of the Republic of Moldova (“ Spetetchii ”), in exchange for: (i) the issuance of Twenty-Five Million Three Hundred and Ninety-Four Thousand Four Hundred (25,394,400) shares of the $.01 par value common stock of Seller (hereinafter the “ Liberator Common Stock ”) to Petrenko, (ii) the issuance of Three Million (3,000,000) shares of Liberator Common Stock to Spetetchii, and (iii) the payment of $100,000 to Spetetchii at the time of closing, all pursuant to that certain Stock Purchase Agreement (the “ Original Stock Purchase Agreement ”); and

WHEREAS, this Agreement contemplates an acquisition of all of the issued and outstanding equity securities of the Company by Purchaser, with the result that Company will become a wholly-owned subsidiary of Purchaser.

NOW, THEREFORE, in consideration of the representations, warranties and covenants herein contained, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, intending legally to be bound, agree as follows:

ARTICLE I

PURCHASE AND SALE; CLOSING

1.1 Definitions . Certain capitalized terms used in this Agreement are defined in Article VIII below.

1.2 Purchase and Sale of Shares . Purchaser hereby agrees to purchase all of the issued and outstanding Company Stock and Company assets, tangible and intangible, from Seller in exchange for: (a) the return of Twenty-Five Million, Three Hundred Ninety-Four Thousand, Four Hundred (25,394,400) shares of the Liberator Common Stock by Petrenko, and (b) Seven Hundred Thousand Dollars and No Cents ($700,000.00). The foregoing purchases shall occur at the Closing as defined hereinbelow.

1.3 The Closing . Subject to Section 1.4(e) below relating to the payment of the Deposit, the closing of the transactions contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Purchaser’s counsel Busch, Slipakoff & Schuh, LLP, 3350 Riverwood Pkwy, Suite 1550, Atlanta, GA 30339, commencing at 6:00 p.m., local time, on October 14, 2011, or such other place, time and date as is mutually agreeable to the Parties, but shall be deemed effective October 1, 2011 (the “ Closing Date ”); provided , however , that in the event the conditions set forth in Section 5.3 of this Agreement are not satisfied on or prior to October 14, 2011, the Parties agree to extend the the Closing for an additional seven (7) days upon the payment by Purchaser of an additional non-refundable deposit of Fifty Thousand Dollars and No Cents ($50,000.00), in which case, the amount to be paid by Seller at Closing under Section 1.4(e)(ii) would be Five Hundred Thousand Dollars and No Cents ($500,000.00) .

1.4 Actions at the Closing . At the Closing:

(a) Petrenko shall deliver to Seller certificates representing the shares of Liberator Common Stock specified in Section 1.2 above, duly endorsed for transfer to the Seller or with separate stock powers attached thereto signed in blank;

(b) Petrenko shall provide his written resignation (i) from the Board of Directors of Seller, and (ii) as Executive Vice President of Seller;

(d) Louis Friedman and Ronald Scott, an individual resident of the State of Georgia (“Scott”), shall provide their written resignations from the Board of Directors of the Company;

(e) Purchaser shall pay Seller Seven Hundred Thousand Dollars and No Cents ($700,000.00) in immediately available funds (the “ Purchase Price ”), payable as follows:

(i) One Hundred Fifty Thousand Dollars and No Cents ($150,000.00) shall be paid to the Seller at the time of execution of this Agreement in form of a non-refundable deposit (the “Deposit”). In the event the transactions fail to close as contemplated in Section 1.3 above, the Seller shall be entitled to retain the Deposit unless such failure to close was caused by the Seller’s decision not to proceed with the transactions contemplated by this Agreement.

(ii) Five Hundred Fifty Thousand Dollars and No Cents ($550,000.00) shall be paid to the Seller at the Closing.

(f) Seller shall deliver to Purchaser certificates representing the shares of Company Stock as specified in Section 1.2 above, duly endorsed for transfer to the Purchaser or with separate stock powers attached thereto signed in blank;

(g) The Liberator Common Stock acquired from Petrenko under Section 1.4(a) shall be held in a traditional escrow account until (i) that certain credit facility loan from Advance Financial Corporation to Seller, dated as of May 24, 2011, in the original amount of Seven Hundred Fifty Thousand Dollars ($750,000) (the “ Advance Financial Loan ”), and (ii) that certain loan from Credit Cash LLC to Seller, dated as of May 19, 2011, in the original amount of Four Hundred Thousand Dollars ($400,000) (the “ Credit Cash Loan ”) have been satisfied or Petrenko and Company have been provided with a written release of any liability thereunder as a guarantor or co-borrower, as applicable, which Seller shall obtain no later than August 1, 2012, at which time the Liberator Common Stock shall be released to Seller. In addition to the foregoing, the escrow agreement (the “ Escrow Agreement ”) shall provide that: (i) if by August 1, 2012 the Advance Financial Loan and the Credit Cash Loan have not been satisfied and Petrenko and Company have not been provided with the written releases described in the previous sentence, then the Liberator Common Stock shall be returned to Purchaser, and (ii) all stock held in escrow may be used to satisfy the Advance Financial Loan and/or the Credit Cash Loan in the event that, at any time prior to the earlier to occur of escrow release or August 1, 2012, any such claims for repayment are made against Petrenko by Advance Financial Corporation or Credit Cash Loan under their respective loans referenced above.

(h) Seller shall release to Purchaser all Company books, records, and files possessed by Seller; and

(i) Seller will cause its affiliate, One Up Innovations, Inc., to provide rental space (the same space the Company has occupied immediately before the Closing) to the Company on a month-to-month basis at the rate of Twelve Thousand Dollars ($12,000) per month to provide the Company time to transition to separate facilities.

(j) In addition to the foregoing, the following documents shall be duly executed and delivered by the respective parties thereto:

(i) The Escrow Agreement, in substantially the form attached as Exhibit A to this Agreement, by and between the Parties.

(ii) Duly executed resolutions of the Company’s Board of Directors approving the transactions contemplated by this Agreement and each of the other definitive instruments, certificates and agreements described in this Section 1.4 (collectively, the “ Transaction Documentation ”), and authorizing a person or persons to execute the Transaction Documentation and any documents required in connection therewith.

(iii) Duly executed resolutions of Seller’s Board of Directors approving the Transaction Documentation, and authorizing a person or persons to execute the Transaction Documentation and any documents required in connection therewith.

(k) Seller shall provide to Purchaser at Closing a signed acknowledgement of the following: (i) the Company’s general ledger detail and bank statements for the months ended January 27, 2011 through August 31, 2011, (ii) the Company’s preliminary general ledger detail for the month of September, 2011 with all of the transactions entered up to the Closing Date, which ledger shall be finalized after the Closing Date in accordance with Section 4.7 below.

(l) Seller shall provide to Petrenko a release of Petrenko’s liability under that certain Guaranty dated March 17, 2011 given by Petrenko in favor of Hope Capital, Inc. (“ Hope Capital ”), in connection with that certain loan from Hope Capital to Seller in the original principal amount of One Hundred Thirty Thousand Dollars ($130,000) (the “ Hope Capital Loan ”), which release shall be duly executed by Hope Capital.

1.5 No Seller Liabilities Assumed by Purchaser . Notwithstanding anything in this Agreement to the contrary, neither Purchaser, Petrenko nor any of their respective affiliates shall assume, and in no event shall be deemed to have assumed, any debt, claim, obligation or other liability of Seller or any of its affiliates. Without limiting the generality of the foregoing, under no circumstances shall Purchaser, Petrenko or any of their respective affiliates be deemed to assume any liability of Seller arising out of or relating to:

(a) any actual or alleged tortious conduct of any of them or of their employees or agents arising or related to the period prior to the Closing;

(b) any claim for breach of warranty or contract arising or related to the period prior to the Closing;

(c) any claim predicated on strict liability or any similar legal theory based on acts, omissions, events or circumstances prior to the Closing;

(d) any actual or alleged violation of any applicable law occurring prior to the Closing;

(e) any liability for taxes of any kind or character arising or related to the period prior to the Closing;

(f) any liability relating to any Seller benefit plan arising or related to the period prior to the Closing;

(g) any debt of Seller;

(h) any liability arising out of any business activity of Seller other than the Business;

(i) any claims, choses in action, causes of action, rights of recovery, rights of set-off of any kind by any third party (including any employee or former employee of Seller) arising out of the conduct of the Business prior to the Closing; or

(j) the Advance Financial Loan, the Credit Cash Loan and the Hope Capital Loan.

1.6 No Company Liabilities Assumed by Seller . Notwithstanding anything in this Agreement to the contrary, neither Seller, Friedman nor any of their respective affiliates shall assume, and in no event shall be deemed to have assumed, any debt, claim, obligation or other liability of Company. Without limiting the generality of the foregoing, under no circumstances shall Seller, Friedman or any of their respective affiliates be deemed to assume any liability of Company arising out of or relating to:

(a) any actual or alleged tortious conduct of any of Company’s employees or agents arising or related to the period prior to the Closing;

(b) any claim for breach of warranty or contract arising or related to the period prior to the Closing;

(c) any claim predicated on strict liability or any similar legal theory based on acts, omissions, events or circumstances prior to the Closing;

(d) any actual or alleged violation of any applicable law occurring prior to the Closing;

(e) any liability for taxes of any kind or character arising or related to the period prior to the Closing;

(f) any liability relating to any Company benefit plan arising or related to the period prior to the Closing;

(g) any debt of Company;

(h) any liability arising out of any business activity of Company; or

(i) any claims, choses in action, causes of action, rights of recovery, rights of set-off of any kind by any third party (including any employee or former employee of Company) arising out of the conduct of the Business prior to the Closing.

1.7 Exemption from Registration . Purchaser, Seller and the Company intend that the shares of Company Stock to be transferred by Seller to Purchaser pursuant to Section 1.2 hereof in connection with the Closing will be issued in a transaction exempt from registration under the Securities Act, by reason of Section 4(2) of the Securities Act, and/or Rule 506 of Regulation D promulgated by the Securities and Exchange Commission (the “ SEC ”).

1.8 Cancelation of All Intercompany Debt . Effective as of the Closing, all intercompany debt and accounts payables due to Seller by Company shall be deemed canceled and the Company shall be deemed released from any claims relating thereto.

1.9 Termination of Certain Agreements . Effective as of the Closing, (a) that certain Contribution Agreement, dated as of January 27, 2011, by and between Petrenko and Friedman (the “Contribution Agreement”), (b) that certain Voting Agreement, dated as of January 27, 2011, by and among Liberator, Petrenko and Friedman (the “Voting Agreement”), and (c) that certain Employment Agreement, dated as of January 27, 2011, by and between Petrenko and Liberator (the “Employment Agreement”, and collectively with the Contribution Agreement and the Voting Agreement, the “Ancillary Documents”), shall be deemed cancelled, terminated and declared null and void by mutual consent of the Parties, and of no further force and effect. No Party shall owe any obligation to any other Party ensuing from the Ancillary Documents.

ARTICLE II

REPRESENTATIONS AND WARRANTIES OF SELLER AND FRIEDMAN

The Seller and Friedman (collectively, the “ Seller Parties ”) hereby jointly and severally represent and warrant to the Purchaser, as modified by the disclosure schedules prepared by the Seller and accompanying this Agreement (the “ Seller Disclosure Schedules ”), that the following representations contained in this Article II are true, correct and complete as of the date hereof and as of the Closing Date:

2.1 Organization, Qualification and Corporate Power . Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. Each of Seller and its subsidiaries is duly qualified to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its businesses or the ownership or leasing of its properties requires such qualification, except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. Each of Seller and its subsidiaries has all requisite corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it.

2.2 Authorization of Transaction . The Seller Parties each have all requisite power and authority to execute and deliver this Agreement and to perform its or his respective obligations hereunder. The execution and delivery by the Seller Parties of this Agreement and the other Transaction Documentation and the consummation by the Seller Parties of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of the Seller Parties. This Agreement has been duly and validly executed and delivered by each of the Seller Parties and constitutes a valid and binding obligation of each of the Seller Parties, enforceable against them in accordance with its terms.

2.3 Noncontravention . To the best of the Seller Parties’ Knowledge, neither the execution and delivery by the Seller Parties of this Agreement and the other Transaction Documentation, nor the consummation by the Seller Parties of the transactions contemplated hereby or thereby, will (a) conflict with or violate any provision of the articles or certificate of incorporation or bylaws of Seller, (b) require on the part of Seller any filing with, or permit, authorization, consent or approval of, any Governmental Body, (c) conflict with, result in breach of, constitute a default under, result in the acceleration of obligations under, create in any Party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which Seller is a Party or by which it is bound or to which any of its or his assets are subject, excluding the Advance Financial Loan, the Credit Cash Loan and the Hope Capital Loan referenced above, (d) result in the imposition of any lien or encumbrance upon any assets of the Seller Parties or (e) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Seller Parties or any of their properties or assets.

2.4 Financial Statements . To the best of the Seller Parties’ Knowledge, the balance sheet of the Company as of September 30, 2011 and the related statement of operations for the period between January 27, 2011 and September 30, 2011 (the “ Company Financial Statements ”) attached hereto as Exhibit B are true and accurate. The Seller Parties have not caused any material changes to be made to the Company Financial Statements.

2.5 Ownership . All of the Company Stock is owned of record and beneficially by the Seller, and the Seller has good and marketable title to such Company Stock, free and clear of all liens or claims of any nature, other than state and federal securities law restrictions. Upon consummation of the Closing pursuant to this Agreement, the Seller shall transfer to the Purchaser good and marketable title to such Company Stock, free and clear of all liens or claims of any nature, other than state and federal securities law restrictions.

2.6 Litigation . Except as disclosed in Section 2.6 of Seller Disclosure Schedule , there is no litigation which is pending or, to the Seller Parties’ Knowledge, threatened against Seller or any subsidiaries which, if determined adversely to Seller, (a) seeks either damages in excess of $25,000 individually, or (b) could have, individually or in the aggregate, a Material Adverse Effect or which in any manner challenges or seeks to prevent, enjoin, alter or delay the transactions contemplated by this Agreement.

2.7 Material Transactions . Since the closing of the Original Stock Purchase Agreement on January 27, 2011, the Seller Parties have not caused any of the following to occur without Petrenko’s written consent:

(a) sell, assign, lease, license, transfer or otherwise dispose of, or mortgage, pledge or encumber any material or intangible assets of the Company;

(b) incur any liability or indebtedness related to the Company except for the Advance Financial Loan, the Credit Cash Loan and the Hope Capital Loan;

(d) issue, sell or otherwise permit to become outstanding any additional shares of the Company or any securities or obligations convertible into or exchangeable for shares of the Company;

(e) amend any of the Company’s organizational documents;

(f) become party to or settle any litigation, claim, action or proceeding relating to the Company;

(g) enter into, amend, modify or renew any employment, consulting, severance or similar agreements or arrangements with any of the Company’s officers or employees, vendors or suppliers; or

(h) transfer any of the Company Shares received under the Original Stock Purchase Agreement, issue any additional Company Shares, or issue any stock appreciation, phantom stock or similar rights with respect to the Company.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF PURCHASER AND PETRENKO

The Purchaser and Petrenko (collectively, the “ Purchaser Parties ”) hereby jointly and severally represent and warrant to Seller that the following representations contained in this Article III are true, correct and complete as of the date hereof and as of the Closing Date:

3.1 Organization, Qualification and Corporate Power . Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Georgia. Purchaser is duly qualified to conduct business and is in good standing under the laws of each jurisdiction in which the nature of its businesses or the ownership or leasing of its properties requires such qualification, except where the failure to be so qualified or in good standing would not have a Material Adverse Effect.

3.2 Authorization of Transaction . The Purchaser Parties each have all requisite power and authority to execute and deliver this Agreement and to perform its or his respective obligations hereunder. The execution and delivery by the Purchaser Parties of the Transaction Documentation and the consummation by the Purchaser Parties of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of the Purchaser Parties. This Agreement has been duly and validly executed and delivered by each of the Purchaser Parties and constitutes a valid and binding obligation of each of the Purchaser Parties, enforceable against them in accordance with its terms.

3.3 Noncontravention . Neither the execution and delivery by the Purchaser Parties of this Agreement and the other Transaction Documentation, nor the consummation by the Purchaser Parties of the transactions contemplated hereby or thereby, will (a) conflict with or violate any provision of the articles of organization or operating agreement of the Purchaser, (b) require on the part of any of the Purchaser Parties any filing with, or permit, authorization, consent or approval of, any Governmental Body, (c) conflict with, result in breach of, constitute a default under, result in the acceleration of obligations under, create in any Party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which any of the Purchaser Parties is a party or by which it is bound or to which any of its or his assets are subject, (d) result in the imposition of any lien or encumbrance upon any assets of Purchaser, except for any transaction closing concurrently with the transactions contemplated by this Agreement, or (e) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Purchaser Parties or any of their properties or assets.

3.4 Financial Statements . To the best of the Purchaser Parties’ Knowledge, the Company Financial Statements are true and accurate. The Purchaser Parties have not caused any material changes to be made to the Company Financial Statements.

3.5 Ownership . All of the Liberator Common Stock is owned of record and beneficially by Petrenko, and Petrenko has good and marketable title to such Liberator Common Stock, free and clear of all liens or claims of any nature, other than state and federal securities law restrictions. Upon consummation of the Closing pursuant to this Agreement and subject to Section 1.4(g) , Petrenko shall transfer to the Seller good and marketable title to such Liberator Common Stock, free and clear of all liens or claims of any nature, other than state and federal securities law restrictions.

3.6 Litigation . There is no litigation which is pending or, to the Purchaser Parties’ Knowledge, threatened against the Company which, if determined adversely to the Company, (a) seeks either damages in excess of $25,000 individually, or (b) could have, individually or in the aggregate, a Material Adverse Effect or which in any manner challenges or seeks to prevent, enjoin, alter or delay the transactions contemplated by this Agreement.

ARTICLE IV

COVENANTS

4.1 Closing Efforts . Each of the Parties shall use reasonable efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated by this Agreement.

4.2 Operation of the Company’s Business . During the period from the date of this Agreement to the Closing Date, the Company shall conduct its operations in the ordinary course of business and in material compliance with all applicable laws and regulations and, to the extent consistent therewith, use its reasonable efforts to preserve intact its current business organization, keep its physical assets in good working condition, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its goodwill and ongoing business shall not be impaired in any material adverse respect. Furthermore, Seller and Company will not liquidate, remove, transfer, or otherwise alter the inventory, cash, or other assets of the Company during the period from the date of the Agreement to the Closing Date. Seller and Company will not enter into any material transactions or contracts on behalf of the Company outside of the ordinary course of business from the date of this Agreement to the Closing Date.

4.3 Public Announcements and Press Releases; Communications with SEC .

(a) Until the Closing, no Party shall, without the approval of all of the other parties, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such Party shall be so obligated by law or the rules of any stock exchange or quotation system, in which case such Party shall so advise the other Parties, and all Parties shall use their reasonable best efforts to cause a mutually agreeable release or announcement to be issued. Immediately following the Closing Date, any Party (including without limitation, Purchaser’s stockholder entities), with the prior approval of all of the other parties (which approval will not be unreasonably withheld) may make any reasonable press release or other public announcement concerning the transaction and promoting Company’s business.

(b) Seller and its counsel shall be solely responsible for all reports, filings and communications with the SEC regarding the transactions described in this Agreement, and no other Party shall communicate with the SEC regarding the transactions described in this Agreement without the prior approval of Seller, unless so obligated by law.

4.4 Confidentiality . The Parties agree that each undersigned Party will keep all terms and conditions of this Agreement confidential, and each undersigned Party has not, and will not disclose or discuss the terms and conditions relating to this Agreement with any third parties, or any other person(s) under any conditions whatsoever, with the exception of (i) his or its attorney or advisors, (ii) testimony given pursuant to an order of court of competent jurisdiction, (iii) disclosure required by the Securities Exchange Act of 1934, as amended, or other applicable law, or under the rules of any stock exchange or quotation system, or (iv) a Party’s members, shareholders, officers, agents, employees, attorneys, partners, directors and subsidiaries, to the extent such persons have a legitimate need to know such information and agree to adhere to the confidentiality requirements described in this Section. Each undersigned Party further acknowledges and agrees that he or it shall be liable for and shall reimburse any injured Party for all attorneys fees and costs incurred by an injured Party as a result of any breach of this obligation of confidentiality.

4.5 Non-Disparagement . The Parties agree that henceforth they shall cease and refrain from making any disparaging or defamatory remarks or comments regarding one another, expressly or by implication, including but not limited to, any Parties’ personal or business dealings and reputations.

4.6 Mutual Releases; Exclusions .

(a) Release of Purchaser, Company and Petrenko by Seller and Friedman . Except as specifically set forth in Section 4.6(c) of this Agreement, each of Seller and Friedman, for itself or himself and on behalf of its or his respective affiliates, subsidiaries, heirs, successors and assigns, knowingly and voluntarily does fully and forever, irrevocably and unconditionally release, remise, acquit and discharge Purchaser, Company and Petrenko, and their respective past and present officers, agents, employees, attorneys, partners, shareholders, directors, subsidiaries, affiliates, heirs, successors and assigns (collectively, the “ Purchaser Released Parties ”), from all present and future claims, actions, causes of action, rights, sums of money, accounts, agreements, promises, controversies, executions, contracts, charges, damages, liabilities, obligations, demands or suits of any kind or character whatsoever, accrued or unaccrued, suspected or unsuspected, fixed or contingent, liquidated or unliquidated, direct or consequential, foreseen or unforeseen, matured or unmatured, developed or undeveloped, discoverable or undiscoverable that Seller and/or Friedman has or might have or might claim to have against any of the Purchaser Released Parties, arising from the beginning of time through the date hereof.

(b) Release of Seller and Friedman by Purchaser, Company and Petrenko. Except as specifically set forth in Section 4.6(c) of this Agreement, each of Purchaser, Company and Petrenko, for itself or himself and on behalf of its or his respective affiliates, subsidiaries, heirs, successors and assigns, knowingly and voluntarily does fully and forever, irrevocably and unconditionally release, remise, acquit and discharge Seller and Friedman, and their respective past and present officers, agents, employees, attorneys, partners, shareholders, directors, subsidiaries, affiliates, heirs, successors and assigns (collectively, the “ Seller Released Parties ”), from all present and future claims, actions, causes of action, rights, sums of money, accounts, agreements, promises, controversies, executions, contracts, charges, damages, liabilities, obligations, demands or suits of any kind or character whatsoever, accrued or unaccrued, suspected or unsuspected, fixed or contingent, liquidated or unliquidated, direct or consequential, foreseen or unforeseen, matured or unmatured, developed or undeveloped, discoverable or undiscoverable that Purchaser, Company and/or Petrenko has or might have or might claim to have against any of the Seller Released Parties, arising from the beginning of time through the date hereof.

(c) Exclusions . The mutual releases set forth in Sections 4.6(a) and 4.6(b) above are intended by the Parties to be global and comprehensive and are intended to release and relinquish all present and future claims, actions, causes of action, rights, sums of money, accounts, agreements, promises, controversies, executions, contracts, charges, damages, liabilities, obligations, demands or suits of any kind or character whatsoever, whether known or unknown, accrued or unaccrued suspected or unsuspected, fixed or contingent, liquidated or unliquidated, direct or consequential, foreseen or unforeseen, matured or unmatured, developed or undeveloped, discoverable or undiscoverable, pertaining to every relationship in which the Purchaser, Company and Petrenko, on the one hand, and the Seller and Friedman, on the other hand, had or may have had any interest or involvement; provided, however, that neither the Purchaser, Company and Petrenko, on the one hand, nor the Seller and Friedman, on the other, is releasing any rights or claims he or it may have against the other arising out of any rights or claims arising out of any breach of this Agreement including, without limitation, the representations, warranties and covenants contained in this Agreement, and the indemnities contained in this Agreement.

4.7 Completion and Delivery of Month End Financial Statements . Seller will finalize and deliver to Purchaser the general ledger, trial balance, balance sheet and income statement of the Company for the month ended September 30, 2011, no later than October 31, 2011. The Purchaser Parties will cooperate in providing Seller with the information necessary for Seller to complete its financial review of the three (3) month period ended September 30, 2011, including providing any and all financial records and documents requested by Seller’s external auditor.

4.8 Cooperation of Petrenko in Obtaining Consents of Company and Seller . Petrenko shall cooperate with Seller in the preparation, execution and delivery of board of director and shareholder resolutions for the Company and the Seller that approve the transactions contemplated by this Agreement.

4.9 Purchaser Parties’ Negative Covenants . Purchaser Parties acknowledge that the restrictions contained in this Section are reasonable and necessary to protect the legitimate business interests of the Seller Parties.

(a) Trade Secrets and Confidential Information . Purchaser Parties represent and warrant that neither party will: (i) use, disclose, or reverse engineer the Trade Secrets or the Confidential Information of the Seller Parties; or (ii) retain Trade Secrets or Confidential Information of the Seller Parties, including any copies existing in any form (including electronic form), which are in his possession or control. The obligations under this Section shall remain in effect (i) with regard to the Trade Secrets, for as long as the information constitutes a trade secret under applicable law, and (ii) with regard to the Confidential Information, for a period of five (5) years from the Effective Date. Notwithstanding anything contained hereinto the contrary, nothing in this Agreement will prohibit the Purchaser Parties from using its general skills, knowledge and experience developed in positions with the Company or other parties, provided that Purchaser Parties do not use Trade Secrets or Confidential Information of the Seller Parties or its customers or suppliers or retain any tangible copies of such Trade Secrets or Confidential Information or disclose such Trade Secrets or Confidential Information.

(b) Non-Solicitation of Employees . Purchaser Parties will not, directly or indirectly, solicit, recruit or induce any employee to (i) terminate his or her employment relationship with the Seller Parties, or (ii) work for any other person or entity engaged in a business that offers goods or services directly competitive with those goods or services offered by the Seller.

4.10 Seller Parties’ Negative Covenants . Seller Parties acknowledge that the restrictions contained in this Section are reasonable and necessary to protect the legitimate business interests of the Purchaser Parties.

(a) Trade Secrets and Confidential Information . Seller Parties represent and warrant that neither party will: (i) use, disclose, or reverse engineer the Trade Secrets or the Confidential Information of the Purchaser Parties; or (ii) retain Trade Secrets or Confidential Information of the Purchaser Parties, including any copies existing in any form (including electronic form), which are in his possession or control. The obligations under this Section shall remain in effect (i) with regard to the Trade Secrets, for as long as the information constitutes a trade secret under applicable law, and (ii) with regard to the Confidential Information, for a period of five (5) years from the Effective Date. Notwithstanding anything contained hereinto the contrary, nothing in this Agreement will prohibit the Seller Parties from using its general skills, knowledge and experience developed in positions with the Company or other parties, provided that Seller Parties do not use Trade Secrets or Confidential Information of the Purchaser Parties or its customers or suppliers or retain any tangible copies of such Trade Secrets or Confidential Information or disclose such Trade Secrets or Confidential Information.

(b) Non-Solicitation of Employees . Seller Parties will not, directly or indirectly, solicit, recruit or induce any employee to (i) terminate his or her employment relationship with the Purchaser Parties, or (ii) work for any other person or entity engaged in a business that offers goods or services directly competitive with those goods or services offered by the Company.

4.11 Capitalization of Company . To the best of Friedman’s and Petrenko’s Knowledge, (a) the authorized capital stock of the Company consists of One Thousand (1,000) shares of common stock, no par value per share (the “ Company Shares ”), (b) as of the date of this Agreement, there are Six Hundred Sixteen (616) Company Shares issued and outstanding, all of which are owned by Seller as a result of the Original Stock Purchase Agreement, (c) there are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Company, and (d) all of the issued and outstanding shares of Company Stock are duly authorized, validly issued, fully paid, nonassessable and free of all preemptive rights.

4.12 Seller Loans . Subject to Section 1.4(g) , no later than August 1, 2012, the Seller Parties shall cause Credit Cash LLC and Advance Financial Corporation to provide Petrenko and Company with written releases of all liability under the Credit Cash Loan and Advance Financial Loan. None of the Purchaser Parties shall provide, or shall be required to provide, any continuation or extension of any personal guarantee with respect to either the Credit Cash Loan or Advance Financial Loan.

ARTICLE V

CONDITIONS TO CLOSING

5.1 Conditions to Each Party’s Obligations . The respective obligations of each Party to proceed to Closing are subject to the satisfaction of the following conditions:

(a) execution and consummation of all required definitive instruments and agreements in forms acceptable to the parties as set forth in Section 1.4 hereof; and

(b) that there be no injunction or order in effect by any Governmental Body prohibiting the Closing.

5.2 Conditions to Obligations of Seller Parties . The obligation of the Seller Parties to proceed to Closing is subject to the satisfaction of the following additional condition:

(a) the representations, warranties and covenants of the Purchaser Parties set forth in this Agreement shall be true and correct as of the date of this Agreement and shall be true and correct as of the Closing as though made as of the Closing, except for any untrue or incorrect representation and warranty that, individually or in the aggregate, does not have a Material Adverse Effect on the Purchaser Parties or a Material Adverse Effect on the ability of the Parties to consummate the transactions contemplated by this Agreement.

5.3 Conditions to Obligations of Purchaser . The obligation of Purchaser Parties to proceed to Closing is subject to the satisfaction of the following additional conditions:

(a) the representations, warranties and covenants of the Seller Parties set forth in this Agreement shall be true and correct as of the date of this Agreement and shall be true and correct as of the date of the Closing as though made as of the Closing, except for any untrue or incorrect representation and warranty that, individually or in the aggregate, does not have a Material Adverse Effect on the Seller Parties or the ability of the Parties to consummate the transactions contemplated by this Agreement;

(b) there have been no Material Adverse Changes to the Company’s business since the date of this Agreement; and

ARTICLE VI

INDEMNIFICATION

6.1 Indemnification by Seller Parties . Seller and Friedman shall jointly and severally indemnify and hold harmless the Purchaser, the Company and Petrenko, their affiliates and their respective heirs, successors and assigns (and their respective shareholders, officers, directors, employees and agents) (collectively the “ Purchaser Indemnified Parties ”) from and against any and all damages, fines, fees, penalties, deficiencies, liabilities, claims, losses (including loss of value), demands, judgments, settlements, actions, obligations and costs and expenses (including interest, court costs and fees and costs of attorneys, accountants and other experts or other expenses of litigation or other proceedings or of any claim, default or assessment) (collectively, “ Losses ”) that may be asserted against, or paid, suffered or incurred by any Purchaser Indemnified Party that, directly or indirectly, arise out of, result from, are based upon or relate to (a) the inaccuracy, as of the date of this Agreement or the Closing, of any representation or warranty made by any of the Seller Parties in this Agreement; (b) any failure by the Seller Parties to perform or fulfill any of their covenants or agreements required to be performed by the Seller Parties under this Agreement; (c) claims, litigation or any other proceedings initiated by or involving Donald Cohen existing currently or initiated in the future; (d) present or future Seller’s shareholder claims, litigation or proceedings against the Purchaser Indemnified Parties arising out of this transaction; (e) any claims arising under the Advance Financial Loan, the Credit Cash Loan and the Hope Capital Loan; and (f) any liability or obligation of Seller of any nature whatsoever arising out of the conduct of Seller prior to the Closing and to which Seller had Knowledge; provided , however , that Seller and Friedman shall not be obligated to indemnify the Purchaser Indemnified Parties if the claim was directly or indirectly caused by the Purchaser Indemnified Parties; and, provided , further , that, for purposes of any limitation on indemnification resulting from the application of the immediately preceding proviso, neither the execution of this Agreement nor the consummation of any transactions contemplated hereby is intended or shall be construed, directly or indirectly, as having caused a claim to be brought against the Purchaser Indemnified Parties.

6.2 Indemnification by the Purchaser and Company . The Purchaser and Company shall jointly and severally indemnify and hold harmless Seller and Friedman, their affiliates and their respective heirs, successors and assigns (and their respective shareholders, officers, directors, employees and agents) (collectively the “ Seller Indemnified Parties ”) from and against any and all Losses that may be asserted against, or paid, suffered or incurred by any Seller Indemnified Party that, directly or indirectly, arise out of, result from, are based upon or relate to (a) the inaccuracy, as of the date of this Agreement or the Closing Date, of any representation or warranty made by the Purchaser Parties in this Agreement; and (b) any failure by the Purchaser Parties to perform or fulfill any of their covenants or agreements required to be performed by the Purchaser Parties under this Agreement; and (c) any liability or obligation of Purchaser of any nature whatsoever arising out of the conduct of the Business after the Closing; provided , however , that Purchaser and Company shall not be obligated to indemnify the Seller Indemnified Parties if the claim was directly or indirectly caused by the Seller Indemnified Parties; and, provided , further , that, for purposes of any limitation on indemnification resulting from the application of the immediately preceding sentence, neither the execution of this Agreement nor the consummation of any transactions contemplated hereby is intended or shall be construed, directly or indirectly, as having caused a claim to be brought against the Seller Indemnified Parties.

6.3 Limitation on Indemnification. The total indemnification obligations of (a) the Seller Parties for claims for indemnification pursuant to Section 6.1 , and (b) the Purchaser Parties for claims for indemnification pursuant to Section 6.3 , shall in either case not exceed the value of the Company Stock received by the Purchaser in the transactions contemplated hereby.

6.4 Conditions of Indemnity . As conditions for indemnification by this Article VI : (a) an indemnified party shall promptly notify the indemnifying party in writing of such claim; (b) the indemnifying party shall assume the sole control of the defense or settlement of any claim subject to indemnity; and (c) the indemnified party shall provide reasonable assistance to the indemnifying party at the sole expense of the indemnified party.

6.5 Survival of Representations and Warranties . All representations and warranties contained in this Agreement shall survive the Closing, and shall expire on the date two (2) years following the Closing Date.

ARTICLE VII

TERMINATION

7.1 Termination by Mutual Agreement . This Agreement may be terminated at any time by mutual written consent of the Parties.

7.2 Termination for Failure to Perform Covenants or Conditions . This Agreement may be terminated prior to the Closing Date:

(a) by Seller if: (i) any of the representations and warranties made in this Agreement by the Purchaser Parties shall not be materially true and correct, when made or at any time prior to consummation of the contemplated transactions as if made at and as of such time; (ii) any of the conditions set forth in Section 5.2 hereof have not been fulfilled in all material respects by the Closing Date; or (iii) the Purchaser Parties shall have failed to observe or perform any of their material respective obligations under this Agreement.

(b) by Purchaser if: (i) any of the representations and warranties of the Seller Parties shall not be materially true and correct when made or at any time prior to consummation of the contemplated transactions as if made at and as of such time; (ii) any of the conditions set forth in Section 5.3 hereof have not been fulfilled in all material respects by the Closing Date; or (iii) the Seller Parties shall have failed to observe or perform any of their material respective obligations under this Agreement.

ARTICLE VIII

DEFINITIONS

Certain terms used in this Agreement are listed in alphabetical order and defined or referred to below (such terms as well as any other terms defined elsewhere in this Agreement shall be equally applicable to both the singular and plural forms of the terms defined).

“ Advance Financial Loan ” is defined in Section 1.4(g) .

“ Credit Cash Loan ” is defined in Section 1.4(g) .

“ Governmental Body ” means any (a) nation, state, commonwealth, province, territory, county, municipality, district, or other jurisdiction of any nature, or any political subdivision thereof, (b) federal, state, local, municipal, foreign, or other government, or (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, instrumentality, official, organization, contractor, regulatory body, or other entity and any court, arbitrator, or other tribunal).

“ Hope Capital Loan ” is defined in Section 1.4(l) .

“ Knowledge ” or “ to the Knowledge of ” means as follows: (a) with respect to an individual, an individual will be deemed to have “Knowledge” of a particular fact or other matter if that individual is actually aware of such fact or matter, or should have been aware of that fact or matter following a reasonable investigation and inquiry; (b) with respect to the Purchaser Parties, the Purchaser Parties will be deemed to have “Knowledge” of a particular fact or other matter if Petrenko has, or at any time had, Knowledge of such fact or other matter; or (c) with respect to the Seller Parties, the Seller Parties will be deemed to have “Knowledge” of a particular fact or other matter if Friedman or Scott has, or at any time had, Knowledge of such fact or other matter.

“ Material Adverse Change ” or “ Material Adverse Effect ” means, with respect to a Party, any change or changes in, or effect on, such Party that is individually, or are in the aggregate, reasonably likely to be materially adverse to or materially impair the revenue or anticipated revenue of the Party or the value of the Party as of the date of this Agreement, or the operation of the Party (as presently conducted) taken as a whole, provided that none of the following shall be deemed to constitute, and none of the following shall be taken into account in determining whether there has been, a Material Adverse Change or Material Adverse Effect: (a) any adverse change, event, development, or effect arising from or relating to (1) any change resulting from conditions affecting the industry in which the Company operates or from changes in general business or economic conditions, (2) changes in United States generally accepted accounting principles, (3) any change resulting from the announcement or pendency of any of the transactions contemplated by this Agreement, (4) any change resulting from compliance by a Party with the terms of, or the taking of any action contemplated or permitted by the Agreement and (b) any adverse change in or effect on such Party that is cured before the earlier of (1) the Closing Date, and (2) the date on which this Agreement is terminated pursuant to Section 7.2 hereof.

“ SEC ” is defined in Section 1.7 .

“ Transaction ” means the purchase and sale of the Company Stock at the Closing and the other transactions contemplated by this Agreement and the other Transaction Documentation.

“ Transaction Documentation ” is defined in Section 1.4(j) .

ARTICLE IX

MISCELLANEOUS

9.1 Entire Agreement . This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements or representations by or among the Parties, written or oral, with respect to the subject matter hereof.

9.2 Succession and Assignment . This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Parties.

9.3 Further Actions . The Parties hereto shall execute and deliver such additional instruments and take such further action as may reasonably be necessary to carry out the intent of this Agreement.

9.4 Expenses . Each Party shall be responsible for its own costs and expenses (including legal and accounting fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby.

9.5 Headings . The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

9.6 Notices . All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered four business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one (1) business day after it is sent for next business day delivery via a reputable nationwide overnight courier service, in each case to the intended recipient as set forth below:

If to the Purchaser :	Copy to:

Web Merchants Atlanta LLC	Busch, Slipakoff & Schuh, LLP
1820 Peachtree Rd NW	3350 Riverwood Pkwy, Suite 1550
Atlanta, GA 30309	Atlanta, GA 30339
Attn: Fyodor Petrenko, Sole Member	Attn: Adam Slipakoff, Esq.

If to the Seller :	Copy to:

Liberator, Inc.	Friedman, Dever & Merlin, LLC
2745 Bankers Industrial Drive	5555 Glenridge Connector NE, Suite 925
Atlanta, GA 30360	Atlanta, GA 30342
Attn: Louis S. Friedman, President	Attn: Sheldon E. Friedman, Esq.

Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth.

9.7 Governing Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of Georgia without giving effect to any choice or conflict of law provision or rule (whether of the State of Georgia or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Georgia.

9.8 Amendments and Waivers . No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver of any right or remedy hereunder shall be valid unless the same shall be in writing and signed by the Party giving such waiver. No waiver by any Party with respect to any default, misrepresentation or breach of warranty or covenant hereunder shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

9.9 Severability . Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

9.10 Submission to Jurisdiction . All disputes arising out of or relating to this Agreement or termination thereof shall be submitted to the exclusive jurisdiction of the state courts of DeKalb County, Georgia and the federal court for the Northern District of Georgia, and each Party irrevocably consents to such personal jurisdiction and waives all objections thereto. Any Party may make service on another Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 9.6 .

9.11 Counterparts and Facsimile Signature . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. This Agreement may be executed by facsimile signature.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF , the Parties have executed this Agreement as of the date first above written.

	LIBERATOR, INC.

	By:	/s/ Louis S. Friedman
	Name:	LOUIS S. FRIEDMAN
	Title:	President and Chief Executive Officer

	By:	/s/ Ronald P. Scott
	Name:	RONALD SCOTT
	Title:	Chief Financial Officer

	FRIEDMAN :

	/s/ Louis S. Friedman
	LOUIS S. FRIEDMAN, personally

	WEB MERCHANTS INC.

	By:	/s/ Louis S. Friedman
	Name:	LOUIS S. FRIEDMAN

	By:	/s/ Ronald P. Scott
	Name:	RONALD SCOTT

	WEB MERCHANTS ATLANTA, LLC

	By:	/s/ Fyodor Petrenko
	Name:	FYODOR PETRENKO
	Title:	Sole Member

	PETRENKO:

	/s/ Fyodor Petrenko
	FYODOR PETRENKO, personally

[Signature Page 1 of 1 to Stock Purchase Agreement]

Section 2.6 of Seller Disclosure Schedule

Litigation

Donald Cohen

[Disclosure Schedule to Stock Purchase Agreement]

EXHIBIT A

Escrow Agreement

[Attached Separately]

[Exhibit A to Stock Purchase Agreement]

EXHIBIT B

Company Financial Statements

[Attached Separately]

[Exhibit B to Stock Purchase Agreement]

EXHIBIT 10.27

ESCROW AGREEMENT

THIS ESCROW AGREEMENT (this “ Agreement ”) is made as of this 6th day of October, 2011, by and among WEB MERCHANTS ATLANTA, LLC , a Georgia limited liability company (“ Purchaser ”), LIBERATOR, INC. (f/k/a WES Consulting, Inc.), a Florida corporation ( “ Seller ”), and TRANSFER ONLINE, INC. , an Oregon corporation (“ Escrow Agent ”).

WITNESSETH

WHEREAS , the Purchaser has agreed to purchase all of the outstanding stock of Web Merchants, Inc., a Delaware corporation (the “ Company ”) from the Seller pursuant to the terms and conditions of that certain Stock Purchase Agreement, dated as of October 6, 2011, and effective October 1, 2011, by and among the Purchaser, the Seller, the Company, Louis S. Friedman and Fyodor Petrenko (the “ Purchase Agreement ”);

WHEREAS , a portion of the purchase price under the Purchase Agreement consists of the return by Petrenko of Twenty-Five Million Three Hundred and Ninety-Four Thousand Four Hundred (25,394,400) shares of the $.01 par value common stock of Seller (hereinafter the “ Liberator Common Stock ”); and

WHEREAS , Section 1.4(g) of the Purchase Agreement provides that Purchaser shall deliver to Escrow Agent the certificate(s) representing the Liberator Common Stock acquired from Petrenko under the Purchase Agreement (the “ Escrowed Stock ”), and for Escrow Agent to disburse the Escrowed Stock in accordance with the terms and conditions hereof.

NOW, THEREFORE , in consideration of the mutual promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows:

1. Appointment of Escrow Agent. Seller and Purchaser hereby designate and appoint Escrow Agent to serve as escrow agent hereunder, and Escrow Agent hereby confirms its agreement to act as escrow agent upon the terms, conditions, and provisions of this Agreement.

2. Delivery of Escrowed Stock. Upon the closing of the transactions under the Purchase Agreement, Purchaser shall deliver to the Escrow Agent the certificate(s) representing the Escrowed Stock. The Escrowed Stock is to be held, administered, and delivered from (subject to Section 3 below) escrow by the Escrow Agent as provided for herein. Escrow Agent acknowledges receipt of the Escrowed Stock and agrees to hold, administer, and deliver the same from escrow in accordance with the terms of this Agreement. Escrow Agent shall release such Escrowed Stock only as expressly permitted hereunder.

3. Disbursement of Escrowed Stock from Escrow. The Escrow Agent shall hold, administer and deliver the certificate(s) representing the Escrowed Stock as follows:

(a) If on or before August 1, 2012, Seller has either satisfied, or Petrenko and Company have been provided with written release of any liability as a guarantor or co-borrower by the respective lender under, (1) that certain credit facility loan from Advance Financial Corporation to Seller, dated as of May 24, 2011, in the original amount of Seven Hundred Fifty Thousand Dollars ($750,000) (the “ Advance Financial Loan ”), and (2) that certain loan from Credit Cash LLC to Seller, dated as of May 19, 2011, in the original amount of Four Hundred Thousand Dollars ($400,000) (the “ Credit Cash Loan ”), then the Escrow Agent shall deliver the Escrowed Stock to the Seller.

(b) If by August 1, 2012, Seller has not satisfied the Advance Financial Loan and the Credit Cash Loan and Petrenko and Company have not been provided with the written releases of liability described in subsection (a), then the Escrow Agent shall deliver the Escrowed Stock to the Purchaser.

(c) At all times from the date hereof until the time when the conditions for delivery of the Escrowed Stock are satisfied under subsections (a) or (b) above, the Escrowed Stock shall serve as a source of funds to satisfy indemnifiable Loss(es) incurred by Fyodor Petrenko under Section 6.1(e) of the Purchase Agreement arising from claims for repayment under the Advance Financial Loan and/or the Credit Cash Loan, subject to the provisions of Article VI of the Purchase Agreement.

4. Escrow Agent’s Duties. Escrow Agent shall be obligated to perform only such duties as are expressly set forth in this Agreement.

5. Liability of Escrow Agent . The Escrow Agent’s sole duty and responsibility hereunder is to receive and distribute the Escrowed Stock in accordance with the terms of this Agreement. The Escrow Agent’s liability under this Agreement shall be limited to such responsibilities, which shall be carried out as the Escrow Agent shall determine. The Escrow Agent shall be protected in acting upon any written notice, request, affidavit, certificate, waiver, consent, receipt, judgment, court order or other paper or document which Escrow Agent in good faith believes to be genuine and what it purports to be. In performing any of its duties hereunder, the Escrow Agent shall not incur any liability to anyone for damages, losses or expenses, except for willful default or breach of trust, and, accordingly, the Escrow Agent shall not incur any such liability with respect to (a) any action taken or omitted in good faith upon advice of its counsel given with respect to any questions relating to the duties and responsibilities of the Escrow Agent under this Agreement, or (b) any action taken or omitted in reliance upon any instrument, including any written notice, request or instruction provided for in this Agreement, not only as to its due execution and the validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which the Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by a proper person or persons and to conform with the provisions of this Agreement. The Escrow Agent shall not be liable for any error or judgment, or for any act done or step taken or omitted by it in good faith, or for any mistake of fact or law, or for anything which it may do or refrain from doing in connection herewith, except its own gross negligence or willful misconduct. The Escrow Agent shall have no responsibility with respect to the application of the Escrowed Stock disbursed by it pursuant to the provisions hereof.

6. Disputes Affecting Escrowed Stock . In the event of any disagreement between Seller and Purchaser resulting in adverse claims and demands being made in connection with the Escrowed Stock (or any portion thereof) involved herein or affected hereby, the Escrow Agent shall be entitled to refuse to comply with any such claims or demands as long as such disagreement may continue, and in so refusing, shall make no delivery or other disposition of any part of the Escrowed Stock then held under this Agreement which are the subject of such disagreement, and in so doing shall be entitled to continue to refrain from acting until (a) the right of adverse claimants shall have been finally settled by binding arbitration or finally adjudicated in a court in Fulton County, Georgia assuming and having jurisdiction of the Escrowed Stock involved herein or affected hereby or (b) all differences shall have been adjusted by agreement and the Escrow Agent shall have been notified in writing of such agreement signed by the parties hereto. In the event of such disagreement, the Escrow Agent may, but need not, tender into the registry or custody of any court of competent jurisdiction in Fulton County, Georgia all money or property in the Escrow Agent’s hands under the terms of this Agreement, together with such legal proceedings as the Escrow Agent deems appropriate and thereupon to be discharged from all further duties under this Agreement. The filing of any such legal proceeding shall not deprive the Escrow Agent of compensation earned prior to such filing. The Escrow Agent shall have no obligation to take any legal action in connection with this Agreement or towards its enforcement, or to appear in, prosecute or defend any action or legal proceeding which would or might involve the Escrow Agent in any cost, expense, loss or liability unless indemnification shall be furnished to the Escrow Agent.

7. Escrow Agent’s Fees. The parties shall pay Escrow Agent a one time fee of $750 as compensation for its duties hereunder.

8. Indemnification. So long as Escrow Agent has met the standard of care required of it pursuant to this Agreement, the parties agree to indemnify and hold Escrow Agent harmless from and against any and all loss, damage, expense, liability or claim to which Escrow Agent may become subject as a result of performing its duties as Escrow Agent under this Agreement; provided that the Escrow Agent shall not be entitled to any indemnity for any losses, damages, taxes, liabilities or expenses that directly result from its own willful misconduct or gross negligence.

9. Ownership for Tax and Corporate Law Purposes . The parties hereto agree that, for purposes of federal and other taxes based on income, and for purposes of exercising any voting rights associated with or receiving any dividends or other distributions (including liquidating distributions) payable upon the Escrowed Stock, Seller is and will be treated as the beneficial owner of the Escrowed Stock unless and until it is disbursed to a person other than Seller pursuant to Section 3(b) or (c) above, and will report all income, if any, that is earned on, or derived from, the Escrowed Stock as its income in the taxable year or years in which such income is properly included and pay any taxes attributable thereto. Escrow Agent will not be responsible for tax reporting. Escrow Agent shall report and, as required, withhold any taxes as it reasonably determines may be required by any law or regulation in effect at the time.

10. General Provisions.

(a) Assignment . Neither this Agreement nor any right or benefit of any party hereunder may be assigned or transferred by such party without the prior written consent of all other parties hereto.

(b) Amendment. This Agreement may not be amended or modified without the prior written consent of all parties.

(c) Waiver. Failure to insist upon strict compliance with any of the terms or conditions of this Agreement at any one time shall not be deemed a waiver of such term or condition at any other time; nor shall any waiver or relinquishment of any right or power granted herein at any time be deemed a waiver or relinquishment of the same or any other right or power at any other time.

(d) Governing Law. Notwithstanding the place where this Agreement may be executed by any of the parties, the parties expressly agree that this Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of Georgia, without regard for its conflict of laws doctrine.

(e) Notices. Any notice or other communication to be given hereunder shall be in writing and shall be deemed sufficient when (i) mailed by United States certified mail, return receipt requested, (ii) delivered by overnight courier service, or (iii) delivered in person, at the address set forth below, or such other address as a party may provide to the others in accordance with the procedure for notices set forth in this Section:


If to the Purchaser :		With a copy to :

Web Merchants Atlanta, LLC		Busch, Slipakoff & Schuh, LLP
1820 Peachtree Rd NW		3350 Riverwood Pkwy, Suite 1550
Atlanta, GA 30309		Atlanta, GA 30339
Attn: Fyodor Petrenko, Sole Member		Attn: Adam Slipakoff, Esq.

If to the Seller :		With a copy to

Liberator, Inc.		Friedman, Dever & Merlin, LLC
2745 Bankers Industrial Drive		5555 Glenridge Connector NE, Suite 925
Atlanta, GA 30360		Atlanta, GA 30342
Attn: Louis S. Friedman, President		Attn: Sheldon E. Friedman, Esq.

If to the Escrow Agent :

Transfer Online, Inc.
512 SE Salmon Street
Portland, OR 97214
Attn: Lori Livingston, President & CEO

Notices shall be effective upon the date of delivery or refusal of personal delivery, certified mail or courier delivery. Any party may change the address to which notices are to be sent by giving written notice of such change of address to the other parties in the manner above provided for giving notice.

(f) Invalid Provision. If any provision of this Agreement shall be determined to be invalid or unenforceable, this Agreement shall be deemed amended to delete such provision and the remainder of this Agreement shall be enforceable by its terms.

(g) Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns.

(h) Further Assurances. Each party agrees to execute and deliver all such further instruments and do all such further acts as may be reasonably necessary or appropriate to effectuate this Agreement.

(i) Headings. Headings and captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or prescribe the scope of this Agreement or the intent of any provision.

(j) Person and Gender. The masculine gender shall include the feminine and neuter genders and the singular shall include the plural.

(k) Entire Agreement . This Agreement constitutes the entire agreement of the parties with respect to matters set forth in this Agreement, and supersedes any prior understanding or agreement, oral or written, with respect to such matters.

(l) Interpretations. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any party hereto, whether under any rule of construction or otherwise. No party shall be considered the draftsman. On the contrary, this Agreement has been reviewed, negotiated and accepted by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto.

(m) Execution in Counterparts. This Agreement may be executed in any number of counterparts (including facsimile and .pdf counterparts), each of which shall be an original, and all such counterparts shall constitute one and the same Agreement.

[Signatures on Following Page]

IN WITNESS WHEREOF , the parties have executed this Escrow Agreement as of the day and year first above written.

	PURCHASER :

	WEB MERCHANTS ATLANTA, LLC

	By:	/s/ Fyodor Petrenko
	Name:	F. Petrenko
	Title:	Sole Member

	SELLER :

	LIBERATOR, INC.

	By:	/s/ Louis S. Friedman
	Name:	Louis S. Friedman
	Title:	President and CEO

	ESCROW AGENT :

	TRANSFER ONLINE, INC.

	By:
	Name:	Lori Livingston
	Title:	President & CEO

EXHIBIT 10.28

LEASE AGREEMENT

THIS LEASE AGREEMENT (the “ Lease ”) is made this the 6th day of October, 2011, effective October 1, 2011 (the “ Effective Date ”), by and between ONE UP INNOVATIONS, INC., a Georgia corporation (“ Landlord ”) and WEB MERCHANTS INC. , a Delaware corporation (“ Tenant ”).

WITNESSETH :

WHEREAS, Landlord is the lessor of a certain tract of real property located at 2745 Bankers Industrial Drive, Atlanta, GA 30360 (the “ Real Property ”); and

WHEREAS , Tenant and Liberator, Inc. (f/k/a WES Consulting, Inc.), a Florida corporation and parent company of Landlord (“ Liberator ”), are parties to a Stock Purchase Agreement of even date herewith, pursuant to which Liberator is selling all of the outstanding stock of Tenant to a third party (the “ Purchase Agreement ”); and

WHEREAS, in order to provide for an orderly transition, Liberator desires that Landlord sublease to Tenant, and Tenant desires to sublease from Landlord, the portion of the Real Property occupied by Tenant immediately prior to the closing of the transactions under the Purchase Agreement (the “ Premises ”), on a month-to-month basis on the terms and conditions provided herein;

NOW THEREFORE, in consideration of the mutual covenants, representations and agreements contained herein, and other good and valuable consideration, the receipt, sufficiency and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

1. Lease of Premises . Landlord, for and in consideration of the rents, covenants, agreements and stipulations contained in this Lease, leases and rents unto Tenant, and Tenant hereby leases and takes upon the terms and conditions contained in this Lease, the Premises.

2. Lease Term . Except as otherwise set forth herein, the Tenant shall have and hold the Premises for a term commencing on the Effective Date hereof and continuing from that date on a month-to-month basis. This Lease will continue for successive terms of one month each until either Landlord or Tenant terminate this Lease tenancy by giving the other thirty (30) days written notice of an intention to terminate the Premises. In the event such notice is given, Tenants agree to pay all rent up to and including the notice period.

3. Rental Payments . Tenant agrees to pay to Landlord monthly rental for the Premises of Twelve Thousand and no/100 Dollars ($12,000.00), payable in advance on the first (1 st ) day of each calendar month, commencing on November 1, 2011. The parties will address the payment of the October 2011 rent separately.

4. Late Charges . If Landlord fails to receive any rent payment within five (5) days after it becomes due, Tenant shall pay Landlord, as additional rental, a late charge equal to five percent (5%) of the monthly rental payment. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment.

5. No Security Deposit . Tenant shall not be required to pay Landlord a security deposit.

6. Utilities, Taxes, Shared Services and Equipment . The monthly rent is inclusive of utilities, property taxes, garbage collection and other sanitary services, and reasonable use and access to copiers and other shared equipment. Tenant shall be responsible for its postage charges, which shall be invoiced separately and paid to Landlord monthly.

7. Use of Premises . The Premises shall be used for the same purposes for which it is currently being used by Tenant and shall not be used for any illegal purposes, nor in any manner to create any nuisance or trespass, nor in any manner to vitiate the insurance or increase the rate of insurance on the Premises.

8. Access to Premises . Tenant shall have the same rights of access to the Premises that existed immediately prior to the date of this Lease. Authorized keys and alarm codes shall be issued to Tenant’s personnel approved by Landlord.

9. Abandonment of the Premises . Tenant agrees not to abandon or vacate the Premises during the term of this Lease and agrees to use the Premises for the purposes permitted herein.

10. Insurance . As soon as reasonably practicable after the Effective Date hereof, but in all cases no later than ten (10) days after the date of execution of this Lease by the parties, the Tenant shall obtain and maintain in full force and effect at all times during the remainder of the Lease term, liability insurance of not less than $1,000,000, and casualty insurance covering damage or injury to the Premises with a policy limit not less than $2,000,000. Tenant shall provide evidence of such insurance to Landlord prior to the commencement of the term of this lease. Landlord and Tenant each hereby release and relieve the other, and waive its right of recovery, for loss or damage arising out of or incident to the perils insured against which perils occur in, on or about the Premises, whether due to the negligence of Landlord or Tenant or their agents, employees, contractors and/or invitees, to the extent that such loss or damage is within the policy limits of said insurance. Landlord and Tenant shall, upon obtaining the policies of insurance required, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease.

11. Repairs by Landlord . Landlord shall be responsible, at its sole expense, for the maintenance and repair of the Premises during the term of the Lease. Landlord shall, throughout the term of the Lease, and any extension or renewal thereof, at its sole expense, keep in good repair the roof, foundations and exterior walls of the Premises (inclusive of all glass and exterior doors) and underground utility and sewer pipes outside the exterior walls of the Premises. Further, Landlord shall provide for the mowing of grass, care of shrubs and general landscaping, and proper maintenance, repair and replacement of the HVAC system.

12. Alterations. Tenant shall not make any alterations, additions, or improvements to the Premises without Landlord’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. All approved alterations, additions, and improvements will be accomplished in a good and workmanlike manner, in conformity with all applicable laws and regulations.

13. Removal of Fixtures . Tenant may (if not in default hereunder) prior to the expiration of this Lease, or any extension or renewal thereof, remove all fixtures and equipment which it has placed in the Premises (but not any fixtures or equipment placed in the Premises by a prior tenant), provided Tenant repairs all damage to the Premises caused by such removal.

14. Destruction or Damage to Premises . If the Premises are partially or totally destroyed by storm, fire, lightning, earthquake or other casualty, this Lease shall terminate as of the date of such destruction and rental shall be accounted for as between Landlord and Tenant as of that date.

15. Default By Tenant; Remedies .

(a) Event of Default . The happening of any one or more of the following shall be deemed to be an event of default (hereinafter referred to as an “ Event of Default ”) under the Lease:

(i) the failure of Tenant to pay for installment of rent or other charge or money obligation herein required to be paid by Tenant within ten (10) days its due date; or

(ii) failure to cure any other covenant or provision of this lease within thirty (30) days after receiving written notice of such failure from Landlord; or

(iii) the making by Tenant of an assignment for the benefit of its creditors or the institution of voluntary or involuntary proceedings in a court of competent jurisdiction for the reorganization, liquidation or dissolution of Tenant, or for its adjudication as a bankrupt or insolvent, or for the appointment of a receiver of the property of Tenant, and any such involuntary proceedings not being dismissed and any receiver, trustee, or liquidator appointed therein not being discharged within ninety (90) days after the institution of such proceedings.

(b) Rights of Landlord. Upon the occurrence of any Event of Default, Landlord may, at its option, during the continuance of such Event of Default:

(i) terminate this Lease by written notice to Tenant and recover from Tenant damages incurred by reason of such Event of Default, including the reasonable costs of recovering and reletting the Premises and reasonable attorneys’ fees relating thereto, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof; or

(ii) Landlord may pursue such other remedies as are available at law or in equity.

16. Assignment and Subletting . Tenant may not assign or sublet any of its interest, rights and obligations under this Lease to another entity without the consent of Landlord.

17. Quiet Enjoyment. So long as Tenant observes and performs the covenants and Leases contained herein, it shall at all times during the Lease term peacefully and quietly have and enjoy possession of the Premises, but always subject to the terms hereof.

18. Miscellaneous.

(a) Interpretation and Construction. This Lease has been fully and freely negotiated by the parties hereto, and shall be considered as having been drafted jointly by the parties hereto, and shall be interpreted and construed as if so drafted, without construction in favor of or against any party on account of its participation in the drafting hereof.

(b) Assignment. Buyer may freely assign this Lease, and shall timely provide Seller with written notice thereof.

(c) Time. Time is of the essence of this Lease. Whenever the last day for the exercise of any privilege or the discharge of any duty hereunder shall fall upon a Saturday, Sunday or any public or legal holiday, the party having such privilege or duty shall have until 5:00 p.m. on the next succeeding business day to exercise such privilege or to discharge such duty.

(d) Governing Law. This Lease is to be governed by and construed in accordance with the internal laws of the state of Georgia.

(e) Attorney’s Fees. In any litigation between the parties to enforce any provision or right under this Lease, the unsuccessful party covenants and agrees to pay to the successful party all costs and expenses accrued by the prevailing party in connection with the litigation including, but not limited to, reasonable attorney’s fees.

(f) Counterparts. This Lease may be executed simultaneously in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

[Signatures begin next page]

IN WITNESS WHEREOF , the parties hereto have affixed their hands and seals the day and year first above written.

	LANDLORD :

	ONE UP INNOVATIONS, INC.

	By:	/s/ Ronald P. Scott
	Name:	Ronald P. Scott
	Title:	Chief Financial Officer

	TENANT :

	WEB MERCHANTS INC.

	By:	/s/ Fyodor Petrenko
	Name:	Fyodor Petrenko
	Title:	President

EXHIBIT 21.1

List of Subsidiaries of Liberator, Inc.

Name		State of Organization

One Up Innovations, Inc.		Georgia

Web Merchants, Inc.		Delaware

Foam Labs, Inc.		Georgia

Exhibit 31.1

CERTIFICATION

I, Louis S. Friedman, certify that:

1.	I have reviewed this annual report on Form 10-K of Liberator, Inc.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 12, 2011	/s/ Louis S. Friedman
	Louis S. Friedman
	Chief Executive Officer (Principal Executive Officer) of Liberator, Inc.

Exhibit 31.2

CERTIFICATION

I, Ronald P. Scott, certify that:

1. I have reviewed this annual report on Form 10-K of Liberator, Inc.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 12, 2011	/s/ Ronald P. Scott
	Ronald P. Scott
	Chief Financial Officer (Principal Financial and Accounting
	Officer) of Liberator, Inc.

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Liberator, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2011 as filed with the Securities and Exchange Commission (the “Report”), I, Louis S. Friedman, Chief Executive Officer (Principal Executive Officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date: October 12, 2011	/s/ Louis S. Friedman
	Louis S. Friedman
	Chief Executive Officer (Principal Executive Officer) of Liberator, Inc.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Liberator, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2011 as filed with the Securities and Exchange Commission (the “Report”), I, Ronald P. Scott, Chief Financial Officer (Principal Financial and Accounting Officer) of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date: October 12, 2011	/s/ Ronald P. Scott
	Ronald P. Scott
	Chief Financial Officer (Principal Financial and Accounting Officer) of Liberator, Inc.