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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2001

or

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

For the transition period from  to

Commission file number: 33-7106-A

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NATURADE, INC.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

23-2442709(I. R. S. Employer Identification No.)14370 Myford Rd., Irvine, California(Address of principal executive offices)

92606(Zip Code)


(714) 573-4800(Registrant's telephone number, including area code)

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

The
number of shares outstanding of the registrant's common stock, as of November 1, 2001: 7,823,639

Exhibit
Index on Page

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FORM 10-Q  QUARTERLY REPORT  Quarter Ended September 30, 2001    TABLE OF CONTENTS

|           |         |                                                                                                                                       |                                                                                       | PAGE NO.
|---------- | ------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------
|PART I:    |         | FINANCIAL INFORMATION                                                                                                                 |                                                                                       |         
|           | Item 1. |                                                                                                                                       | Financial Statements                                                                  |         
|           |         | Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000 (audited)                                                   |                                                                                       | 3       
|           |         | Statements of Operations for the three and nine month periods ended September 30, 2001 (unaudited) and September 30, 2000 (unaudited) |                                                                                       | 4       
|           |         | Statements of Cash Flows for the nine month periods ended September 30, 2001 (unaudited) and September 30 2000 (unaudited)            |                                                                                       | 5       
|           |         | Notes to Financial Statements                                                                                                         |                                                                                       | 6       
|           | Item 2. |                                                                                                                                       | Management's Discussion and Analysis of Financial Condition and Results of Operations |         
|           | Item 3. |                                                                                                                                       | Quantitative and Qualitative Disclosures About Market Risk                            |         
|PART II:   |         | OTHER INFORMATION                                                                                                                     |                                                                                       |         
|           | Item 1. |                                                                                                                                       | Legal Proceedings                                                                     |         
|           | Item 2. |                                                                                                                                       | Changes in Securities and Use of Proceeds                                             |         
|           | Item 3. |                                                                                                                                       | Defaults Upon Senior Securities                                                       |         
|           | Item 4. |                                                                                                                                       | Submission of Matters to a Vote of Security Holders                                   |         
|           | Item 5. |                                                                                                                                       | Other Information                                                                     |         
|           | Item 6. |                                                                                                                                       | Exhibits and Reports on Form 8-K                                                      |         
|SIGNATURES |         | 20                                                                                                                                   

2

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NATURADE, INC.
Balance Sheets
As of September 30, 2001 and December 31, 2000

|                                                                                                                                                                     |                                           | September 30, 2001                          |             | December 31, 2000 |           
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------- | ----------- | ----------------- | ----------
|
|ASSETS                                                                                                                                                               |                                           |                                             |             |                   |           
|Current assets:                                                                                                                                                      |                                           |                                             |             |                   |           
|                                                                                                                                                                     | Cash and cash equivalents                 |                                             | $           | 0                 |           
|                                                                                                                                                                     | Accounts receivable, net                  |                                             |             | 1,441,196         |           
|                                                                                                                                                                     | Inventories                               |                                             |             | 1,358,099         |           
|                                                                                                                                                                     | Prepaid expenses and other current assets |                                             |             | 414,784           |           
|                                                                                                                                                                     |                                           |                                             |             |                   |           
|                                                                                                                                                                     |                                           | Total current assets                        |             |                   | 3,214,079 
|Property and equipment, net                                                                                                                                          |                                           |                                             | 331,131     |                   |           
|Other assets                                                                                                                                                         |                                           |                                             | 63,500      |                   |           
|                                                                                                                                                                     |                                           |                                             |             |                   |           
|                                                                                                                                                                     |                                           | Total assets                                |             | $                 | 3,608,710 
|                                                                                                                                                                     |                                           |                                             |             |                   |           
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                |                                           |                                             |             |                   |           
|Current liabilities:                                                                                                                                                 |                                           |                                             |             |                   |           
|                                                                                                                                                                     | Accounts payable                          |                                             | $           | 2,494,470         |           
|                                                                                                                                                                     | Accrued expenses                          |                                             |             | 569,649           |           
|                                                                                                                                                                     | Current portion of long-term debt         |                                             |             | 1,641,867         |           
|                                                                                                                                                                     |                                           |                                             |             |                   |           
|                                                                                                                                                                     |                                           | Total current liabilities                   |             |                   | 4,705,986 
|Long-term debt, less current maturities                                                                                                                              |                                           |                                             | 5,464,831   |                   |           
|COMMITMENTS AND CONTINGENCIES                                                                                                                                        |                                           |                                             |             |                   |           
|STOCKHOLDERS' DEFICIT:                                                                                                                                               |                                           |                                             |             |                   |           
|Common stock, par value $0.0001 per share; authorized, 50,000,000 shares; issued and outstanding, 7,823,639 at September 30, 2001 and 7,347,389 at December 31, 2000 |                                           |                                             | 782         |                   |           
|Preferred stock, par value $0.0001 per share; authorized, 2,000,000 shares; issued and outstanding, 1,250,024                                                        |                                           |                                             | 125         |                   |           
|Additional paid-in capital                                                                                                                                           |                                           |                                             | 11,530,167  |                   |           
|Accumulated deficit                                                                                                                                                  |                                           |                                             | (18,093,181 | )                 |           
|                                                                                                                                                                     |                                           |                                             |             |                   |           
|                                                                                                                                                                     |                                           | Total stockholders' deficit                 |             |                   | (6,562,107
|                                                                                                                                                                     |                                           |                                             |             |                   |           
|                                                                                                                                                                     |                                           | Total liabilities and stockholders' deficit |             | $                 | 3,608,710 
|                                                                                                                                                                     |                                           |                                             |             |                   |           

See
accompanying notes to financial statements.

3

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NATURADE, INC

Statements of Operations for the Three Months
and Nine Months Ended September 30, 2001 and 2000

|                                                                                          |                                              | Three Months
Ended
September 30, 2001 |           | Three Months
Ended
September 30, 2000 |           | Nine Months
Ended
September 30, 2001 |           | Nine Months
Ended
September 30, 2000 |           
|----------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------- | --------- | ------------------------------------- | --------- | ------------------------------------ | --------- | ------------------------------------ | ----------
|
|Net sales                                                                                 |                                              | $                                     | 3,811,001 |                                       | $         | 3,839,867                            |           | $                                    | 12,480,677
|Cost of sales                                                                             |                                              |                                       | 2,105,558 |                                       |           | 2,084,990                            |           |                                      | 6,636,887 
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|Gross profit                                                                              |                                              |                                       | 1,705,443 |                                       |           | 1,754,877                            |           |                                      | 5,843,790 
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|Costs and expenses:                                                                       |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|                                                                                          | Selling, general and administrative expenses |                                       |           | 2,432,645                             |           |                                      | 2,105,350 |                                      |           
|                                                                                          | Depreciation and amortization                |                                       |           | 24,514                                |           |                                      | 40,508    |                                      |           
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|                                                                                          |                                              | Total operating costs and expenses    |           |                                       | 2,457,159 |                                      |           | 2,145,858                            |           
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|Operating loss                                                                            |                                              |                                       | (751,716  | )                                     |           | (390,981                             | )         |                                      | (1,837,430
|Other expense:                                                                            |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|                                                                                          | Interest expense                             |                                       |           | 138,666                               |           |                                      | 131,261   |                                      |           
|                                                                                          | Other expense (income)                       |                                       |           | (415                                  | )         |                                      | (1,673    | )                                    |           
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|Loss before provision for income taxes                                                    |                                              |                                       | (889,967  | )                                     |           | (520,569                             | )         |                                      | (2,269,642
|Provision for income taxes                                                                |                                              |                                       | 800       |                                       |           |                                     |           |                                      | 800       
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|Net loss                                                                                  |                                              | $                                     | (890,767  | )                                     | $         | (520,569                             | )         | $                                    | (2,270,442
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|Basic and Diluted Loss per share                                                          |                                              | $                                     | (0.11     | )                                     | $         | (0.07                                | )         | $                                    | (0.30     
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           
|Weighted Average Number of Shares used in Computation of Basic and Diluted Loss per Share |                                              |                                       | 7,823,639 |                                       |           | 7,347,389                            |           |                                      | 7,537,540 
|                                                                                          |                                              |                                       |           |                                       |           |                                      |           |                                      |           

See
accompanying notes to financial statements

4

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NATURADE, INC

Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and September 30, 2000

|                                                  |          | Nine Months Ended
September 30, 2001                                        |                                                     | Nine Months Ended
September 30, 2000                               |                                           
|------------------------------------------------- | -------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------
|
|Cash flows from operating activities:             |          |                                                                             |                                                     |                                                                    |                                           
|                                                  | Net loss |                                                                             | $                                                   | (2,270,442                                                         | )                                         
|                                                  |          | Adjustments to reconcile net loss to net cash used in operating activities: |                                                     |                                                                    |                                           
|                                                  |          |                                                                             | Depreciation and amortization                       |                                                                    |                                           
|                                                  |          |                                                                             | Provision for bad debt expense                      |                                                                    |                                           
|                                                  |          |                                                                             | Provision for excess and obsolete inventories       |                                                                    |                                           
|                                                  |          |                                                                             | Writeoff of debt discount                           |                                                                    |                                           
|                                                  |          |                                                                             | Effect of stock options granted                     |                                                                    |                                           
|                                                  |          |                                                                             | Changes in assets and liabilities:                  |                                                                    |                                           
|                                                  |          |                                                                             |                                                     | Accounts receivable                                                |                                           
|                                                  |          |                                                                             |                                                     | Inventories                                                        |                                           
|                                                  |          |                                                                             |                                                     | Prepaid expenses and other current assets                          |                                           
|                                                  |          |                                                                             |                                                     | Other assets                                                       |                                           
|                                                  |          |                                                                             |                                                     | Accounts payable and accrued expenses                              |                                           
|                                                  |          |                                                                             |                                                     |                                                                    |                                           
|                                                  |          |                                                                             |                                                     |                                                                    | Net cash used in operating activities:    
|Cash flows from investing activities:             |          |                                                                             |                                                     |                                                                    |                                           
|                                                  |          |                                                                             | Purchase of property and equipment                  |                                                                    |                                           
|                                                  |          |                                                                             | Proceeds from sale of property and equipment        |                                                                    |                                           
|                                                  |          |                                                                             |                                                     |                                                                    |                                           
|                                                  |          |                                                                             |                                                     |                                                                    | Net cash used in investing activities:    
|Cash flows from financing activities:             |          |                                                                             |                                                     |                                                                    |                                           
|                                                  |          |                                                                             | Net borrowings under line of credit                 |                                                                    |                                           
|                                                  |          |                                                                             | Net borrowings under related party debt             |                                                                    |                                           
|                                                  |          |                                                                             | Payments of long-term debt, including capital lease |                                                                    |                                           
|                                                  |          |                                                                             | Proceeds from issuance of debt to related party     |                                                                    |                                           
|                                                  |          |                                                                             |                                                     |                                                                    |                                           
|                                                  |          |                                                                             |                                                     |                                                                    | Net cash provided by financing activities:
|Net decrease in cash and cash equivalents         |          |                                                                             | (202,648                                            | )                                                                  |                                           
|Cash and cash equivalents, beginning of period    |          |                                                                             | 202,648                                             |                                                                    |                                           
|                                                  |          |                                                                             |                                                     |                                                                    |                                           
|Cash and cash equivalents, end of period          |          | $                                                                           | 0                                                   |                                                                    | $                                         
|                                                  |          |                                                                             |                                                     |                                                                    |                                           
|Supplemental Disclosures of Cash Flow Information |          |                                                                             |                                                     |                                                                    |                                           
|                                                  |          |                                                                             | Cash paid during the period for:                    |                                                                    |                                           
|                                                  |          |                                                                             |                                                     | Interest                                                           |                                           
|                                                  |          |                                                                             |                                                     | Taxes                                                              |                                           
|                                                  |          |                                                                             | Non-cash financing activities:                      |                                                                    |                                           
|                                                  |          |                                                                             |                                                     | Conversion of notes and related accrued interest into common stock |                                           

See
accompanying notes to financial statements

5

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NATURADE, INC.    Notes to Financial Statements



September 30, 2001

December 31, 2000(Unaudited)

(Audited)Raw Materials

$
275,207

$
300,219Finished Goods


1,443,157


2,086,058Subtotal


1,718,364


2,386,277Less: Reserve for Excess and Obsolete Inventories


(360,265
)

(269,618
)$
1,358,099

$
2,116,659


Year

Amount2001 (September-December)

$
111,9252002


433,0262003


434,0212004


415,2662005


427,624Thereafter


283,056Total

$
2,104,918


6

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7

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|                                      |               | Distribution Channels |   |          
|------------------------------------- | ------------- | --------------------- | - | ---------
|
|Three months ended September 30, 2001 |               |                       |   |          
|                                      | Sales         |                       | $ | 2,063,102
|                                      | Cost of Sales |                       |   | 1,185,389
|                                      |               |                       |   |          
|                                      |               | Gross Profit          |   | $        
|Nine months ended September 30, 2001  |               |                       |   |          
|                                      | Sales         |                       | $ | 6,571,597
|                                      | Cost of Sales |                       |   | 3,611,580
|                                      |               |                       |   |          
|                                      |               | Gross Profit          |   | $        
|Three months ended September 30, 2000 |               |                       |   |          
|                                      | Sales         |                       | $ | 2,621,168
|                                      | Cost of Sales |                       |   | 1,476,176
|                                      |               |                       |   |          
|                                      |               | Gross Profit          |   | $        
|Nine months ended September 30, 2000  |               |                       |   |          
|                                      | Sales         |                       | $ | 7,880,913
|                                      | Cost of Sales |                       |   | 4,270,329
|                                      |               |                       |   |          
|                                      |               | Gross Profit          |   | $        



8

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|                                      |               | United States |   | International |           | Total
|------------------------------------- | ------------- | ------------- | - | ------------- | --------- | -----
|Three months ended September 30, 2001 |               |               |   |               |           |      
|                                      | Sales         |               | $ | 3,720,230     |           | $    
|                                      | Cost of Sales |               |   | 2,052,712     |           |      
|                                      |               |               |   |               |           |      
|                                      |               | Gross Profit  |   | $             | 1,667,518 |      

|                                     |               | United States |   | International |           | Total
|------------------------------------ | ------------- | ------------- | - | ------------- | --------- | -----
|Nine months ended September 30, 2001 |               |               |   |               |           |      
|                                     | Sales         |               | $ | 12,187,246    |           | $    
|                                     | Cost of Sales |               |   | 6,467,906     |           |      
|                                     |               |               |   |               |           |      
|                                     |               | Gross Profit  |   | $             | 5,719,340 |      

|                                      |               | United States |   | International |           | Total
|------------------------------------- | ------------- | ------------- | - | ------------- | --------- | -----
|Three months ended September 30, 2000 |               |               |   |               |           |      
|                                      | Sales         |               | $ | 3,733,721     |           | $    
|                                      | Cost of Sales |               |   | 2,015,909     |           |      
|                                      |               |               |   |               |           |      
|                                      |               | Gross Profit  |   | $             | 1,717,812 |      

|                                     |               | United States |   | International |           | Total
|------------------------------------ | ------------- | ------------- | - | ------------- | --------- | -----
|Nine months ended September 30, 2000 |               |               |   |               |           |      
|                                     | Sales         |               | $ | 10,536,588    |           | $    
|                                     | Cost of Sales |               |   | 5,568,216     |           |      
|                                     |               |               |   |               |           |      
|                                     |               | Gross Profit  |   | $             | 4,968,372 |      



9

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, such statements
are inherently subject to risk and the Company can give no assurances that such expectations will prove to be correct. Such forward looking statements involve risks and uncertainties, and actual
results could differ from those described herein. Future results may be subject to numerous factors, many of which are beyond the control of the Company. Such risk factors include, without limitation,
the risks set forth below under "Risk Factors." The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of unexpected events.

All
comparisons below are for the three and nine month period ended September 30, 2001 compared to the three and nine month period ended September 30, 2000.

General

The Company is a branded nutraceuticals marketing company focused on high growth, innovative natural products that nourish the health and
well-being of consumers. The Company concentrates on the rapidly expanding soy food market which it expects to grow between 15 and 20% per year reaching $5 to 6 billion by 2005. The
Company has purposely avoided the vitamin and herbal categories which have experienced 20 to 25% declines per year from the late nineties. The Company's products include Naturade Total Soy (NTS), a
full line of nutritionally complete meal replacements available in several flavors of powders, ready-to-drink and bars, Naturade Soy protein boosters, Aloe Vera 80 health and
beauty care products and other niche dietary supplements. The Company's products are sold in supermarkets (e.g., Kroger and Albertson's), drug stores (e.g., CVS and Rite-Aid), mass
merchants (e.g., Wal*Mart and Kmart), club stores (e.g., Sam's Clubs and Costco), natural supermarkets (e.g., Whole Foods and Wild Oats) and over 10,000 independent health food stores.

Results of Operations



Net sales for the three months ended September 30, 2001 decreased $28,866, or 0.8%, to $3,811,001 from $3,839,867 for the three months ended September 30,
2000. Net sales for the nine months ended September 30, 2001 increased $1,582,027, or 15%, to $12,480,677 from $10,898,650 for the nine months ended September 30, 2000. These changes in net sales were
primarily a result of (i) an increase in the number of mass market customers from approximately 20,000 at September 30, 2000 to approximately 28,000 at September 30, 2001 and (ii) expanded sales of
the Company's NTS products to existing mass market customers, partially offset by a continued weakness in the health food market. These overall net sales results mask the underlying trends within the
mass market and health food channels which are explained below.



For the three months ended September 30, 2001, mass market net sales increased $529,200, or 43%, to $1,747,899 from $1,218,699 for the three months ended
September 30, 2000. For the nine months ended September 30, 2001, mass market net sales increased $2,891,343, or 96%, to $5,909,080 from $3,017,737 for the nine months ended September 30, 2000. These
increases in mass market net sales were primarily a result of (i) Year 2000 new distribution sales converting into repeat (turn) business in Year 2001, (ii) Year 2001 new distribution sales with the
addition of accounts such as Safeway and K-Mart, (iii) additional products introduced to existing mass market customers such as

10

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Kroger and Albertson's, (iv) a channel shift as certain mass market customers switched their buying patterns from purchasing through health food distributors (classified as health food sales) to
direct purchases (classified as mass market sales) and (iv) a greater brand awareness of the Company's NTS products.

The
following table illustrates mass market net sales for the three and nine months ended September 30, 2001 and 2000:

Mass Market Net Sales  ($ in 000's)

|                 |  | Three Months Ended September 30 |         | Nine Months Ended September 30
|---------------- |  | ------------------------------- | ------- | ------------------------------
|
|
|New Distribution |  | $                               | 176.0   |                               
|Channel Shift    |  |                                 |         |                               
|Turn Business    |  |                                 | 1,042.7 |                               
|                 |  |                                 |         |                               
|Total            |  |                                 | 1,218.7 |                               

The
growth in the core turn business is indicative of the successful conversion of Year 2000 new distribution sales into repeat business and the greater brand awareness of the
Company's products. For the three months ended September 30, 2001, mass market turn business net sales increased $365,200, or 35%, to $1,407,900 from $1,042,700 for the three months ended September
30, 2000. For the nine months ended September 30, 2001, mass market turn business net sales increased $1,661,400, or 67%, to $4,158,300 from $2,496,900 for the nine months ended September 30, 2000.



For the three months ended September 30, 2001, health food net sales decreased $558,066, or 21%, to $2,063,102 from $2,621,168 for the three months ended
September 30, 2000. For the nine months ended September 30, 2001, health food net sales decreased $1,309,316, or 17%, to $6,571,597 from $7,880,913 for the nine months ended September 30, 2000.

In
Year 2001, the Company discontinued products which accounted for $115,000 and $362,600, respectively, for the three months and nine months ended September 30, 2000. By factoring in
the channel shift from health food distributors to direct mass market purchases as shown in the above table and lost Year 2001 sales due to the Company's decision to discontinue these Year 2000
products, a more realistic picture emerges. For the three months ended September 30, 2001, core health food net sales are down 9.8% compared to the three months ended September 30, 2000. For the nine
months ended September 30, 2001, core health food net sales are down 4.8% compared to the nine months ended September 30, 2000. These trends compare to a category decline of 7% from Year 2000 sales
levels.

On
a percent of net sales basis, the three months ended September 30, 2001 reflects the continuing growth in the Company's sales from expansion of the mass market channel. For
the three months ended September 30, 2001, the mass market net sales represented 45.9% of total net sales compared to 31.7% of net sales for the three months ended September 30, 2000.
For the nine months ended September 30, 2001, the mass market net sales represented 47.3% of total net sales compared to 27.7% of net sales for the three months ended September 30, 2000.
 .

For
the three months ended September 30, 2001, domestic net sales decreased $13,491, or 0.4%, to $3,720,230 from $3,733,721 for the three months ended September 30,
2000. For the three months ended September 30, 2001, international net sales decreased $15,375, or 15%, to $90,771 from $106,146

11

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for the three months ended September 30, 2000. For the nine months ended September 30, 2001, domestic net sales increased $1,650,658, or 16%, to $12,187,246 from $10,536,588 for the nine
months ended September 30, 2000 primarily due to the growth in the mass market customer base and sales of NTS products to existing mass market customers. For the nine months ended
September 30, 2001, international net sales decreased $68,631, or 19%, to $293,431 from $362,062 for the nine months ended September 30, 2000 as the Company continued to
de-emphasize lower margin international business and concentrate on the more profitable domestic business.

For
the three months ended September 30, 2001, the top 40 customers accounted for $3,447,100, or 90.5% of net sales, with 15 mass market customers contributing $1,574,700, or
41.3% of net sales, 23 health food customers contributing $1,639,700, or 43% of net sales, and two international customers contributing $232,700, or 6% of net sales. For the three months ended
September 30, 2001, the Company continued its rollout of NTS powder products, which contributed $1,638,592, or 43% of net sales. During the quarter, the Company's NTS Calcium 1000 powder sales
continued the normal sell-through distribution started in the second quarter. Also during the quarter, sales of the Company's NTS bars increased $106,406 over the second quarter due to
expanded sales to K-Mart, several Safeway divisions and Kroger. The three months ended September 30, 2001 also saw the beginning of normal turn business for the NTS
ready-to-drink products with $315,773 or 8.3% of net sales. Overall, for the three months ended September 30, 2001, the top 25 products represented $2,655,500, or 70% of
net sales, with fifteen NTS products contributing $1,949,800, or 51% of net sales, eight protein powders contributing $599,400, or 16% of net sales, and two Aloe Vera products representing $106,300,
or 3% of net sales. For the three months ended September 30, 2001, the NTS family of products represented $2,153,600, or 56.5% of net sales, compared to $1,331,300, or 34.7% of net sales, for
the three months ended September 30, 2000, representing a $822,300, or 62%, increase in NTS sales from the third quarter of 2000.



Gross profit as a percentage of net sales for the three months ended September 30, 2001 decreased 0.9% to 44.8% of net sales from 45.7% for the three
months ended September 30, 2000 due to an additional reserve for slow moving inventory and expanded private label business which generally carries a lower gross margin than branded products,
partially offset by better control over label purchases and temporary labor used in repackaging certain products. Gross profit as a percentage of net sales for the nine months ended
September 30, 2001 decreased 0.1% to 46.8% of sales from 46.9% for the nine months ended September 30, 2000 due to the additional reserve for slow moving inventory and the increase in
lower margin private label business, partially offset by initial sales of NTS ready-to-drink and increased sales of other NTS products and better control over label purchases.
This private label business represents sales to one customer and accelerated during the nine months ended September 30, 2001 from a virtually nonexistent level during the nine months ended
September 30, 2000. While this private label business carries a lower gross margin, it strengthens the Company's overall business relationship with this one customer thereby potentially
creating branded business opportunities. The Company's strategy is to concentrate on branded business and does not plan to pursue other private label business.



Selling, general and administrative expenses for the three months ended September 30, 2001 increased $327,295 to $2,432,645, or 63.8% of net sales, from
$2,105,350, or 54.8% of net sales, for the three months ended September 30, 2000, an increase of 15.5%. This increase is due primarily to a $424,965 increase in brand expenses for the three
months ended September 30, 2001. As a percent of net sales, brand expenses were 24.1% and 12.9%, respectively, for the three months ended September 30, 2001 and 2000. The increase in
brand expenses for the three months ended

12

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September 30, 2001 is due primarily to increases in trade promotions of $402,841 and consumer promotions of $107,870, partially offset by reductions in advertising and public relations costs of
$96,500. These increases in brand expenses are part of the Company's strategy to promote the Company's expanded Naturade Total Soy product line under an umbrella concept of brand advertising in order
to support the recently obtained mass market distribution.



Interest expense for the three months ended September 30, 2001 increased $7,405 compared to the three months ended September 30, 2000 due to
additional borrowings under the Credit Agreement and the Loan Agreement. See Notes 5, 6 and 7 to the Financial Statements.

Liquidity and Capital Resources

The Company's cash used by operating activities was $429,778 for the nine months ended September 30, 2001 compared to cash used by operating activities
of $2,094,052 for the nine months ended September 30, 2000. This improvement was largely due to faster accounts receivable collections, improved inventory control and better management of
vendor payables for the nine months ended September 30, 2001.

The
Company's working capital decreased from $226,869 at December 31, 2000 to ($1,491,907) at September 30, 2001. This decrease was largely due to the Company's
operating losses for the nine months ended September 30, 2001.

Cash
used in investing activities during the nine months ended September 30, 2001 was $136,717 compared to cash used in investing activities during the nine months ended
September 30, 2000 of $17,758. This increase for the nine months ended September 30, 2001 was largely due to the Company's continued investment in advanced hardware and software intended
to improve the Company's receiving and shipping operations through UPC bar code scanning which is intended to eventually reduce shipping costs and errors.

The
Company's cash provided by financing activities was $363,847 for the nine months ended September 30, 2001 compared to cash provided by financing activities of $1,163,127
for the nine months ended September 30, 2000. The September 30, 2001 amount was the result of a decrease in borrowings under the Credit and Security Agreement, an increase in borrowings
under the Credit Agreement and the Loan Agreement, the conversion of accrued interest under the Credit Agreement and the Loan Agreement into principal, the conversion of part of the Loan Agreement
Advances into shares of Common Stock of the Company and the normal, recurring repayment of certain small debt obligations. See Notes 5, 6 and 7 to the Financial Statements.

The
accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. As of September 30, 2001, the Company had an accumulated deficit of $18,093,181, a net working capital deficit of $1,491,907, a stockholders' capital deficiency of
$6,562,107 and had incurred recurring net losses. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.

The
Company believes that its existing cash balances and financing arrangements will provide it with sufficient funds to finance its operations during the next twelve months. However,
in order for the Company's rollout of the NTS product line to be successful, the Company will require a capital infusion to support mass market promotional requirements. Consequently, the Company is
seeking to raise additional funds through the sale of public or private equity and/or debt financings or from other sources. No assurance can be given that additional financing will be available in
the future or that, if available, such financing will be obtainable on terms acceptable to the Company or its stockholders.

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Recently Issued Statement of Financial Accounting Standards

In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.SFAS 144 requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 is effective for financial statement issued for fiscal
years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company believes the adoption of this Statement will have no material impact on its financial
statements.

In
August 2001, the FASB issued SFAS 143,Accounting for Asset Retirement Obligations.SFAS No. 143 requires the
fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company believes
the adoptions of this Statement will have no material impact on its financial statements.

In
June 2001, the FASB finalized FASB Statements No. 141,Business Combinations(SFAS 141), and No. 142, Goodwill and Other Intangible Assets(SFAS 142).SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also
requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142
requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and
cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in
SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of
when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required
to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142.

The
Company does not expect the adoption of SFAS 141 or SFAS 142 to have a material impact on the financial position, results of operations, or cash flows of the
Company.

SFAS
No. 133,Accounting for Derivatives and Hedging Activities, is effective for all fiscal years beginning after
June 15, 2000. SFAS 133, as amended, established accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts and
for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS effective
January 1, 2001. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101,Revenue Recognition in Financial
Statements, which the Company adopted in the

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fourth quarter of 2000. Adoption of SAB 101 did not have a material impact on the Company's financial statements.

In
March 2000, the FASB issued FASB Interpretation No. 44,Accounting for Certain Transactions involving Stock
Compensation, an interpretation of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to
Employees("FIN 44"). FIN 44 clarifies the application of APB 25 for the following: the definition of employee for the purposes of applying APB 25; the criteria for determining
whether a plan qualifies as a non-compensatory plan; the accounting consequence for various modifications to the terms of a previously fixed stock option or award; and the accounting for
an exchange of stock compensation awards in a business combination. The Company repriced options to purchase 381,000 shares of Common Stock in 1999. The Company adopted FIN 44 effective July 1,
2000 and such adoption did not have a material impact on the Company's financial statements. However, the repriced options are now accounted for as variable awards and future increases in the
Company's stock price may affect future operating results.

Risk Factors

The short and long-term success of the Company is subject to certain risks, many of which are substantial in nature. Stockholders and prospective
stockholders in the Company should consider carefully the following risk factors, in addition to other information contained herein.



The Company's success is dependent on its current financing as well as new financing to support its working capital requirements and fund its operating losses.
Currently, the Company is not in technical compliance with the minimum net income covenant of the Credit and Security Agreement with Wells Fargo which, if not waived by Wells Fargo, could result in
termination of this agreement. See "Management's Discussion and Analysis of Financing Condition and Results of OperationsLiquidity and Capital Resources" and Note 7 to the
Financial Statements. Starting in 2000, the Company embarked on a strategy to rollout the NTS product line to the mass market which requires a high level of marketing expenditures. Although the
Company is seeking additional third party financing to fund this strategy, no assurance can be given that the Company will have access to additional funds or, if funds can be obtained, that the terms
on which they can be obtained will be satisfactory. In such event, the Company's business and results of operations, and its ability to continue as a going concern, will be
materially adversely affected. See Financial Statements to the Company's Form 10-K for the fiscal year ended December 31, 2000, Note 1Going Concern.



Our business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorist activities and threats
aimed at the United States, transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services
could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we may experience an increase in operating costs, such as costs for transportation,
insurance and security as a result of the terrorist activities and potential activities. We may also experience delays in receiving payments from payers that have been affected by the terrorist
activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact our
results of operations, impair our ability to raise capital or otherwise adversely affect our ability to grow our business.

15

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The Company's operations, properties and products are subject to regulation by various foreign, federal, state and local government entities and agencies,
particularly the U.S. Food and Drug Administration ("FDA") and Federal Trade Commission. Among other matters, such regulation is concerned with statements and claims made in connection with the
packaging, labeling, marketing and advertising of the Company's products. The governmental agencies have a variety of processes and remedies available to them, including initiating investigations,
issuing warning letters and cease and desist orders, requiring corrective labeling or advertising, requiring consumer redress, seeking injunctive relief or product seizure, imposing civil penalties
and commencing criminal prosecution.

As
a result of the Company's efforts to comply with applicable statutes and regulations, the Company has from time to time reformulated, eliminated or relabeled certain of its
products and revised certain aspects of its sales, marketing and advertising programs. The Company may be subject in the future to additional laws or regulations administered by federal, state or
foreign regulatory authorities, the repeal or amendment of laws or regulations which the Company considers favorable, such as the Dietary Supplement Health and Education Act, or more stringent
interpretations of current laws or regulations. The Company is unable to predict the nature of such future laws, regulations, interpretations or applications, nor can the Company predict what effect
additional governmental regulations or
administrative orders, when and if promulgated, would have on the Company's business in the future. Such future laws and regulations could, however, require the reformulation of certain products to
meet new standards, the recall or discontinuance of certain products that cannot be reformulated, the imposition of additional recordkeeping requirements, expanded documentation of product efficacy,
and expanded or modified labeling and scientific substantiation. Any or all of such requirements could have a materially adverse effect on the Company's results of operations and financial condition.



The Company currently is engaged in developing nutraceuticals, which are characterized by extensive research efforts and rapid technological progress and
change. New process developments are expected to continue at a rapid pace in both industry and academia. The Company's future success will depend on its ability to develop and commercialize its
existing product candidates and to develop new products. There can be no assurance that the Company will successfully complete the development of any of its existing product candidates or that any of
its future products will be commercially viable or achieve market acceptance. In addition, there can be no assurance that research and development and discoveries by others will not render some or all
of the Company's programs or potential product candidates uncompetitive or obsolete.



Since the Company outsourced its manufacturing requirements in 1999, the Company is significantly dependent on these third-party manufacturers. The use of
third party manufacturers and the resulting lack of direct control over the production of its products could result in the Company's failure to receive timely delivery of products of acceptable
quality. Although the Company believes that alternative manufacturing sources are available, the loss of one or more third party manufacturers could have a materially adverse effect on the Company's
results of operations until an alternative source is located and has commenced producing the Company's products.



The market for nutraceutical products is highly competitive. Many, if not all, of the Company's competitors have substantially greater capital resources,
research and development capabilities, and

16

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manufacturing and marketing resources, capabilities and experience than the Company. The Company's competitors may succeed in developing products that are more effective or less costly than any
products that may be developed by the Company.



The Company's success is dependent upon its ability to attract and retain qualified scientific and executive management personnel. To commercialize its
products and product candidates, the Company must maintain and expand its personnel, particularly in the areas of product sales and marketing. The Company faces intense competition for such personnel
from other companies, academic institutions, government entities and other research organizations. There can be no assurance that the Company will be successful in hiring or retaining qualified
personnel. Moreover, managing the integration of such new personnel could pose significant risks to the Company's development and progress and increase its operating expenses.



The Company has experienced, and expects to continue to experience, variations in its net sales and operating results from quarter to quarter. The Company
believes that the factors which influence this variability of quarterly results include the timing of the Company's introduction of new product lines, the level of consumer acceptance of each product
line, general economic and industry conditions that affect consumer spending and retailer purchasing, the availability of manufacturing capacity, the timing of trade shows, the product mix of customer
orders, the timing of placement or cancellation of customer orders, transportation delays, the occurrence of chargebacks in excess of reserves and the timing of expenditures in anticipation of
increased sales and actions of competitors. Accordingly, a comparison of the Company's results of operations from period to period is not necessarily meaningful, and the Company's results of
operations for any period are not necessarily indicative of future performance.



Product liability risk is inherent in the testing, manufacture, marketing and sale of the Company's products and product candidates, and there can be no
assurance that the Company will be able to avoid significant product liability exposure. The Company may be subject to various product liability claims, including, among others, that its products
include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. The Company currently maintains a general liability insurance
policy and a product liability insurance policy. There can be no assurance that the Company will be able to maintain such insurance in sufficient amounts to protect the Company against such
liabilities at a reasonable cost. Any future product liability claim
against the Company could result in the Company paying substantial damages, which may not be covered by insurance and may have a materially adverse effect on the business and financial condition of
the Company.



The Company's products consist of vitamins, minerals, herbs and other ingredients that the Company regards as safe when taken as suggested by the Company and
that various scientific studies have suggested may involve health benefits. While the Company conducts extensive quality control testing on its products the Company generally does not conduct or
sponsor clinical studies relating to the benefits of its products. The Company is highly dependent upon consumers' perception of the overall integrity of its business, as well as the safety and
quality of its products and similar products distributed by other companies which may not adhere to the same quality standards as the Company. The Company could be adversely affected if any of the
Company's products or any similar products

17

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distributed by other companies should prove or be asserted to be harmful to consumers or should scientific studies provide unfavorable findings regarding the effectiveness of any such products. The
Company's ability to attract and retain distributors could be adversely affected by negative publicity relating to it or by the announcement by any governmental agency of investigatory proceedings
regarding the business practices of the Company.



The Company's success depends in part on its ability to obtain and maintain patent protection for its technologies and products, preserve its trade secrets,
and operate without infringing on the property rights of third parties. The Company's policy is to pursue registrations for all of the trademarks associated with its key products. The Company relies
on common law trademark rights to protect its unregistered trademarks as well as its trade dress rights. Common law trademark rights generally are limited to the geographic area in which the trademark
is actually used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere in the United States. The
Company intends to register its trademarks in certain foreign jurisdictions where the Company's products are sold. However, the protection available, if any, in such jurisdictions may not be as
extensive as the protection available to the Company in the United States.

Currently,
the Company has received over twenty United States trademark registrations as well as a California registration on one trademark. The Company also maintains trademark
registrations in over
twelve foreign countries. To the extent the Company does not have patents on its products, another company may replicate one or more of the Company's products. Litigation may be necessary to enforce
the Company's patent and proprietary rights. Any such litigation could be very costly and could distract the Company's personnel. The Company can provide no assurance of a favorable outcome of any
litigation proceeding. An unfavorable outcome in any proceeding could have a materially adverse effect on the Company's business, financial condition and results of operations.



Each year, the Company introduces new products to meet consumer demands and counter competitive threats. These new products include product line extensions,
such as new flavors to currently existing products, as well as new formulations or configurations, such as ready-to-drink and bars. While the Company conducts extensive market
research to determine consumer trends in both the mass and health food markets, there can be no assurance that the Company's new products will be accepted by consumers and retailers. In addition,
there can be no assurance that once new products are initially distributed to mass market and health food retailers, there will be repeat orders for these new products. Furthermore, expensive
introductory retailer charges for additional shelf space may negate any initial increase in sales.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Company's earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies as a result of international purchases.
As a result, the Company bears the risk of exchange rate gains or losses.

The
Company's interest expense is sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect interest paid on the
Company's debt. The Company's line of credit is at a variable rate while the Company's Credit Agreement and Loan Agreement are at fixed interest rates.

18

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PART II. Other Information

ITEM 1. Legal Proceedings

NONE

ITEM 2. Changes in Securities and Use of Proceeds

NONE

ITEM 3. Defaults Upon Senior Securities

As of September 30, 2001 and the date of this Quarterly Report, the Company was not in technical compliance with the minimum net income covenant of the
Credit and Security Agreement with Wells Fargo Business Credit ("Wells Fargo") requiring that the net loss of the Company for the nine months ended September 30, 2001 not exceed $1,900,000. The
Company has notified Wells Fargo of the foregoing and is in discussions with Wells Fargo regarding a potential waiver of this covenant. However, there can be no assurance that the Company will be
successful in having this covenant waived. In such event, Wells Fargo would be entitled to exercise certain remedies under the Credit and Security Agreement, including termination of this agreement.

ITEM 4. Submission of Matters to a Vote of Security Holders

At the annual meeting of stockholders held on October 9, 2001, the following proposals were adopted by the margins indicated:



Number of SharesFor

Against

AbstainLionel P. Boissiere, Jr.

7,341,930

0

23,124William B. Doyle, Jr.

7,341,930

0

23,124Derek Hall

7,341,952

0

23,102Bill D. Stewart

7,341,729

0

23,325David Weil

7,341,729

0

23,325




For

6,005,821Against

21,632Abstain

1,590




For

7,350,767Against

13,526Abstain

583


NONE

ITEM 5. Other Information

NONE

ITEM 6. Exhibits and Reports on Form 8-K



19

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.

|                        |  | NATURADE, INC.
(Registrant)
|----------------------- |  | ---------------------------
|DATE: November 14, 2001 |  | By:                        
|DATE: November 14, 2001 |  | By:                        

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