**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**forthe Quarterly Period Ended March 31, 2007**

Commission file number **000-23731**

**NUTRACEUTICAL INTERNATIONAL CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                   |   | **87-0515089**                     |
|----------------------------------------------------------------|--------|------------------------------------|
| (State of  incorporation)                                      |   | (IRS Employer  Identification No.) |
| **1400 Kearns Boulevard, 2****nd Floor, Park City, Utah** |   | **84060**                          |
| (Address of  principal executive office)                       |   | (Zip code)                         |

 

**(435) 655-6106**

(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

YES  x      NO  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer as defined in Rule 12b-2of the Exchange Act (check one):

| Large accelerated filer  o |   | Accelerated filer  x |   | Non-accelerated  filer  o |
|--------------------------------------|--------|--------------------------------|--------|-------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

YES  o      NO  x

At April 26,2007, the registrant had 11,020,804 shares of common stock outstanding.

 

----

**NUTRACEUTICALINTERNATIONAL CORPORATION**

**INDEX**

| **Description** | ** ** | ** **             | ** ** | ** **                                                                                                                                  | ** ** | ** ** | **Page No.** |
|-----------------|------------|------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------------|
| Part I.    |       | Financial  Information | 3          |
|            |       | Item  1.               |       | Financial  Statements                                                                                                                       | 3          |
|            |       |                   |       | Condensed Consolidated Balance Sheets  -September 30, 2006 and March 31, 2007                                                     | 3          |
|            |       |                   |       | Condensed Consolidated Statements of Operations and  Comprehensive Income - Three Months and Six Months Ended March 31, 2006  and 2007 | 4          |
|            |       |                   |       | Condensed Consolidated Statements of Cash Flows -Six  Months Ended March 31, 2006 and 2007                                             | 5          |
|            |       |                   |       | Notes to Condensed Consolidated Financial Statements                                                                                        | 6          |
|            |       | Item 2.                |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                 | 10         |
|            |       | Item 3.                |       | Quantitative and Qualitative Disclosures about Market  Risk                                                                                 | 17         |
|            |       | Item 4.                |       | Controls and Procedures                                                                                                                     | 18         |
| Part II.   |       | Other  Information     | 19         |
|            |       | Item  1.               |       | Legal  Proceedings                                                                                                                          | 19         |
|            |       | Item 1A.               |       | Risk Factors                                                                                                                                | 19         |
|            |       | Item 2.                |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                | 19         |
|            |       | Item 4.                |       | Submission of Matters to a Vote of Security Holders                                                                                         | 19         |
|            |       | Item 6.                |       | Exhibits                                                                                                                                    | 20         |

 

2

----

**PART I—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

**NUTRACEUTICAL INTERNATIONAL CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(unaudited)(dollars in thousands)**

| ** **                                    | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                    | ** ** | **2006(1)**            | ** ** | **2007**           | ** ** |
| **ASSETS**                                    | ** ** |                   | ** ** | ** **         |       | ** ** | ** ** |
| Current assets                                |       |                   |       | ** **         |       |   |   |
| Cash                                          |       |                   | $          | 2,834              | ** ** |   | $ | 3,239 |   |
| Accounts receivable, net                      |       |                   | 10,621     | ** **         |       | 13,856 |   |
| Inventories, net                              |       |                   | 27,329     | ** **         |       | 26,656 |   |
| Prepaid expenses and other current assets     |       |                   | 1,882      | ** **         |       | 2,497 |   |
| Deferred income taxes                         |       |                   | 1,771      | ** **         |       | 1,781 |   |
| Total current assets                          |       |                   | 44,437     | ** **         |       | 48,029 |   |
| Property, plant and equipment, net            |       |                   | 32,669     | ** **         |       | 35,482 |   |
| Goodwill                                      |       |                   | 18,366     | ** **         |       | 33,231 |   |
| Intangible  assets, net                       |       |                   | 6,755      | ** **         |       | 9,818 |   |
| Other non-current  assets, net                |       |                   | 630        | ** **         |       | 594 |   |
| Deferred income  taxes, net                   |       |                   | 5,103      | ** **         |       | 4,013 |   |
|                                          |       |                   | $          | 107,960            | ** ** |   | $ | 131,167 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** | ** ** |                   | ** ** | ** **         |       | ** ** | ** ** |
| Current liabilities                           |       |                   |       | ** **         |       |   |   |
| Accounts payable                              |       |                   | $          | 9,124              | ** ** |   | $ | 10,523 |   |
| Accrued expenses                              |       |                   | 5,370      | ** **         |       | 5,034 |   |
| Total current liabilities                     |       |                   | 14,494     | ** **         |       | 15,557 |   |
| Long-term debt                                |       |                   | 2,500      | ** **         |       | 17,000 |   |
| Other non-current  liabilities                |       |                   | 184        | ** **         |       | 191 |   |
| Total liabilities                             |       |                   | 17,178     | ** **         |       | 32,748 |   |
| Stockholders’  equity                    |       |                   |       | ** **         |       |   |   |
| Common stock                                  |       |                   | 110        | ** **         |       | 110 |   |
| Additional paid-in capital                    |       |                   | 32,665     | ** **         |       | 32,769 |   |
| Retained earnings                             |       |                   | 57,840     | ** **         |       | 65,354 |   |
| Accumulated other comprehensive income        |       |                   | 167        | ** **         |       | 186 |   |
| Total stockholders’ equity               |       |                   | 90,782     | ** **         |       | 98,419 |   |
|                                          |       |                   | $          | 107,960            | ** ** |   | $ | 131,167 |   |

----

(1)          The condensedconsolidated balance sheet as of September 30, 2006 has been preparedusing information from the audited financial statements at that date.

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

3

----

**NUTRACEUTICAL INTERNATIONAL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME(unaudited)(dollars in thousands, except per share data)**

| ** **                                          | ** ** | **Three months ended March 31,** | ** ** | **Six months ended March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                             | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net sales                                           |       | $                                                    | 41,025     |                                               | $          | 42,104 |   | $ | 77,729 |   | $ | 77,952 |   |
| Cost of sales                                       |       | 19,272                                               |       | 18,980                                             |       | 36,832 |   | 35,304 |   |
| Gross profit                                        |       | 21,753                                               |       | 23,124                                             |       | 40,897 |   | 42,648 |   |
| Operating expenses                                  |       |                                                 |       |                                               |       |   |   |   |   |
| Selling, general and administrative                 |       | 14,485                                               |       | 16,036                                             |       | 27,931 |   | 29,958 |   |
| Amortization of intangible assets                   |       | 94                                                   |       | 63                                                 |       | 188 |   | 109 |   |
| Income from  operations                             |       | 7,174                                                |       | 7,025                                              |       | 12,778 |   | 12,581 |   |
| Interest and  other (income)/expense, net           |       | (1,020                                               | )          | 318                                                |       | (1,031 | ) | 462 |   |
| Income before  provision for income taxes           |       | 8,194                                                |       | 6,707                                              |       | 13,809 |   | 12,119 |   |
| Provision for  income taxes                         |       | 3,154                                                |       | 2,548                                              |       | 5,316 |   | 4,605 |   |
| Net income                                          |       | $                                                    | 5,040      |                                               | $          | 4,159 |   | $ | 8,493 |   | $ | 7,514 |   |
| Other  comprehensive income/(loss)                  |       |                                                 |       |                                               |       |   |   |   |   |
| Foreign currency translation adjustment, net of tax |       | 5                                                    |       | 25                                                 |       | (5 | ) | 19 |   |
| Comprehensive  income                               |       | $                                                    | 5,045      |                                               | $          | 4,184 |   | $ | 8,488 |   | $ | 7,533 |   |
| Net income per  common share                        |       |                                                 |       |                                               |       |   |   |   |   |
| Basic                                               |       | $                                                    | 0.44       |                                               | $          | 0.38 |   | $ | 0.74 |   | $ | 0.68 |   |
| Diluted                                             |       | 0.43                                                 |       | 0.37                                               |       | 0.73 |   | 0.67 |   |
| Weighted average  common shares outstanding         |       |                                                 |       |                                               |       |   |   |   |   |
| Basic                                               |       | 11,407,900                                           |       | 11,018,748                                         |       | 11,439,865 |   | 11,017,342 |   |
| Dilutive effect of stock options                    |       | 185,703                                              |       | 221,917                                            |       | 175,174 |   | 209,118 |   |
| Diluted                                             |       | 11,593,603                                           |       | 11,240,665                                         |       | 11,615,039 |   | 11,226,460 |   |

 

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

4

----

**NUTRACEUTICAL INTERNATIONAL CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(dollars in thousands)**

| ** **                                                                        | ** ** | **Six months ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                           | ** ** | **2007** | ** ** |
| **Cash flows from operating  activities**                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net income                                                                        |       | $                                                  | 8,493      |   | $ | 7,514 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities |       |                                               |       |   |   |
| Depreciation and amortization                                                     |       | 2,338                                              |       | 2,265 |   |
| Amortization of deferred financing fees                                           |       | 91                                                 |       | 28 |   |
| Losses/(gain) on disposals of property and equipment                              |       | (1,100                                             | )          | 4 |   |
| Deferred income taxes                                                             |       | 597                                                |       | 612 |   |
| Changes in assets  and liabilities, net of effects of acquisitions                |       |                                               |       |   |   |
| Accounts receivable, net                                                          |       | (2,499                                             | )          | (2,818 | ) |
| Inventories, net                                                                  |       | (3,588                                             | )          | 2,283 |   |
| Prepaid expenses and other current assets                                         |       | 365                                                |       | (580 | ) |
| Other non-current assets, net                                                     |       | 6                                                  |       | (3 | ) |
| Accounts payable                                                                  |       | 806                                                |       | 1,254 |   |
| Accrued expenses                                                                  |       | (418                                               | )          | (417 | ) |
| Other non-current liabilities                                                     |       | —                                             |       | (49 | ) |
| Net cash provided by operating activities                                         |       | 5,091                                              |       | 10,093 |   |
| **Cash  flows from investing activities**                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Acquisitions of  businesses                                                       |       | (95                                                | )          | (20,064 | ) |
| Proceeds from  sale of property and equipment                                     |       | 4,500                                              |       | — |   |
| Purchases of  property and equipment                                              |       | (9,896                                             | )          | (4,221 | ) |
| Net cash used in investing activities                                             |       | (5,491                                             | )          | (24,285 | ) |
| **Cash  flows from financing activities**                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Payments on other  non-current liabilities                                        |       | (225                                               | )          | — |   |
| Proceeds from  long-term debt                                                     |       | 6,000                                              |       | 20,500 |   |
| Payments on  long-term debt                                                       |       | (5,000                                             | )          | (6,000 | ) |
| Proceeds from  issuances of common stock                                          |       | 140                                                |       | 86 |   |
| Purchases of  common stock for treasury                                           |       | (1,969                                             | )          | — |   |
| Tax benefit from  stock option exercises                                          |       | 10                                                 |       | 18 |   |
| Net cash provided by (used in) financing activities                               |       | (1,044                                             | )          | 14,604 |   |
| Effect of exchange rate changes on cash                                           |       | (2                                                 | )          | (7 | ) |
| Net increase (decrease) in cash                                                   |       | (1,446                                             | )          | 405 |   |
| Cash at beginning  of period                                                      |       | 3,371                                              |       | 2,834 |   |
| Cash at end of period                                                             |       | $                                                  | 1,925      |   | $ | 3,239 |   |

 

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

5

----

**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (dollars in thousands, except per share data)**

**1.**                 INTERIM CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the accompanyingunaudited condensed consolidated financial statements include all necessaryadjustments (consisting of normal recurring accruals) to present fairly the consolidatedfinancial position of Nutraceutical International Corporation and itssubsidiaries (the “Company”) as of March 31, 2007, the results of theiroperations for the three months and six months ended March 31, 2006 and2007 and their cash flows for the six months ended March 31, 2006 and2007, in conformity with accounting principles generally accepted in the UnitedStates of America for interim financial information applied on a consistentbasis. Results for the three and six months ended March 31, 2007 are notnecessarily indicative of the results to be expected for the full fiscal year.

Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted. Accordingly, these financial statements should beread in conjunction with the Company’s Form 10-K for the Fiscal YearEnded September 30, 2006, which was filed with the Securities and ExchangeCommission on November 30, 2006.

**2.**                 ACCOUNTSRECEIVABLE, NET

Accountsreceivable, net of allowances for sales returns and doubtful accounts,consisted of the following:

| ** **           | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|----------------------|------------|------------------------|------------|--------------------|------------|
| ** **           | ** ** | **2006**               | ** ** | **2007**           | ** ** |
| Accounts  receivable |       |                   | $          | 12,610             |       |   |   | $ | 15,904 |   |   |
| Less allowances      |       |                   | (1,989     | )                  |       |   | (2,048 | ) |   |
|                 |       |                   | $          | 10,621             |       |   |   | $ | 13,856 |   |   |

 

**3.**                 INVENTORIES, NET

Inventories,net of reserves for slow moving, obsolete and/or damaged inventory, werecomprised of the following:

| ** **      | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|-----------------|------------|------------------------|------------|--------------------|------------|
| ** **      | ** ** | **2006**               | ** ** | **2007**           | ** ** |
| Raw materials   |       |                   | $          | 11,712             |       |   |   | $ | 10,997 |   |   |
| Work-in-process |       |                   | 6,415      |               |       |   | 6,163 |   |   |
| Finished goods  |       |                   | 11,104     |               |       |   | 11,396 |   |   |
|            |       |                   | 29,231     |               |       |   | 28,556 |   |   |
| Less reserves   |       |                   | (1,902     | )                  |       |   | (1,900 | ) |   |
|            |       |                   | $          | 27,329             |       |   |   | $ | 26,656 |   |   |

 

**4.**                 ACQUISITION

On January 10, 2007, the Company acquired the *Zand*®, *Natra-Bio*®, *bioAllers*®, * Herbs for Kids*TM and *Complimed*® brands by purchasing selected operating assets ofBotanical Laboratories, Inc.

6

----

**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) (dollars in thousands, except per share data)**

The aggregate purchase price of this acquisition wasapproximately $8,674 in cash. The Consolidated Statements of Operations andConsolidated Statements of Cash Flows presented herein include the activitiesof this acquired business from the date of acquisition. The expected long-termsales and expense synergies of acquired businesses are generally not realizedimmediately following acquisition as certain transition and integration mattersmust be completed.

Thisacquisition is in keeping with the Company’s business strategy of consolidatingthe fragmented industry in which it competes. The acquisition was accounted forusing the purchase method of accounting. Accordingly, the aggregate purchaseprice was assigned to the assets acquired and liabilities assumed based ontheir fair market values at the date of acquisition. The excess of aggregatepurchase price over the fair market values of the assets acquired andliabilities assumed was classified as goodwill. The following reflects theallocation of the aggregate purchase price for this acquisition to theaggregate assets acquired and liabilities assumed:

| Current assets    |   | $     | 507    |   |
|-------------------|--------|-------|--------|--------|
| Goodwill          |   | 7,191 |   |
| Intangible assets |   | 976   |   |
|              |   | $     | 8,674  |   |

 

The acquired intangibleassets of $976, which include trademarks and tradenames that have indefinitelives and are not subject to amortization, and goodwill of $7,191, which is notsubject to amortization for financial statement purposes, are expected to bedeductible for tax purposes over fifteen years.

**5.**                 PROPERTY, PLANTAND EQUIPMENT

On January 20, 2006,the Company sold its 31,340 square foot building located in Park City, Utah forapproximately $4,500 in cash. At the time of sale, the building had a bookvalue of $3,395. A gain of $1,105 ($680 after tax, or $0.06 per diluted share)was included in interest and other (income)/expense for the three and sixmonths ended March 31, 2006.

**6.**                 GOODWILL

Thechange in the carrying amount of goodwill from September 30, 2006 to March 31,2007 was as follows:

| ** **                                        | ** ** | **Goodwill** | ** ** |
|---------------------------------------------------|------------|--------------|------------|
| Balance as of  September 30, 2006            |       | $            | 18,366     |   |
| Goodwill attributable to fiscal 2007 acquisitions |       | 14,865       |       |
| Balance as of  March 31, 2007                |       | $            | 33,231     |   |

 

7

----

**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) (dollars in thousands, except per share data)**

**7.**                 INTANGIBLE ASSETS

Thecarrying amounts of intangible assets at September 30, 2006 and March 31,2007 were as follows:

| ** **                                      | ** ** | **September 30, 2006** | ** ** | **March 31, 2007** | ** ** | **Weighted** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|--------------|------------|
| ** **                                      | ** ** | **Gross**                        | ** ** | ** **                   | ** ** | **Net**      | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** | **Average** | ** ** |
| ** **                                      | ** ** | **Carrying**                     | ** ** | **Accumulated**              | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** | **Amortization** | ** ** |
| ** **                                      | ** ** | **Amount**                       | ** ** | **Amortization**             | ** ** | **Amount**   | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Period (Years)** | ** ** |
| Intangible assets subject  to amortization:     |       |                             |       |                         |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trademarks/trade names/patents                  |       |                             | $          | 361                          |       |         |       | $ | (284 | ) |   |   | $ | 77 |   |   |   | $ | 425 |   |   |   | $ | (305 | ) |   |   | $ | 120 |   |   |   | 5 |   |   |
| Customer relationships                          |       |                             | —     |                         |       |         | —     |   |   |   | — |   |   |   | 457 |   |   |   | (24 | ) |   |   | 433 |   |   |   | 8 |   |   |
| Developed software and technology               |       |                             | —     |                         |       |         | —     |   |   |   | — |   |   |   | 772 |   |   |   | (64 | ) |   |   | 708 |   |   |   | 5 |   |   |
|                                            |       |                             | 361        |                         |       |         | (284       | ) |   |   | 77 |   |   |   | 1,654 |   |   |   | (393 | ) |   |   | 1,261 |   |   |   |   |   |   |
| Intangible assets not  subject to amortization: |       |                             |       |                         |       |         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trademarks/trade names/licenses                 |       |                             | 6,678      |                         |       |         | —     |   |   |   | 6,678 |   |   |   | 8,557 |   |   |   | — |   |   |   | 8,557 |   |   |   |   |   |   |
|                                            |       |                             | $          | 7,039                        |       |         |       | $ | (284 | ) |   |   | $ | 6,755 |   |   |   | $ | 10,211 |   |   |   | $ | (393 | ) |   |   | $ | 9,818 |   |   |   |   |   |   |

 

Estimatedfuture amortization expense related to the March 31, 2007 net carryingamount of $1,261 for intangible assets subject to amortization is as follows:

| ** **                                   | ** ** | **Estimated**    | ** ** |
|----------------------------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Amortization** | ** ** |
| **Year Ending September 30,** | ** ** | ** **       | ** ** | **Expense** | ** ** |
| 2007(1)                                      |       |             | $          | 125 |   |   |
| 2008                                         |       |             | 244        |   |   |
| 2009                                         |       |             | 241        |   |   |
| 2010                                         |       |             | 234        |   |   |
| 2011                                         |       |             | 227        |   |   |
| Thereafter                                   |       |             | 190        |   |   |
|                                         |       |             | $          | 1,261 |   |   |
|                                              |            |                  |            |  |  |  |  |  |

----

(1)                Estimatedamortization expense for the year ending September 30, 2007 includes onlyamortization to be recorded after March 31, 2007.

**8.**                 OPERATINGSEGMENTS

Segment identification and selection is consistentwith the management structure used by the Company to evaluate performance andmake decisions regarding resource allocation, as well as the materiality offinancial results consistent with that structure. Based on the Company’smanagement structure and method of internal reporting, the Company has oneoperating segment. The Company does not review operating results on adisaggregated basis; rather, management reviews operating results on anaggregate basis.

8

----

**NUTRACEUTICAL INTERNATIONAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (unaudited) (dollars in thousands, except per share data)**

Netsales attributed to customers in the United States and foreign countries forthe three and six months ended March 31, 2006 and 2007 were as follows:

| ** **        | ** ** | **Three months ended  March 31,** | ** ** | **Six months ended  March 31,** | ** ** |
|-------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **        | ** ** | **2006**                                         | ** ** | **2007**                                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| United States     |       | $                                                | 37,237     |                                           | $          | 37,800 |   | $ | 70,430 |   | $ | 70,093 |   |
| Foreign countries |       | 3,788                                            |       | 4,304                                          |       | 7,299 |   | 7,859 |   |
|              |       | $                                                | 41,025     |                                           | $          | 42,104 |   | $ | 77,729 |   | $ | 77,952 |   |

 

Certain net sales attributed to customers in theUnited States are sold to customers who in turn may sell such products tocustomers in foreign countries while certain net sales attributed to customersin foreign countries are sold to customers who in turn may sell such productsto customers in the United States.

9

----

**Item 2.**   Management’sDiscussion and Analysis of Financial Condition  and Results of Operations

**General**

The following discussion and analysis should be readin conjunction with this report on Form 10-Q, including Part I,Item 1.

We are an integrated manufacturer, marketer,distributor and retailer of branded nutritional supplements and other naturalproducts sold primarily to and through domestic health and natural food stores.Internationally, we market and distribute branded nutritional supplements and othernatural products to and through health and natural product distributors andretailers. Our core business strategy is to acquire, integrate and operate,from beginning to end, the manufacturing, marketing and distribution of brandednutritional supplement businesses in the natural products industry. We believethat the consolidation and integration of these acquired businesses providesongoing financial synergies through increased scale and market penetration, aswell as strengthened customer relationships.

We sell branded nutritional supplements and othernatural products under the trademarks *Solaray**®**,*KAL*®,*Nature’s Life*®,*Natural Balance*®,*NaturalMax*®,*VegLife*®,*Premier One*®,*Pioneer*®,*CompliMed*®,*Sunny Green*®,*Zand*®,*Natra-Bio®*,*bioAllers*®,* Herbs for KidsTM*,*Natural Sport*®,* Supplement Training SystemsTM*,*FunFresh FoodsTM*,*ActiPet*®,* Action Labs*®,* Thompson*®,* Montana Big SkyTM*,*Body Gold*®,* Healthway*®,*  LivingFlower Essences*®,*Life-flo*®,*Larenim*®,* AllVia*TM,*Sayge BioSciences*TM,*Monarch Nutritional Laboratories*TM and*Great Basin BotanicalsTM. Under the name *Woodland Publishing*TM, we publish, printand market a line of books and booklets to, among others, book distributors,national retail bookstores and health and natural food stores. We alsodistribute branded products of certain third parties.

We own neighborhood natural food markets, whichoperate under the trade names *The Real FoodCompany* TM, *Thom’s Natural Foods*TMand *Cornucopia Community MarketTM*.We also own health food stores, which operate under the trade names *Arizona Health Foods*TM, *Fresh Vitamins*TM, *Granola’s*TM and *Pilgrim’s Natureway*TM.

We were formed in 1993 bysenior management and Bain Capital, Inc. to effect a consolidationstrategy in the fragmented vitamin, mineral, herbal and other nutritionalsupplements industry (the “VMS Industry”). Since our formation, we havecompleted the following acquisitions: Solaray, Inc.; Premier One Products, Inc.;Makers of KAL, Inc. and Makers of KAL, B.V.; Monarch NutritionalLaboratories, Inc.; Action Labs, Inc.; NutraForce (Canada)International, Inc.; Woodland Publishing, Inc. and Summit Graphics, Inc.;Thompson Nutritionals, Inc.; The Real Food Company, Inc.; Thom’sNatural Foods; M.K. Health Food Distributors, Inc. (dba Nature’s Life);Arizona Health Foods, Inc.; Natural Balance, Inc.; Montana Naturals, Inc.;Cornucopia Community Market, Inc.; Pilgrim’s Natureway LLC; PioneerNutritional Formulas, Inc.; Living Flower Essences LLC; Life-flo HealthCare Products, Inc. and Nutraceutical Labs, Inc.; Vitamin Outlet, Inc.(dba Larenim) and Botanical Laboratories, Inc. As a result of theseacquisitions, internal growth and cost management, we believe that we are wellpositioned to continue to capitalize on acquisition opportunities that arise inthe VMS Industry.

**Critical AccountingPolicies**

The preparation of our financial statements inconformity with accounting principles generally accepted in the United Statesof America required us to make estimates and assumptions that affected thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the dates of the financial statements and the reportedamounts of net sales and expenses during the reported periods. Significantestimates included values and lives assigned to acquired intangible assets,reserves for customer returns and allowances, uncollectible accounts receivableand slow moving and obsolete and/or damaged inventory. Actual results maydiffer from these estimates.

10

----

Our estimates and judgments related to our criticalaccounting policies, including factors and assumptions considered in makingthese estimates and judgments, did not vary significantly for the periodspresented and had no material impact on the consolidated financial statementsas reported. Our critical accounting policies include the following:

*Accounts Receivable*—Provision is made for estimated bad debts based onperiodic analysis of individual customer balances, including an evaluation ofdays sales outstanding, payment history, recent payment trends and perceivedcredit worthiness. If general economic conditions and/or customer financialcondition were to change, additional provisions for bad debts may be required,which could have a material impact on the consolidated financial statements.

*Inventories*—Provision is made for slow moving, obsolete and/ordamaged inventory based on periodic analysis of individual inventory items,including an evaluation of historical usage and/or movement, age, expirationdate and general condition. If market demand and/or consumer preferences areless favorable than historical trends or future expectations, additionalprovisions for slow moving, obsolete and/or damaged inventory may be required,which could have a material impact on the consolidated financial statements.

*Property, Plant andEquipment*—Depreciation andamortization expense is impacted by our judgments regarding the estimateduseful lives of assets placed in service. If the actual lives of assets aresignificantly less than expected, depreciation and amortization expense wouldbe accelerated, which could have a material impact on the consolidatedfinancial statements.

*Goodwill andIntangible Assets*—Statementof Financial Accounting Standards No. 141, Business Combinations, and Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets (“SFAS 142”),require estimates and judgments in determining the initial recognition andmeasurement of goodwill and intangible assets, including factors andassumptions used in determining fair values and useful lives. Intangible assetswith finite useful lives are amortized, while intangible assets with indefiniteuseful lives are not amortized. In addition, SFAS 142 requires ongoing,periodic impairment testing, which relies on such factors and assumptions asidentified reporting units, as well as expected future net cash flows relativeto recorded book values. If an asset impairment were identified, a loss wouldbe recorded, which could have a material impact on the consolidated financialstatements.

*Revenue Recognition*—Revenue is recognized in accordance with StaffAccounting Bulletin No. 104, Revenue Recognition, which states that revenue should be recognized whenthe following criteria are met:  (1) persuasiveevidence of an arrangement exists; (2) the product has been shipped andthe customer takes ownership and assumes the risk of loss; (3) the sellingprice is fixed or determinable; and (4) collection of the resultingreceivable is reasonably assured. We believe that these criteria are satisfiedupon shipment from our facilities or, in the case of our neighborhood naturalfood markets and health food stores, at the point of sale within these stores. Revenueis reduced by provisions for estimated returns and allowances, which are basedon historical averages that have not varied significantly for the periodspresented, as well as specific known claims, if any. No other significantdeductions from revenue must be estimated at the point in time that revenue isrecognized.

11

----

**Results ofOperations**

The following table setsforth certain consolidated statements of operations data as a percentage of netsales for the periods indicated:

| ** **                                | ** ** | **Three months ended  March 31,** | ** ** | **Six months ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                         | ** ** | **2007**                                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net sales                                 |       | 100.0                                            | %          | 100.0                                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                             |       | 47.0                                             | %          | 45.1                                           | %          | 47.4 | % | 45.3 | % |
| Gross profit                              |       | 53.0                                             | %          | 54.9                                           | %          | 52.6 | % | 54.7 | % |
| Selling, general and administrative       |       | 35.3                                             | %          | 38.1                                           | %          | 35.9 | % | 38.4 | % |
| Amortization of intangible assets         |       | 0.2                                              | %          | 0.1                                            | %          | 0.3 | % | 0.2 | % |
| Income from  operations                   |       | 17.5                                             | %          | 16.7                                           | %          | 16.4 | % | 16.1 | % |
| Interest and other (income)/expense, net  |       | (2.5                                             | )%         | 0.8                                            | %          | (1.3 | )% | 0.6 | % |
| Income before  provision for income taxes |       | 20.0                                             | %          | 15.9                                           | %          | 17.7 | % | 15.5 | % |
| Provision for income taxes                |       | 7.7                                              | %          | 6.0                                            | %          | 6.8 | % | 5.9 | % |
| Net income                                |       | 12.3                                             | %          | 9.9                                            | %          | 10.9 | % | 9.6 | % |
| EBITDA(1)                                 |       | 20.4                                             | %          | 19.4                                           | %          | 19.4 | % | 19.0 | % |

 

----

(1)          See“—EBITDA.”

**Comparison of theThree Months Ended March 31, 2007 to the Three Months Ended March 31,2006**

*NetSales.*   Net sales increased by $1.1 million,or 2.6%, to $42.1 million for the three months ended March 31, 2007 (“secondquarter of fiscal 2007”) from $41.0 million for the three months ended March 31,2006 (“second quarter of fiscal 2006”). Net sales of branded nutritionalsupplements and other natural products increased by $1.2 million, or 3.1%,to $37.8 million for the second quarter of fiscal 2007 compared to $36.6 millionfor the second quarter of fiscal 2006. The increase in net sales of brandednutritional supplements and other natural products was primarily related to thenet sales contributions of the fiscal 2007 acquired businesses, partiallyoffset by a decrease in sales of some SKUs of branded products to certaincustomers. Other net sales remained relatively flat at $4.3 million forthe second quarter of fiscal 2007 compared to $4.4 million for the secondquarter of fiscal 2006. Management believes that the VMS Industry continues tohave low growth rates and remains very competitive.

*GrossProfit.*   Gross profit increased by $1.3 million,or 6.3%, to $23.1 million for the second quarter of fiscal 2007 from $21.8 millionfor the second quarter of fiscal 2006. This increase in gross profit wasprimarily attributable to the increase in net sales. As a percentage of netsales, gross profit increased to 54.9% for the second quarter of fiscal 2007compared to 53.0% for the second quarter of fiscal 2006. This increase in grossprofit was primarily attributable to decreased material costs as a percentageof net sales, including some changes in sales mix related to the fiscal 2007acquisitions.

*Selling,General and Administrative.*   Selling, general andadministrative expenses increased by $1.5 million, or 10.7%, to $16.0 millionfor the second quarter of fiscal 2007 from $14.5 million for the secondquarter of fiscal 2006. As a percentage of net sales, selling general andadministrative expenses increased to 38.1% for the second quarter of fiscal2007 compared to 35.3% for the second quarter of fiscal 2006. This increase inselling, general and administrative expenses was primarily attributable tooperating costs related to the fiscal 2007 acquired businesses, as well ascosts that tend to be fixed in the short term for sales of certain products tocertain customers, which sales were below management’s expectations.

12

----

*Amortization ofIntangibles.*   Amortization of intangibles wasapproximately $0.1 million for the second quarter of fiscal 2007 and 2006. Foreach period, amortization expense was primarily related to intangible assetsrecorded in connection with acquisitions.

*Interest and Other (Income)/Expense,Net.*   Net interest and other (income)/expense forthe second quarter of fiscal 2006 included other income of $1.1 million($0.7 million after tax, or $0.06 per diluted share) related to the gainon the sale of our 31,340 square foot building located in Park City, Utah. Exclusiveof this gain, net interest and other (income)/expense was $0.3 million forthe second quarter of fiscal 2007 and $0.1 million for the second quarter offiscal 2006 and primarily consisted of interest expense on indebtedness underour revolving credit facility.

*Provision for Income Taxes.*   Oureffective tax rate was 38.0% for the second quarter of fiscal 2007 and 38.5%for the second quarter of fiscal 2006. In each period, our effective tax ratewas higher than the federal statutory rate primarily due to state taxes.

**Comparison of the Six Months Ended March 31, 2007to the Six Months Ended March 31, 2006**

*Net Sales.*   Netsales increased by $0.3 million, or 0.3%, to $78.0 million for thesix months ended March 31, 2007 from $77.7 million for the six monthsended March 31, 2006. Net sales of branded nutritional supplements andother natural products increased by $0.4 million, or 0.5%, to $69.4 millionfor the six months ended March 31, 2007 compared to $69.0 million for thesix months ended March 31, 2006. The increase in net sales of branded nutritionalsupplements and other natural products was primarily related to the net salescontributions of the fiscal 2007 acquired businesses, partially offset by adecrease in sales of some SKUs of branded products to certain customers. Othernet sales remained relatively flat at $8.6 million for the six monthsended March 31, 2007 compared to $8.7 million for the six monthsended March 31, 2006. Management believes that the VMS Industry continuesto have low growth rates and remains very competitive.

*Gross Profit.*   Grossprofit increased by $1.7 million, or 4.3%, to $42.6 million for the sixmonths ended March 31, 2007 from $40.9 million for the six monthsended March 31, 2006. As a percentage of net sales, gross profit increasedto 54.7% for the six months ended March 31, 2007 compared to 52.6% for thesix months ended March 31, 2006. This increase in gross profit wasprimarily attributable to decreased material costs as a percentage of netsales, including some changes in sales mix related to the fiscal 2007acquisitions, as well as the increase in net sales.

*Selling, General andAdministrative.*   Selling, general andadministrative expenses increased by $2.1 million, or 7.3%, to $30.0 millionfor the six months ended March 31, 2007 from $27.9 million for thesix months ended March 31, 2006. As a percentage of net sales, sellinggeneral and administrative expenses increased to 38.4% for the six months endedMarch 31, 2007 compared to 35.9% for the six months ended March 31,2006. This increase in selling, general and administrative expenses wasprimarily attributable to operating costs related to the fiscal 2007 acquiredbusinesses, as well as costs that tend to be fixed in the short term for salesof certain products to certain customers, which sales were below management’sexpectations.

*Amortization ofIntangibles.*   Amortization of intangibles was$0.1 million for the six months ended March 31, 2007 compared to $0.2 millionfor the six months ended March 31, 2006. For each period, amortizationexpense was primarily related to intangible assets recorded in connection withacquisitions.

*Interest and Other(Income)/Expense, Net.*   Net interest and other(income)/expense for the six months ended March 31, 2006 included otherincome of $1.1 million ($0.7 million after tax, or $0.06 per dilutedshare) related to the gain on the sale of our 31,340 square foot buildinglocated in Park City, Utah as well as $0.1 million for payments received assettlement of litigation to which we were a plaintiff. Exclusive of theseitems, net interest and other (income)/expense was $0.5 million for thesix months ended March 31, 2007 and $0.2 million for the six monthsended March 31, 2006 and primarily consisted of interest expense onindebtedness under our revolving credit facility.

13

----

*Provision for Income Taxes.*   Oureffective tax rate was 38.0% for the six months ended March 31, 2007 and38.5% for the six months ended March 31, 2006. In each period, oureffective tax rate was higher than the federal statutory rate primarily due tostate taxes.

**EBITDA**

EBITDA (a non-GAAPmeasure) is defined as earnings before net interest and other (income)/expense,taxes, depreciation and amortization. EBITDAhas some inherent limitations in measuring operating performance due to theexclusion of certain financial elements such as depreciation and amortizationand is not necessarily comparable to other similarly titled captions of othercompanies due to potential inconsistencies in the method of calculation. Furthermore,EBITDA is not intended to be a substitute for cash flows from operatingactivities, as a measure of liquidity, or an alternative to net income indetermining our operating performance in accordance with generally acceptedaccounting principles. Our use of EBITDA should be considered within thefollowing context:

·       Weacknowledge that plant and equipment (while less important in our line ofbusiness due to outsourcing alternatives) are necessary to earn revenue basedon our current business model.

·       Ouruse of EBITDA as a measure of operating performance is not based on any beliefabout the reasonableness of excluding depreciation and amortization when measuring financial performance.

·       Our use of EBITDA issupported by the importance of EBITDA to the following key stakeholders:

·        **Analysts**—whoestimate our projected EBITDA and other EBITDA-based metrics in theirindependently developed financial models for investors;

·        **Creditors**—whoevaluate our operating performance based on compliance with certainEBITDA-based debt covenants;

·        **InvestmentBankers**—who use EBITDA and other EBITDA-based metrics in theirwritten evaluations and comparisons of companies within our industry; and

·        **Board ofDirectors and Executive Management**—who use EBITDA as an essentialmetric for evaluating management performance relative to our operating budgetand bank covenant compliance, as well as our ability to service debt and raisecapital for growth opportunities, including acquisitions, which are a criticalcomponent of our stated strategy. Historically, we have recorded a monthlyaccrual for incentive compensation as a percentage of EBITDA, which has beenpaid out to executive management, as well as other employees, upon completionof our annual audit.

Thefollowing table sets forth a reconciliation of net income to EBITDA for eachperiod included herein:

| ** **                                   | ** ** | **Three months ended  March 31,** | ** ** | **Six months ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                         | ** ** | **2007**                                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net income                                   |       | $                                                | 5,040      |                                           | $          | 4,159 |   | $ | 8,493 |   | $ | 7,514 |   |
| Provision for  income taxes                  |       | 3,154                                            |       | 2,548                                          |       | 5,316 |   | 4,605 |   |
| Interest and  other (income)/expense, net(1) |       | (1,020                                           | )          | 318                                            |       | (1,031 | ) | 462 |   |
| Depreciation and  amortization               |       | 1,197                                            |       | 1,164                                          |       | 2,338 |   | 2,265 |   |
| EBITDA                                       |       | $                                                | 8,371      |                                           | $          | 8,189 |   | $ | 15,116 |   | $ | 14,846 |   |

----

(1)          Includes amortization ofdeferred financing fees and losses associated with fixed asset disposals. Thethree and six months ended March 31, 2006 also include a gain of $1,105 onthe sale of a building, which gain is excluded in determining EBITDA.

14

----

Our EBITDA decreased to $8.2 million for the secondquarter of fiscal 2007 from $8.4 million for the second quarter of fiscal 2006.EBITDA as a percentage of net sales decreased to 19.4% for the second quarterof fiscal 2007 from 20.4% for the second quarter of fiscal 2006.

Our EBITDA decreased to$14.8 million for the six months ended March 31, 2007 from $15.1 millionfor the six months ended March 31, 2006. EBITDA as a percentage of netsales decreased to 19.0% for the six months ended March 31, 2007 from19.4% for the six months ended March 31, 2006.

**Seasonality**

We believe that ourbusiness is characterized by minor seasonality. However, sales to anyparticular customer can vary substantially from one quarter to the next basedon such factors as industry trends, timing of promotional discounts,international economic conditions and acquisition-related activities. Excludingthe effect of acquisitions, we have historically recorded higher brandedproducts sales volume during the second fiscal quarter (January thruMarch) due to increased interest in health-related products among consumersfollowing the holiday season.

**Liquidity andCapital Resources**

We had working capital of $32.5 million as of March 31,2007 compared to $29.9 million as of September 30, 2006. This increase inworking capital was primarily the result of increases in cash, accountsreceivable and prepaid expenses and other current assets and a decrease inaccrued expenses, partially offset by a decrease in inventories and an increasein accounts payable.

Net cash provided by operating activities for the sixmonths ended March 31, 2007 was $10.1 million compared to $5.1 million forthe comparable period in fiscal 2006. This increase in net cash provided byoperating activities for the six months ended March 31, 2007 was primarilyattributable to an increase in cash provided by changes in assets andliabilities, net of effects of acquisitions.

Net cash used in investing activities was $24.3million for the six months ended March 31, 2007 compared to $5.5 millionfor the comparable period in fiscal 2006. Our investing activities during theseperiods consisted of acquisitions of businesses, capital expenditures and, forthe six months ended March 31, 2006, proceeds of $4.5 million related tothe sale of our building.

During the six months ended March 31, 2007, wemade four acquisitions. On October 31, 2006, we acquired a majorityinterest in a complementary natural products business. On November 15,2006, we acquired the *Life-flo*® brandof health care products, which includes therapeutic creams sold in health andnatural food stores, by purchasing substantially all of the operating assets ofLife-flo Health Care Products, Inc. and Nutraceutical Labs, Inc. On December 15,2006, we acquired the *Larenim*® brandof mineral makeup by purchasing certain assets of Vitamin Outlet, Inc. On January 10,2007, we acquired the *Zand*®, *Natra-Bio*®, *bioAllers*®, * Herbs for Kids*TM and *Complimed*® brands by purchasing certain operating assets ofBotanical Laboratories, Inc. These acquisitions are in keeping with ourbusiness strategy of consolidating the fragmented industry where we compete andgive us nutritional brands with products we currently do not sell.

The aggregate purchase price of these acquisitions wasapproximately $20.1 million in cash, which was financed primarily usingborrowings under our revolving credit facility. The expected long-term salesand expense synergies of acquired businesses are generally not realizedimmediately following acquisition as certain transition and integration mattersmust be completed.

Capital expenditures during these periods relatedprimarily to real estate, distribution and manufacturing equipment, buildingimprovements related to facility consolidation efforts and information systems.

15

----

Net cash provided by (used in) financing activitieswas $14.6 million for the six months ended March 31, 2007 compared to ($1.0)million for the comparable period in fiscal 2006. During these periods,financing activities primarily related to borrowings and repayments under ourrevolving credit facility, purchases of common stock for treasury and proceedsfrom the issuance of common stock.

Our current revolving credit facility has availablecredit borrowings of $60.0 million with no automatic reductions and provides anaccordion feature which can increase the available credit borrowings to $90.0million, subject to approval by the lenders and compliance with certaincovenants and conditions.

At March 31, 2007, we had outstanding revolvingcredit borrowings of $17.0 million.   Borrowings under the revolving creditfacility are collateralized by substantially all our assets. At our election,borrowings under the revolving credit facility bear interest at the applicableEurodollar Rate plus a variable margin or at a base rate, which is the higherof the Federal Funds Rate plus 0.5% or the Prime Lending Rate, plus a variablemargin. At March 31, 2007, the applicable weighted-average interest ratefor borrowings was 6.10%. We are also required to pay a variable quarterly feeon the unused balance under the revolving credit facility. At March 31,2007, the applicable rate was 0.18%. Accrued interest on Eurodollar Rateborrowings is payable based on elected intervals of one, two or three months.Accrued interest on base rate borrowings is payable quarterly. The revolvingcredit facility matures on September 7, 2011, and we are required to repayall principal outstanding under the revolving credit facility on such date.

The revolving credit facility contains restrictivecovenants, including limitations on incurring certain other indebtedness andrequirements that we maintain certain financial ratios. As of March 31,2007, we were in compliance with these restrictive covenants. Upon theoccurrence of a default, the lender has various remedies or rights, which mayinclude proceeding against the collateral or requiring us to repay all amountsoutstanding under the revolving credit facility.

A key component of our business strategy is to seek tomake additional acquisitions, which may require that we obtain additionalfinancing, which could include the incurrence of substantial additionalindebtedness or the issuance of additional stock. We believe that borrowingsunder our current revolving credit facility or a replacement credit facility,together with cash flows from operations, will be sufficient to make requiredpayments under the current credit facility or any such replacement facility,and to make anticipated capital expenditures and fund working capital needs forfiscal 2007.

Oursignificant non-cancelable contractual obligations as of March 31, 2007were as follows:

| ** **                                | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **(dollars in thousands)**      | ** ** |
| **Contractual Obligations**          | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less Than  1 Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **After  5 Years** | ** ** |
| Revolving credit  facility                |       | $                                         | 17,000     |   |   | $ | — |   |   | $ | — |   | $ | 17,000 |   |   | $ | — |   |   |
| Interest on  revolving credit facility(a) |       | 5,076                                     |       |   | 1,142 |   |   | 2,285 |   | 1,649 |   |   | — |   |   |
| Operating leases                          |       | 5,015                                     |       |   | 2,161 |   |   | 1,801 |   | 967 |   |   | 86 |   |   |
| Total                                     |       | $                                         | 27,091     |   |   | $ | 3,303 |   |   | $ | 4,086 |   | $ | 19,616 |   |   | $ | 86 |   |   |
|                                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(a)           Representsestimated interest obligations associated with our outstanding revolving creditfacility balance of $17.0 million at March 31, 2007, assuming noprincipal payments are made before maturity, a weighted-average interest rateof 6.10% and an underutilization fee rate of 0.18%.

**New AccountingStandards**

The Financial Accounting Standards Board issuedInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (“FIN 48”) in June 2006. The interpretationclarifies the accounting for uncertainty in income taxes recognized infinancial statements in accordance with SFAS 109. FIN 48 is effective forfiscal 

16

----

years beginning after December 15,2006. We have not determined the effect, if any, the adoption of FIN 48 willhave on our consolidated financial statements.

We periodically review newaccounting standards that are issued from time to time. Although some of theseaccounting standards may be applicable to us, we have not identified any othernew standards that we believe merit further discussion, and we expect that nonewould have a significant impact on our consolidated financial statements.

**Inflation**

Inflation affects the costof raw materials, goods and services used by us. In recent years, inflation hasbeen modest. The competitive environment somewhat limits our ability to recoverhigher costs resulting from inflation by raising prices. We seek to mitigate theadverse effects of inflation primarily through improved productivity and costcontainment programs. We do not believe that inflation has had a materialimpact on our results of operations for the periods presented, except withrespect to increased costs in manufacturing, packaging and distributionresulting from increased fuel and other petrochemical costs, as well aspayroll-related costs, insurance premiums and other costs arising from orrelated to government imposed regulations.

**Forward-LookingStatements**

This Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934. These statements relate to our future plans, objectives, expectations,intentions and financial performance and the assumptions that underlie thesestatements. These statements involve known and unknown risks, uncertainties andother factors that may cause actual results, level of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by these statements.We undertake no obligation to update forward-looking statements to reflectevents or circumstances occurring after the date this Form 10-Q wasfirst filed with the SEC. Important factors that may cause results to differfrom these forward-looking statements include, but are not limited to,government regulations,  productliability claims and litigation, insurance coverage issues, a decrease in orslowing of the growth rate of the vitamin, mineral and supplement market, thesuccess of the healthy foods channel, consumer perception of the safety andquality of our products and similar products, competition, intellectualproperty rights of other parties, the loss of key personnel, disruptions fromacquisitions, issues with obtaining raw materials of adequate quality orquantity, problems with information management systems, manufacturingefficiencies and operations, litigation generally, the volatility of the stockmarket generally and of our stock specifically, a general lack of adequateindustry analyst coverage, and other factors indicated from time to time in ourSEC reports, copies of which are available upon request from our investorrelations group or which may be obtained at the SEC’s website (www.sec.gov).

**Item 3.      Quantitativeand Qualitative Disclosures about Market Risk**

At our election, borrowings under our revolving creditfacility bear interest at the applicable Eurodollar Rate plus a variable marginor at a base rate, which is the higher of the Federal Funds Rate plus 0.5% orthe Prime Lending Rate, plus a variable margin. At March 31, 2007, theapplicable weighted-average interest rate for borrowings was 6.10% and we hadtotal borrowings outstanding of $17.0 million. To date, we have not obtainedinterest rate protection with respect to these borrowings.

With respect to ourinternational operations, we are subject to currency fluctuations; however, wedo not believe that these fluctuations would have a material adverse impact onour financial position because the majority of our net sales to foreigncountries are transacted in U.S. dollars. To date, we have not hedged any ofour potential foreign currency exposures.

17

----

**Item 4.      Controlsand Procedures**

*Evaluationof Disclosure Controls and Procedures.**  *We maintain disclosure controls and proceduresthat are designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controlsand procedures, we recognize that any controls and procedures, no matter howwell designed and operated, can provide only reasonable assurance of achievingthe desired control objectives, and we are required to apply our judgment inevaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), wecarried out an evaluation, under the supervision of and with the participationof our management, including our principal executive and principal financialofficers, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered by this report.Based on the foregoing, our principal executive and principal financialofficers have concluded that our disclosure controls and procedures wereeffective.

*Changesin Internal Control Over Financial Reporting.*   Therewere no changes in our internal control over financial reporting that occurredduring the last fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

18

----

**PART II - OTHERINFORMATION**

**Item 1.**                        LegalProceedings

As discussed in our other filings, we are subject toregulation by a number of federal, state and foreign agencies and are involvedin various legal matters arising in the normal course of business.

We carry insurance coverage in the types and amountsthat we consider reasonably adequate to cover the risks we face in the industryin which we compete. However, our current liability policy excludes claimsrelated to certain ingredients, including products containing ephedra.

In our opinion, theoutcomes of individual regulatory and legal matters in which we are presentlyinvolved are not probable and no estimate can be made of the range of potentialgains or losses. While incapable of estimation, in the opinion of management,the individual regulatory and legal matters in which we are involved are notexpected to have a material adverse effect on our consolidated financialposition, results of operations or cash flows.

**Item 1A.**                RiskFactors

There have been nomaterial changes in our risk factors from those disclosed in our 2006 AnnualReport on Form 10-K.

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

We did not sell anyunregistered equity securities nor did we repurchase any shares of our commonstock during the period covered by this Form 10-Q for the QuarterlyPeriod Ended March 31, 2007.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

The Annual Meeting of Stockholders of the Company washeld on January 26, 2007, at which meeting the stockholders voted to electtwo individuals to serve as Class III Directors of the Company and toratify the appointment of PricewaterhouseCoopers LLP as the Company’sindependent auditors for the fiscal year ending September 30, 2007.

Thenominees for election as Class III Directors of the Company are listedbelow. The results were as follows:

| **Nominee**       | ** ** | ** ** | ** ** | **For** | ** ** | **Against/  Withheld** | ** ** | **Abstain** | ** ** |
|-------------------|------------|------------|------------|---------|------------|------------------------|------------|-------------|------------|
| Frank W. Gay II   |       | 10,287,512 |       |    | 59,469     |                   |       | 671,323     |       |
| Gregory M. Benson |       | 10,251,237 |       |    | 95,744     |                   |       | 671,323     |       |

 

The namesof other Directors of the Company whose term of office continued after themeeting are as follows:
| Micheal D. Burke    |
|---------------------|
| J. Kimo Esplin      |
| Jeffrey A. Hinrichs |
| James D. Stice      |

 

19

----

Othermatters voted upon at the meeting and the results of those votes were asfollows:

| ** **                                                                             | ** ** | **For**    | ** ** | **Against/  Withheld** | ** ** | **Abstain** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|-------------|------------|
| Ratification of  PricewaterhouseCoopers LLP as the Company’s independent auditors |       | 10,256,176 |       |                   | 82,965     |        |       | 679,163 |   |
|                                                                                        |            |            |            |                        |            |             |            |  |  |

 

**Item 6.**         Exhibits

| 31.1 |   | Certifications Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                      |   |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------|--------|
| 32.1 |   | Certifications Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |   |

 

20

----

**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                                 | NUTRACEUTICAL INTERNATIONAL CORPORATION  (Registrant) |
|---------------------------------|-------------------------------------------------------|
| Date:  April 26, 2007 | By:                                                   | /s/ Leslie M.  Brown, Jr. |
|                            |                                                  | Leslie M. Brown, Jr. |
|                            |                                                  | Senior Vice President, Finance, Chief Financial  Officer and Assistant Secretary |
|                            |                                                  | (Principal Financial and Accounting Officer) |

 

21

----