**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 June 30, 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 mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

YES  x  NO  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer asdefined in Rule 12b-2 of the Exchange Act (check one):

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

YES  o  NO  x

At July 26, 2007, theregistrant had 11,136,702 shares of common stock outstanding.

 

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**NUTRACEUTICALINTERNATIONAL CORPORATION**

**INDEX**

| Description   | ** **             | ** **                                                                                                                                     | ** ** | **Page  No.** | ** ** |
|---------------|------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|
| Part I.  | Financial  Information |                                                                                                                                           | 3          |          |       |
|          | Item 1.                | Financial  Statements                                                                                                                          |       | 3             |       |   |
|          |                   | Condensed  Consolidated Balance Sheets—September 30, 2006 and  June 30, 2007                                               |       | 3             |       |   |
|          |                   | Condensed  Consolidated Statements of Operations and Comprehensive Income—Three Months  and Nine Months Ended June 30, 2006 and 2007 |       | 4             |       |   |
|          |                   | Condensed  Consolidated Statements of Cash Flows—Nine Months Ended June 30, 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 6.                | Exhibits                                                                                                                                       |       | 19            |       |   |
|               |                        |                                                                                                                                                |            |               |            |  |  |  |

 

2

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**PART I—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

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

|                                               | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                    | ** ** | **2006(1)**            | ** ** | **2007**          | ** ** |
| **ASSETS**                                    | ** ** |                   | ** ** | ** **        |       | ** ** | ** ** |
| Current assets                                |       |                   |       | ** **        |       |   |   |
| Cash                                          |       |                   | $          | 2,834             | ** ** |   | $ | 5,524 |   |
| Accounts receivable, net                      |       |                   | 10,621     | ** **        |       | 12,100 |   |
| Inventories, net                              |       |                   | 27,329     | ** **        |       | 29,459 |   |
| Prepaid expenses and other current assets     |       |                   | 1,882      | ** **        |       | 3,606 |   |
| Deferred income taxes                         |       |                   | 1,771      | ** **        |       | 1,724 |   |
| Total current assets                          |       |                   | 44,437     | ** **        |       | 52,413 |   |
| Property, plant and equipment, net            |       |                   | 32,669     | ** **        |       | 36,918 |   |
| Goodwill                                      |       |                   | 18,366     | ** **        |       | 38,626 |   |
| Intangible  assets, net                       |       |                   | 6,755      | ** **        |       | 13,114 |   |
| Other non-current  assets, net                |       |                   | 630        | ** **        |       | 577 |   |
| Deferred income  taxes, net                   |       |                   | 5,103      | ** **        |       | 3,713 |   |
|                                          |       |                   | $          | 107,960           | ** ** |   | $ | 145,361 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY** | ** ** |                   | ** ** | ** **        |       | ** ** | ** ** |
| Current liabilities                           |       |                   |       | ** **        |       |   |   |
| Accounts payable                              |       |                   | $          | 9,124             | ** ** |   | $ | 10,674 |   |
| Accrued expenses                              |       |                   | 5,370      | ** **        |       | 6,199 |   |
| Total current liabilities                     |       |                   | 14,494     | ** **        |       | 16,873 |   |
| Long-term debt                                |       |                   | 2,500      | ** **        |       | 25,500 |   |
| Other non-current  liabilities                |       |                   | 184        | ** **        |       | 193 |   |
| Total liabilities                             |       |                   | 17,178     | ** **        |       | 42,566 |   |
| Stockholders’  equity                    |       |                   |       | ** **        |       |   |   |
| Common stock                                  |       |                   | 110        | ** **        |       | 111 |   |
| Additional paid-in capital                    |       |                   | 32,665     | ** **        |       | 34,135 |   |
| Retained earnings                             |       |                   | 57,840     | ** **        |       | 68,207 |   |
| Accumulated other comprehensive income        |       |                   | 167        | ** **        |       | 342 |   |
| Total stockholders’ equity               |       |                   | 90,782     | ** **        |       | 102,795 |   |
|                                          |       |                   | $          | 107,960           | ** ** |   | $ | 145,361 |   |

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(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

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**NUTRACEUTICALINTERNATIONAL CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME**

**(unaudited)**

**(dollars in thousands, except per share data)**

| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Nine months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                            | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net sales                                           |       | $                                                   | 36,985     |                                               | $          | 38,694 |   | $ | 114,714 |   | $ | 116,646 |   |
| Cost of sales                                       |       | 17,414                                              |       | 17,889                                             |       | 54,246 |   | 53,193 |   |
| Gross profit                                        |       | 19,571                                              |       | 20,805                                             |       | 60,468 |   | 63,453 |   |
| Operating expenses                                  |       |                                                |       |                                               |       |   |   |   |   |
| Selling, general and administrative                 |       | 13,876                                              |       | 15,730                                             |       | 41,807 |   | 45,688 |   |
| Amortization of intangible assets                   |       | 92                                                  |       | 121                                                |       | 280 |   | 230 |   |
| Income from  operations                             |       | 5,603                                               |       | 4,954                                              |       | 18,381 |   | 17,535 |   |
| Interest and  other (income)/expense, net           |       | 138                                                 |       | 352                                                |       | (893 | ) | 814 |   |
| Income before  provision for income taxes           |       | 5,465                                               |       | 4,602                                              |       | 19,274 |   | 16,721 |   |
| Provision for  income taxes                         |       | 2,104                                               |       | 1,749                                              |       | 7,420 |   | 6,354 |   |
| Net income                                          |       | $                                                   | 3,361      |                                               | $          | 2,853 |   | $ | 11,854 |   | $ | 10,367 |   |
| Other  comprehensive income                         |       |                                                |       |                                               |       |   |   |   |   |
| Foreign currency translation adjustment, net of tax |       | 40                                                  |       | 156                                                |       | 35 |   | 175 |   |
| Comprehensive  income                               |       | $                                                   | 3,401      |                                               | $          | 3,009 |   | $ | 11,889 |   | $ | 10,542 |   |
| Net income per  common share                        |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                               |       | $                                                   | 0.30       |                                               | $          | 0.26 |   | $ | 1.04 |   | $ | 0.94 |   |
| Diluted                                             |       | 0.29                                                |       | 0.25                                               |       | 1.02 |   | 0.92 |   |
| Weighted average  common shares outstanding         |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                               |       | 11,272,259                                          |       | 11,047,027                                         |       | 11,383,996 |   | 11,027,237 |   |
| Dilutive effect of stock options                    |       | 205,561                                             |       | 204,378                                            |       | 185,303 |   | 207,538 |   |
| Diluted                                             |       | 11,477,820                                          |       | 11,251,405                                         |       | 11,569,299 |   | 11,234,775 |   |

 

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

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

| ** **                                                                        | ** ** | **Nine months ended June 30,**                               | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **      2006      ** | ** ** | **      2007      ** | ** ** |
| **Cash flows from operating  activities**                                         |       |                                                                             |       |   |   |   |   |   |   |
| Net income                                                                        |       |                                                                             | $          | 11,854 |   |   |   | $ | 10,367 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities |       |                                                                             |       |   |   |   |   |   |   |
| Depreciation and amortization                                                     |       |                                                                             | 3,476      |   |   |   | 3,501 |   |   |
| Amortization of deferred financing fees                                           |       |                                                                             | 137        |   |   |   | 42 |   |   |
| Losses/(gain) on disposals of property and equipment                              |       |                                                                             | (1,099     | ) |   |   | 4 |   |   |
| Deferred income taxes                                                             |       |                                                                             | 922        |   |   |   | 999 |   |   |
| Changes in assets  and liabilities, net of effects of acquisitions                |       |                                                                             |       |   |   |   |   |   |   |
| Accounts receivable, net                                                          |       |                                                                             | (164       | ) |   |   | 399 |   |   |
| Inventories, net                                                                  |       |                                                                             | (5,235     | ) |   |   | 1,315 |   |   |
| Prepaid expenses and other current assets                                         |       |                                                                             | 459        |   |   |   | (1,619 | ) |   |
| Other non-current assets, net                                                     |       |                                                                             | (3         | ) |   |   | (74 | ) |   |
| Accounts payable                                                                  |       |                                                                             | (518       | ) |   |   | 65 |   |   |
| Accrued expenses                                                                  |       |                                                                             | (803       | ) |   |   | 678 |   |   |
| Other non-current liabilities                                                     |       |                                                                             | (5         | ) |   |   | (47 | ) |   |
| Net cash provided by operating activities                                         |       |                                                                             | 9,021      |   |   |   | 15,630 |   |   |
| **Cash  flows from investing activities**                                         |       |                                                                             |       |   |   |   |   |   |   |
| Acquisitions of  businesses                                                       |       |                                                                             | (95        | ) |   |   | (30,715 | ) |   |
| Proceeds from  sale of property and equipment                                     |       |                                                                             | 4,500      |   |   |   | — |   |   |
| Purchases of  property and equipment                                              |       |                                                                             | (12,675    | ) |   |   | (6,743 | ) |   |
| Net cash used in investing activities                                             |       |                                                                             | (8,270     | ) |   |   | (37,458 | ) |   |
| **Cash  flows from financing activities**                                         |       |                                                                             |       |   |   |   |   |   |   |
| Payments on other  non-current liabilities                                        |       |                                                                             | (225       | ) |   |   | — |   |   |
| Proceeds from  long-term debt                                                     |       |                                                                             | 11,500     |   |   |   | 31,500 |   |   |
| Payments on  long-term debt                                                       |       |                                                                             | (10,000    | ) |   |   | (8,500 | ) |   |
| Proceeds from  issuances of common stock                                          |       |                                                                             | 142        |   |   |   | 1,151 |   |   |
| Purchases of  common stock for treasury                                           |       |                                                                             | (3,414     | ) |   |   | — |   |   |
| Tax benefit from  stock option exercises                                          |       |                                                                             | 12         |   |   |   | 320 |   |   |
| Net cash provided by (used in) financing activities                               |       |                                                                             | (1,985     | ) |   |   | 24,471 |   |   |
| Effect of exchange rate changes on cash                                           |       |                                                                             | 13         |   |   |   | 47 |   |   |
| Net increase (decrease) in cash                                                   |       |                                                                             | (1,221     | ) |   |   | 2,690 |   |   |
| Cash at beginning  of period                                                      |       |                                                                             | 3,371      |   |   |   | 2,834 |   |   |
| Cash at end of period                                                             |       |                                                                             | $          | 2,150 |   |   |   | $ | 5,524 |   |   |

 

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

5

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

**1.**                 INTERIMCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements include all necessary adjustments (consisting of normalrecurring accruals) to present fairly the consolidated financial position ofNutraceutical International Corporation and its subsidiaries (the “Company”) asof June 30, 2007, the results of their operations for the three months andnine months ended June 30, 2006 and 2007 and their cash flows for the ninemonths ended June 30, 2006 and 2007, in conformity with accountingprinciples generally accepted in the United States of America for interimfinancial information applied on a consistent basis. Results for the three andnine months ended June 30, 2007 are not necessarily indicative of theresults to be expected for the full fiscal year.

Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have been omitted.Accordingly, these financial statements should be read in conjunction with theCompany’s Form 10-K for the Fiscal Year Ended September 30,2006, which was filed with the Securities and Exchange Commission on November 30,2006.

**2.**                 ACCOUNTSRECEIVABLE, NET

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

| ** **           | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|----------------------|------------|------------------------|------------|-------------------|------------|
| ** **           | ** ** | **2006**               | ** ** | **2007**          | ** ** |
| Accounts  receivable |       |                   | $          | 12,610            |       |   | $ | 14,308 |   |
| Less allowances      |       |                   | (1,989     | )                 |       | (2,208 | ) |
|                 |       |                   | $          | 10,621            |       |   | $ | 12,100 |   |

 

**3.**                 INVENTORIES, NET

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

| ** **      | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-----------------|------------|------------------------|------------|-------------------|------------|
| ** **      | ** ** | **2006**               | ** ** | **2007**          | ** ** |
| Raw materials   |       |                   | $          | 11,712            |       |   | $ | 10,769 |   |
| Work-in-process |       |                   | 6,415      |              |       | 6,242 |   |
| Finished goods  |       |                   | 11,104     |              |       | 14,431 |   |
|            |       |                   | 29,231     |              |       | 31,442 |   |
| Less reserves   |       |                   | (1,902     | )                 |       | (1,983 | ) |
|            |       |                   | $          | 27,329            |       |   | $ | 29,459 |   |

 

**4.**                 ACQUISITIONS

During the three months ended June 30, 2007, theCompany made two acquisitions. On May 4, 2007, the Company acquiredsubstantially all of the operating assets of TERAPI-consult.as, a leadingwholesale distributor of the Company’s *Solaray®*brand aswell as other branded nutritional supplements and natural products inNorway. On June 29, 2007, the Company acquired the *NaturalCare*®brand of homeopathic and dietary supplement products by purchasingsubstantially all of the operating assets of NaturalCare Products, Inc.

6

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

The aggregate purchase price of these acquisitions wasapproximately $10,651 in cash. The Consolidated Statements of Operations andConsolidated Statements of Cash Flows presented herein include the activitiesof these acquired businesses from their respective dates of acquisition. Theexpected long-term sales and expense synergies of acquired businesses aregenerally not realized immediately following acquisition as certain transitionand integration matters must be completed.

Theseacquisitions are in keeping with the Company’s business strategy ofconsolidating the fragmented industry in which it competes. These acquisitionswere accounted for using the purchase method of accounting. Accordingly, theaggregate purchase price was assigned to the assets acquired and liabilitiesassumed based on their fair market values at the date of acquisition. Theexcess of aggregate purchase price over the fair market values of the assetsacquired and liabilities assumed was classified as goodwill. The followingreflects the allocation of the aggregate purchase price for this acquisition tothe aggregate assets acquired and liabilities assumed:

| Current assets                 |   | $      | 3,396  |   |
|--------------------------------|--------|--------|--------|--------|
| Property, plant  and equipment |   | 29     |   |
| Goodwill                       |   | 5,358  |   |
| Intangible assets              |   | 3,380  |   |
| Current  liabilities           |   | (1,512 | )      |
|                           |   | $      | 10,651 |   |

 

The acquired intangibleassets include trademarks and tradenames totaling $1,100, which have indefinitelives and are not subject to amortization, as well as intangible assetstotaling $2,280 related to customer relationships, which are being amortizedover a period of 6 years for financial statement purposes. The acquiredintangible assets of $3,380, as well as goodwill of $5,358, which is notsubject to amortization for financial statement purposes, are expected to bedeductible for tax purposes over fifteen years.

**5.**                 PROPERTY,PLANT AND 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) wasincluded in interest and other (income)/expense for the nine months ended June 30,2006.

**6.**                 GOODWILL

The change in thecarrying amount of goodwill from September 30, 2006 to June 30, 2007was as follows:

| ** **                                        | ** ** | **Goodwill** | ** ** |
|---------------------------------------------------|------------|--------------|------------|
| Balance as of  September 30, 2006            |       | $            | 18,366     |   |
| Goodwill attributable to fiscal 2007 acquisitions |       | 20,223       |       |
| Foreign currency translation adjustment           |       | 37           |       |
| Balance as of  June 30, 2007                 |       | $            | 38,626     |   |

 

7

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

**7.**                 INTANGIBLEASSETS

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

| ** **                                       | ** ** | **September 30, 2006** | ** ** | **June 30, 2007** | ** ** | **Weighted-** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|---------------|------------|
| ** **                                       | ** ** | **Gross**                        | ** ** | ** **                  | ** ** | **Net**       | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** | **Average** | ** ** |
| ** **                                       | ** ** | **Carrying**                     | ** ** | **Accumulated**             | ** ** | **Carrying**  | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** | **Amortization** | ** ** |
| ** **                                       | ** ** | **Amount**                       | ** ** | **Amortization**            | ** ** | **Amount**    | ** ** | **Amount(1)** | ** ** | **Amortization(1)** | ** ** | **Amount** | ** ** | **Period (Years)** | ** ** |
| Intangible assets  subject to amortization: |       |                             |       |                        |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trademarks/trade names/patents                   |       |                             | $          | 361                         |       |          |       | $ | (284 | ) |   |   | $ | 77 |   |   |   | $ | 430 |   |   |   | $ | (315 | ) |   | $ | 115 |   |   | 5 |   |   |
| Customer relationships                           |       |                             | —     |                        |       |          | —     |   |   |   | — |   |   |   | 2,761 |   |   |   | (96 | ) |   | 2,665 |   |   | 6 |   |   |
| Developed software and technology                |       |                             | —     |                        |       |          | —     |   |   |   | — |   |   |   | 772 |   |   |   | (103 | ) |   | 669 |   |   | 5 |   |   |
|                                             |       |                             | 361        |                        |       |          | (284       | ) |   |   | 77 |   |   |   | 3,963 |   |   |   | (514 | ) |   | 3,449 |   |   |   |   |   |
| Intangible assets not  subject to amortization:  |       |                             |       |                        |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trademarks/trade names/licenses                  |       |                             | 6,678      |                        |       |          | —     |   |   |   | 6,678 |   |   |   | 9,665 |   |   |   | — |   |   | 9,665 |   |   |   |   |   |
|                                             |       |                             | $          | 7,039                       |       |          |       | $ | (284 | ) |   |   | $ | 6,755 |   |   |   | $ | 13,628 |   |   |   | $ | (514 | ) |   | $ | 13,114 |   |   |   |   |   |

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(1)          Amounts include theimpact of foreign currency translation adjustments.

Estimatedfuture amortization expense related to the June 30, 2007 net carryingamount of $3,449 for intangible assets subject to amortization is as follows:

| ** **                                   | ** ** | **Estimated**    | ** ** |
|----------------------------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **Amortization** | ** ** |
| **Year Ending September 30,** | ** ** | ** **       | ** ** | **Expense** | ** ** |
| 2007(1)                                      |       |             | $          | 157 |   |   |
| 2008                                         |       |             | 625        |   |   |
| 2009                                         |       |             | 622        |   |   |
| 2010                                         |       |             | 615        |   |   |
| 2011                                         |       |             | 608        |   |   |
| Thereafter                                   |       |             | 822        |   |   |
|                                         |       |             | $          | 3,449 |   |   |
|                                              |            |                  |            |  |  |  |  |  |

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(1)          Estimatedamortization expense for the year ending September 30, 2007 includes only amortization to be recordedafter June 30, 2007.

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

**8.**                 STOCKOPTIONS

Thefollowing table summarizes stock option activity during the nine months endedJune 30, 2007:

| ** **                                                           | ** ** | **Number of   Options** | ** ** | **Weighted-Average  Exercise  Price** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|
| Options  outstanding and exercisable at September 30, 2006 |       |                              | 875,511    |                                  |       |   | $ | 9.94 |   |   |
| Exercised                                                            |       |                              | (123,398   | )                                     |       |   | 9.20 |   |   |
| Forefeited or  expired                                               |       |                              | (300       | )                                     |       |   | 17.50 |   |   |
| Options outstanding and  exercisable at June 30, 2007                |       |                              | 751,813    |                                  |       |   | $ | 10.06 |   |   |

 

During the nine months ended June 30, 2007, theCompany received proceeds of $1,151 related to the exercise of stock optionsand optionees realized an aggregate pre-tax gain of $843 from these stock optionexercises.

**9.**                 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.

Netsales attributed to customers in the United States and foreign countries forthe three and nine months ended June 30, 2006 and 2007 were as follows:

| ** **        | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|-------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **        | ** ** | **2006**                                   | ** ** | **2007**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| United States     |       | $                                          | 32,698     |                                      | $          | 34,142 |   | $ | 103,041 |   | $ | 104,246 |   |
| Foreign countries |       | 4,287                                      |       | 4,552                                     |       | 11,673 |   | 12,400 |   |
|              |       | $                                          | 36,985     |                                      | $          | 38,694 |   | $ | 114,714 |   | $ | 116,646 |   |

 

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.

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**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 andother natural products to and through health and natural product distributorsand retailers. 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*®, *NaturalBalance*®, *NaturalMax*®, *VegLife*®, *PremierOne*®, *Pioneer*®, *CompliMed*®, *Sunny Green*®, *Zand*®,*Natra-Bio*®, *bioAllers*®, *Herbs for Kids*TM,*NaturalCare*®, *Natural Sport*®, *Supplement Training Systems*TM, *FunFresh Foods*TM, *ActiPet*®,*Action Labs*®, *Thompson*®, *Montana Big Sky*TM, *BodyGold*®, *Healthway*®, *LivingFlower Essences*®, *Life-flo*®, *Larenim*®, *AllVia*TM, *Sayge BioSciences*TM, *MonarchNutritional Laboratories*TM and *GreatBasin Botanicals*TM. Under the name *WoodlandPublishing*TM, we publish, print and market a line of books andbooklets to, among others, book distributors, national retail bookstores andhealth and natural food stores. We also distribute branded products of certainthird 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 nutritional supplementsindustry (the “VMS Industry”). Since our formation, we have completed thefollowing acquisitions of assets or stock: Solaray, Inc.; Premier OneProducts, Inc.; Makers of KAL, Inc. and Makers of KAL, B.V.; MonarchNutritional Laboratories, Inc.; Action Labs, Inc.; NutraForce(Canada) International, Inc.; Woodland Publishing, Inc. and SummitGraphics, Inc.; Thompson Nutritionals, Inc.; The Real Food Company, Inc.;Thom’s Natural Foods; M.K. Health Food Distributors, Inc. (dba Nature’sLife); Arizona Health Foods, Inc.; Natural Balance, Inc.; MontanaNaturals, Inc.; Cornucopia Community Market, Inc.; Pilgrim’sNatureway LLC; Pioneer Nutritional Formulas, Inc.; Living Flower EssencesLLC; Life-flo Health Care Products, Inc. and Nutraceutical Labs, Inc.;Vitamin Outlet, Inc. (dba Larenim); Botanical Laboratories, Inc.;TERAPI-consult.as and NaturalCare Products, 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 

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returns and allowances,uncollectible accounts receivable and slow moving and obsolete and/or damagedinventory. Actual results may differ from these estimates.

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:

*AccountsReceivable—**Provision*is made for estimated baddebts based on periodic analysis of individual customer balances, including anevaluation of days sales outstanding, payment history, recent payment trendsand perceived credit worthiness. If general economic conditions and/or customerfinancial condition were to change, additional provisions for bad debts may berequired, which could have a material impact on the consolidated financialstatements.

*Inventories—**Provision* is made forslow moving, obsolete and/or damaged inventory based on periodic analysis ofindividual inventory items, including an evaluation of historical usage and/ormovement, age, expiration date and general condition. If market demand and/orconsumer preferences are less favorable than historical trends or futureexpectations, additional provisions for slow moving, obsolete and/or damagedinventory may be required, which could have a material impact on theconsolidated financial statements.

*Property,Plant and Equipment—**Depreciation* and amortizationexpense is impacted by our judgments regarding the estimated useful lives ofassets placed in service. If the actual lives of assets are significantly lessthan expected, depreciation and amortization expense would be accelerated,which could have a material impact on the consolidated financial statements.

*Goodwilland Intangible Assets—**Statement* of Financial AccountingStandards No. 141, *Business Combinations*,**and Statement of Financial Accounting Standards No. 142,*Goodwill and Other Intangible Assets* (“SFAS142”), require estimates and judgments in determining the initial recognitionand measurement 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 recognizedin accordance with Staff Accounting Bulletin No. 104, *RevenueRecognition*, which states that revenue should be recognized when thefollowing criteria are met: (1) persuasive evidence of an arrangementexists; (2) the product has been shipped and the customer takes ownershipand assumes the risk of loss; (3) the selling price is fixed ordeterminable; and (4) collection of the resulting receivable is reasonablyassured. We believe that these criteria are satisfied upon shipment from ourfacilities or, in the case of our neighborhood natural food markets and healthfood stores, at the point of sale within these stores. Revenue is reduced byprovisions for estimated returns and allowances, which are based on historicalaverages that have not varied significantly for the periods presented, as wellas specific known claims, if any. No other significant deductions from revenuemust be estimated at the point in time that revenue is recognized.

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**Results ofOperations**

Thefollowing table sets forth certain consolidated statements of operations dataas a percentage of net sales for the periods indicated:

| ** **                                | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                | ** ** | **  2006  **                | ** ** | **  2007  **               | ** ** | **  2006  ** | ** ** | **  2007  ** | ** ** |
| Net sales                                 |       |                                            | 100.0      | %                                              |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales                             |       |                                            | 47.1       | %                                              |       |   | 46.2 | % |   |   | 47.3 | % |   |   | 45.6 | % |   |
| Gross profit                              |       |                                            | 52.9       | %                                              |       |   | 53.8 | % |   |   | 52.7 | % |   |   | 54.4 | % |   |
| Selling, general and  administrative      |       |                                            | 37.5       | %                                              |       |   | 40.7 | % |   |   | 36.5 | % |   |   | 39.2 | % |   |
| Amortization of  intangible assets        |       |                                            | 0.2        | %                                              |       |   | 0.3 | % |   |   | 0.2 | % |   |   | 0.2 | % |   |
| Income from operations                    |       |                                            | 15.2       | %                                              |       |   | 12.8 | % |   |   | 16.0 | % |   |   | 15.0 | % |   |
| Interest and other  (income)/expense, net |       |                                            | 0.4        | %                                              |       |   | 0.9 | % |   |   | (0.8 | )% |   |   | 0.7 | % |   |
| Income before provision  for income taxes |       |                                            | 14.8       | %                                              |       |   | 11.9 | % |   |   | 16.8 | % |   |   | 14.3 | % |   |
| Provision for income  taxes               |       |                                            | 5.7        | %                                              |       |   | 4.5 | % |   |   | 6.5 | % |   |   | 5.4 | % |   |
| Net income                                |       |                                            | 9.1        | %                                              |       |   | 7.4 | % |   |   | 10.3 | % |   |   | 8.9 | % |   |
| EBITDA(1)                                 |       |                                            | 18.2       | %                                              |       |   | 16.0 | % |   |   | 19.1 | % |   |   | 18.0 | % |   |

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(1)          See“—EBITDA.”

**Comparison of the Three Months Ended June 30,2007 to the Three Months Ended June 30, 2006**

*Net Sales.*   Netsales increased by $1.7 million, or 4.6%, to $38.7 million for the three monthsended June 30, 2007 (“third quarter of fiscal 2007”) from $37.0 millionfor the three months ended June 30, 2006 (“third quarter of fiscal 2006”).Net sales of branded nutritional supplements and other natural productsincreased by $1.8 million, or 5.6%, to $34.4 million for the third quarter offiscal 2007 compared to $32.6 million for the third quarter of fiscal 2006.The increase in net sales of branded nutritional supplements and other naturalproducts was primarily related to the net sales contributions of the fiscal2007 acquired businesses, partially offset by a decrease in sales of some SKUsof branded products to certain customers. Other net sales remained relativelyflat at $4.3 million for the third quarter of fiscal 2007 compared to $4.4million for the third quarter of fiscal 2006. Management believes that the VMS Industrycontinues to have low growth rates and remains very competitive.

*Gross Profit.*   Grossprofit increased by $1.2 million, or 6.3%, to $20.8 million for the thirdquarter of fiscal 2007 from $19.6 million for the third quarter of fiscal 2006.This increase in gross profit was primarily attributable to the increase in netsales. As a percentage of net sales, gross profit increased to 53.8% for thethird quarter of fiscal 2007 compared to 52.9% for the third quarter of fiscal2006. This increase in gross profit was primarily attributable to decreasedmaterial costs as a percentage of net sales, including some changes in salesmix related to the fiscal 2007 acquisitions.

*Selling, General andAdministrative.*   Selling, general andadministrative expenses increased by $1.8 million, or 13.4%, to $15.7million for the third quarter of fiscal 2007 from $13.9 million for the third quarterof fiscal 2006. As a percentage of net sales, selling general and administrativeexpenses increased to 40.7% for the third quarter of fiscal 2007 compared to37.5% for the third quarter of fiscal 2006. This increase in selling, generaland administrative expenses was primarily attributable to acquisition,operational and transition costs related to the fiscal 2007 acquiredbusinesses, as well as costs that tend to be fixed in the short term, includingthose that relate to sales of certain products to certain customers, whichsales were below management’s expectations.

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

*Interestand Other (Income)/Expense, Net.*   Net interestand other (income)/expense was $0.4 million for the third quarter of fiscal2007 and $0.1 million for the third quarter of fiscal 2006 and primarilyconsisted of interest expense on indebtedness under our revolving creditfacility, with the increase being primarily related to borrowings for thefiscal 2007 acquired businesses.

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

**Comparison of theNine Months Ended June 30, 2007 to the Nine Months Ended June 30,2006**

*Net Sales.*   Netsales increased by $1.9 million, or 1.7%, to $116.6 million for the nine monthsended June 30, 2007 from $114.7 million for the nine months endedJune 30, 2006. Net sales of branded nutritional supplements and othernatural products increased by $2.1 million, or 2.1%, to $103.7 million for thenine months ended June 30, 2007 compared to $101.6 million for the ninemonths ended June 30, 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 $12.9 million for thenine months ended June 30, 2007 compared to $13.1 million for the ninemonths ended June 30, 2006. Management believes that the VMS Industrycontinues to have low growth rates and remains very competitive.

*Gross Profit.*   Grossprofit increased by $3.0 million, or 4.9%, to $63.5 million for the nine monthsended June 30, 2007 from $60.5 million for the nine months endedJune 30, 2006. As a percentage of net sales, gross profit increased to54.4% for the nine months ended June 30, 2007 compared to 52.7% for thenine months ended June 30, 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 2007 acquisitions,as well as the increase in net sales.

*Selling, General andAdministrative.*   Selling, general and administrativeexpenses increased by $3.9 million, or 9.3%, to $45.7 million for the ninemonths ended June 30, 2007 from $41.8 million for the nine monthsended June 30, 2006. As a percentage of net sales, selling general andadministrative expenses increased to 39.2% for the nine months endedJune 30, 2007 compared to 36.5% for the nine months ended June 30,2006. This increase in selling, general and administrative expenses wasprimarily attributable to acquisition, operational and transition costs relatedto the fiscal 2007 acquired businesses, as well as costs that tend to be fixedin the short term, including those that relate to sales of certain products tocertain customers, which sales were below management’s expectations.

*Amortization ofIntangibles.*   Amortization of intangibles was$0.2 million for the nine months ended June 30, 2007 compared to $0.3million for the nine months ended June 30, 2006. For each period,amortization expense was primarily related to intangible assets recorded inconnection with acquisitions.

*Interest and Other(Income)/Expense, Net.*   Net interest and other(income)/expense for the nine months ended June 30, 2006 included otherincome of $1.1 million ($0.7 million after tax, or $0.06 per diluted share) relatedto the gain on the sale of our 31,340 square foot building located in ParkCity, Utah as well as $0.1 million for payments received as settlement oflitigation to which we were a plaintiff. Exclusive of these items, net interestand other (income)/expense was $0.8 million for the nine months endedJune 30, 2007 and $0.3 million for the nine months ended June 30,2006 and primarily consisted of interest expense on indebtedness under ourrevolving credit facility, with the increase being primarily related toborrowings for the fiscal 2007 acquired businesses.

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*Provision for Income Taxes.*   Oureffective tax rate was 38.0% for the nine months ended June 30, 2007 and38.5% for the nine months ended June 30, 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.

·       Ouruse of EBITDA is supported by the importance of EBITDA to the following keystakeholders:

·        **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  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                   | ** ** | **   2006   **    | ** ** | **   2007   **   | ** ** | **   2006   ** | ** ** | **   2007   ** | ** ** |
| Net income                                   |       |                                            | $          | 3,361                                          |       |   |   | $ | 2,853 |   |   | $ | 11,854 |   | $ | 10,367 |   |
| Provision for income  taxes                  |       |                                            | 2,104      |                                           |       |   | 1,749 |   |   | 7,420 |   | 6,354 |   |
| Interest and other  (income)/expense, net(1) |       |                                            | 138        |                                           |       |   | 352 |   |   | (893 | ) | 814 |   |
| Depreciation and  amortization               |       |                                            | 1,138      |                                           |       |   | 1,236 |   |   | 3,476 |   | 3,501 |   |
| EBITDA                                       |       |                                            | $          | 6,741                                          |       |   |   | $ | 6,190 |   |   | $ | 21,857 |   | $ | 21,036 |   |

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(1)          Includes amortization ofdeferred financing fees and losses associated with fixed asset disposals. Thenine months ended June 30, 2006 also includes a gain of $1,105 on the saleof a building , which gain was excludedin determining EBITDA.

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Our EBITDA decreased to$6.2 million for the third quarter of fiscal 2007 from $6.7 million for thethird quarter of fiscal 2006. EBITDA as a percentage of net sales decreased to16.0% for the third quarter of fiscal 2007 from 18.2% for the third quarter offiscal 2006.

Our EBITDA decreased to$21.0 million for the nine months ended June 30, 2007 from $21.9 millionfor the nine months ended June 30, 2006. EBITDA as a percentage of netsales decreased to 18.0% for the nine months ended June 30, 2007 from19.1% for the nine months ended June 30, 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 and Capital Resources**

We had working capital of$35.5 million as of June 30, 2007 compared to $29.9 million as of September 30,2006. This increase in working capital was primarily the result of increases incash, accounts receivable, inventories and prepaid expenses and other currentassets, partially offset by increases in accounts payable and accrued expenses.

Net cash provided byoperating activities for the nine months ended June 30, 2007 was $15.6 millioncompared to $9.0 million for the comparable period in fiscal 2006. Thisincrease in net cash provided by operating activities for the nine months endedJune 30, 2007 was primarily attributable to an increase in cash providedby changes in assets and liabilities, net of effects of acquisitions.

Net cash used in investingactivities was $37.5 million for the nine months ended June 30, 2007compared to $8.3 million for the comparable period in fiscal 2006. Ourinvesting activities during these periods consisted of acquisitions ofbusinesses, capital expenditures and, for the nine months ended June 30,2006, proceeds of $4.5 million related to the sale of our building.

During the nine monthsended June 30, 2007, we made six acquisitions. On October 31, 2006,we acquired a majority interest in a complementary natural products business. OnNovember 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. On May 4, 2007, we acquiredsubstantially all of the operating assets of TERAPI-consult.as, a leading wholesaledistributor of our *Solaray*® brandas well as other branded nutritional supplements and other natural products inNorway. On June 29, 2007, we acquired the *NaturalCare*®brand of homeopathic and dietary supplement products by purchasingsubstantially all of the operating assets of NaturalCare Products, Inc. Theseacquisitions are in keeping with our business strategy of consolidating thefragmented industry where we compete and give us nutritional brands withproducts we currently do not sell.

The aggregate purchaseprice of these acquisitions was approximately $30.7 million in cash, which wasfinanced primarily using borrowings under our revolving credit facility, aswell as cash provided by operating activities. The expected long-term sales andexpense synergies of acquired businesses are generally not realized immediatelyfollowing acquisition as certain transition and integration matters must becompleted.

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

Net cash provided by (used in) financing activitieswas $24.5 million for the nine months ended June 30, 2007 compared to($2.0) 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 related to stock option exercises.

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 $90.0 million,subject to approval by the lenders and compliance with certain covenants andconditions.

At June 30, 2007, we had outstanding revolvingcredit borrowings of $25.5 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 June 30, 2007, the applicable weighted-average interest ratefor borrowings was 6.40%. We are also required to pay a variable quarterly feeon the unused balance under the revolving credit facility. At June 30,2007, 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 June 30,2007, we were in compliance with these restrictive covenants. Upon the occurrenceof a default, the lender has various remedies or rights, which may includeproceeding 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 June 30, 2007were as follows:

| ** **                                | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | ** **                                | ** ** | **Less Than** | ** ** | **1-3** | ** ** | **4-5** | ** ** | **After** | ** ** |
| **Contractual Obligations**          | ** ** | ** **                                | ** ** | **Total** | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| ** **                                | ** ** | **(dollars in thousands)**      | ** ** |
| Revolving credit  facility                |       | $                                         | 25,500     |   |   | $ | — |   |   | $ | — |   | $ | 25,500 |   |   | $ | — |   |   |
| Interest on  revolving credit facility(a) |       | 7,227                                     |       |   | 1,722 |   |   | 3,445 |   | 2,060 |   |   | — |   |   |
| Operating leases                          |       | 5,128                                     |       |   | 2,301 |   |   | 1,901 |   | 835 |   |   | 91 |   |   |
| Total                                     |       | $                                         | 37,855     |   |   | $ | 4,023 |   |   | $ | 5,346 |   | $ | 28,395 |   |   | $ | 91 |   |   |
|                                           |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Representsestimated interest obligations associated with our outstanding revolving creditfacility balance of $25.5 million at June 30, 2007, assuming no principalpayments are made before maturity, a weighted-average interest rate of 6.40%and an underutilization fee rate of 0.18%.

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**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 years beginning after December 15, 2006. We are in the process ofdetermining the effect, if any, the adoption of FIN 48 will have on ourconsolidated 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 mitigatethe adverse effects of inflation primarily through improved productivity andcost containment 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, product liability claims and litigation, insurancecoverage issues, a decrease in or slowing of the growth rate of the vitamin,mineral and supplement market, the success of the healthy foods channel,consumer perception of the safety and quality of our products and similarproducts, competition, intellectual property rights of other parties, the lossof key personnel, disruptions from acquisitions, issues with obtaining rawmaterials of adequate quality or quantity, problems with information managementsystems, manufacturing efficiencies and operations, litigation generally, thevolatility of the stock market generally and of our stock specifically, ageneral lack of adequate industry analyst coverage, and other factors indicatedfrom time to time in our SEC reports, copies of which are available uponrequest from our investor relations group or which may be obtained at the SEC’swebsite (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 June 30, 2007, theapplicable weighted-average interest rate for borrowings was 6.40% and we hadtotal borrowings outstanding of $25.5 million. To date, we have not obtainedinterest rate protection with respect to these borrowings.

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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.

**Item 4.**                        Controlsand Procedures

*Evaluationof Disclosure Controls and Procedures.**  *We maintain disclosure controls and procedures thatare 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 in evaluatingthe 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.

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**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 or kava.

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 June 30, 2007.

**Item6.**                        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. |

 

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**SIGNATURE**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                          | NUTRACEUTICAL INTERNATIONAL CORPORATION |
|--------------------------|---------------------------------------------------|
|                     | (Registrant)                                      |
| Date: July 26, 2007 | By:                                               | /s/ CORY J. MCQUEEN |
|                     | ** **                                        | Cory J. McQueen |
|                     |                                              | *Vice President and Chief Financial Officer* |
|                     |                                              | *(Principal Financial and Accounting Officer)* |

 

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