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SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K




ý
            ANNUAL REPORT PURSUANT TO SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934For the fiscal year ended May 31,
      2008q
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the transition period from
      _______ to _______.Commission file
      number:
              001-14608




SCHIFF NUTRITION INTERNATIONAL,
INC.


(Exact name of Registrant as specified
in its charter)




Delaware
            
            87-0563574(State or other jurisdiction
      of
              incorporation or
      organization)
            
            (I.R.S.
      Employer
              Identification
      No.)2002 South 5070
      West
              Salt Lake City,
      Utah
            
            84104-4726(Address of
      principal
              executive
      offices)
            
            (Zip
  Code)





Registrant’s telephone number,
      including area code:(801)
      975-5000Securities registered pursuant to
      Section 12(b) of the Act:Class A Common Stock, par value
      $.01 per share(Title of
      Class)New York Stock
      Exchange(Name of
      Exchange)Securities registered pursuant to
      Section 12(g) of the Act:None




Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes qNoý




Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes qNoý




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




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




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




Large accelerated filer q                                                                                             Accelerated
filer q


Non-accelerated filer q (Do
not check if a smaller reporting
company)                                      Smaller reporting companyý




Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes qNoý




The aggregate
market value of the voting and non-voting common equity held by non-affiliates
of the registrant was approximately $62,553,411 as of November 30, 2007, the
last day of the registrant's second fiscal quarter, based upon the closing price
on the New York Stock Exchange of $5.60 for shares of the registrant’s Class A
common stock on that date.




As of August 18,
2008 the registrant had outstanding 12,250,896 shares of Class A common stock
and 14,973,148 shares of Class B common stock.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions of the
registrant’s Definitive Proxy Statement for its 2008 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission no later
than 120 days after the end of the registrant’s fiscal year ended May 31, 2008,
are incorporated by reference into Part III hereof.








SCHIFF NUTRITION INTERNATIONAL,
INC.


TABLE OF
CONTENTS
 
 PART I
  ITEM 1.
              BUSINESS
 ITEM 1A.
              RISK FACTORS
 ITEM 1B.
              UNRESOLVED STAFF
COMMENTS
 ITEM 2.
              PROPERTIES
 ITEM 3.
              LEGAL PROCEEDINGS
 ITEM 4.
              SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
 
 PART II
  ITEM 5.
              MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY
  SECURITIES
 ITEM 6.
              SELECTED CONSOLIDATED FINANCIAL AND OPERATING
      DATA
 ITEM 7.
              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS
 ITEM 7A.
              QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
 ITEM 8.
              FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA
 ITEM 9.
              CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE
 ITEM 9A.
              CONTROLS AND
PROCEDURES
 
 PART III
  ITEM 9B.
              OTHER
INFORMATION
 ITEM 10.
              DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
 ITEM 11.
              EXECUTIVE
COMPENSATION
 ITEM 12.
              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 ITEM 13.
              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE
 ITEM 14.
              PRINCIPAL ACCOUNTING FEES AND
  SERVICES
 
 PART IV
  ITEM 15.
              EXHIBITS, FINANCIAL STATEMENT
  SCHEDULES
  SIGNATURES
  SCHIFF NUTRITION INTERNATIONAL, INC. INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 SCHIFF
NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE
SHEETS
 SCHIFF
NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
INCOME
 SCHIFF
NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
 SCHIFF
NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH
FLOWS
 SCHIFF
NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 1.
              SIGNIFICANT ACCOUNTING
POLICIES
 2.
              DIVESTITURES
 3.
              AVAILABLE-FOR-SALE
SECURITIES
 4.
              RECEIVABLES, NET
 5.
              INVENTORIES
 6.
              PROPERTY AND EQUIPMENT,
NET
 7.
              GOODWILL AND INTANGIBLE ASSETS,
  NET
 8.
              ACCRUED EXPENSES
 9.
              INCOME TAXES
 10.
              CASH DIVIDEND
 11.
              OTHER ACCUMULATED COMPREHENSIVE
  INCOME
 12.
              EARNINGS PER SHARE
 13.
              STOCK-BASED COMPENSATION
PLANS
 14.
              COMMITMENTS AND
CONTINGENCIES
 15.
              RELATED PARTY
TRANSACTIONS
 16.
              QUARTERLY RESULTS
  (UNAUDITED)
   SCHIFF NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES VALUATION
AND QUALIFYING ACCOUNTS
  EXHIBIT – 21.1
              SUBSIDIARIES OF SCHIFF NUTRITION INTERNATIONAL,
      INC.
  EXHIBIT – 23.1
              CONSENT OF INDEPENDENT REGISTERED PUBLIC
      ACCOUNTING FIRM
  EXHIBIT – 31.1
              CERTIFICATION OF CHIEF EXECUTIVE OFFICER
      PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
  ACT
  EXHIBIT – 31.2
              CERTIFICATION OF CHIEF FINANCIAL OFFICER
      PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
  ACT
  EXHIBIT – 32.1
              CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
      CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
      ACT
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PART
I




Note on Forward-Looking
Statements




Certain statements made in this Annual
Report on Form 10-K, including statements under the captions “Business,” “Risk
Factors,” “Legal Proceedings,” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and elsewhere herein are
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, that are based on management’s beliefs and assumptions, current
expectations, estimates and projections. Statements that are not historical
facts, including without limitation statements which are preceded by, followed
by or include the words “believes,” “anticipates,” “plans,” “expects,”
“estimates,” “may,” “should,” “intends,” or similar expressions, are
forward-looking statements. Whilewebelieve these assumptions,expectations,estimates and projections are
reasonable, suchstatements are subject to risks and
uncertainties, certain of which are beyond our control, and therefore, actual
results may differ materially. The fact that some of the risks may be the same
or similar to past reports we have filed with the Securities and Exchange
Commission (“SEC”) means only that the risks are present in multiple periods. We
believe that many of the risks detailed here are part of doing business in the
industry in which we operate and compete and will likely be present in all
periods reported. The fact that certain risks are endemic to the industry does
not lessen their significance. Forward-looking statements only speak as of the
date hereof and we do not undertake and expressly disclaim any obligation to
update or release any revisions to any forward-looking statement whether as a
result of new information, future events or otherwise, except as required by
law. Important factors that may cause these forward-looking statements to be
false or materially different from our current expectations include, but are not
limited to, the factors discussed in Items 1, 1A, 3, 7 and 7A of this Annual
Report. Industry data used throughout this
report was obtained from industry publications and internal company estimates.
While we believe such information to be reliable, its accuracy has not been
independently verified and cannot be
guaranteed.




You should carefully consider the risks
described in this Annual Report on Form 10-K, including those set forth in “Item
1A - Risk Factors” below. Any of these risks could have a material adverse
effect on our results of operations and financial condition.




ITEM 1.BUSINESS




General




Schiff Nutrition International, Inc.
(“we,” “us,” or “our”) develops, manufactures, markets and distributes branded
and private label vitamins, nutritional supplements and nutrition bars in the
United States and throughout the world. We offer a broad range of capsules,
tablets and nutrition bars. Our portfolio of recognized brands, including
Schiff®, Move Free® and Tiger’s Milk®, is marketed primarily through the mass
market (including club) and, to a lesser extent, health food store distribution
channels.




Our principal executive offices are
located at 2002 South 5070 West, Salt Lake City, Utah 84104 and our telephone
number is (801) 975-5000. We were incorporated in Delaware in 1996. Our
corporate internet web site address iswww.schiffnutrition.com.We have included our
internet web sites here and elsewhere only as an inactive textual reference. The
information contained on the internet web sites is not incorporated by reference
into this Annual Report on Form 10-K.We file our proxy statements, annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K, and all amendments thereto with the SEC. Electronic copies of our periodic
reports and current reports, and any amendments to those reports, are available
free of charge by accessing our corporate internet web site atwww.schiffnutrition.com, which provides a link towww.sec.gov, the web site maintained by the SEC.
The public may read and copy any materials we file with the SEC at the SEC’s
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330.




Industry Overview




According to the“Nutrition Business Journal,”the market for vitamins, minerals and
supplements in the United States was estimated to be approximately $23.7 billion
in 2007. We believe that the market has reached its present size due to a number
of factors, including:




●
            increased awareness of the health
      benefits of dietary supplements, especially as reports and medical
      research indicating a correlation between consumption of specific
      nutrients and better health continue to heighten public knowledge of the
      benefits of dietary supplements for
  health;




●
            a growing population of older
      Americans, with increased levels of education and discretionary income,
      who are more likely to consume dietary supplements and nutritional
      products, with an increasing interest in more proactively managing one’s
      own health needs;




●
            successful new product
      introductions in part due to new scientific findings;
      and





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●
            a trend towards preventative
      measures and healthy living due, in part, to increasing health care costs,
      dissatisfaction with existing health care systems, and increasing
      acceptance of alternative/preventative
  care.




In recent years, nutritional supplement
companies, analysts, publications and other industry sources have referenced a
slower growth rate in the nutritional supplement industry. We believe that theslower growth
rateis due in part to,
among other factors, increased competition, including intense private label
expansion and increasing competition from pharmaceutical and food companies, the
general economic slowdown in the U.S., the lack of industry-wide “blockbuster”
products, negative publicity regarding certain nutritional supplement
ingredients and companies, and the general maturing of the
industry.




Although specific data from the
fragmented international markets is not readily available, we believe similar
demographics, events and other trends affect the nutritional supplement market
internationally.




Brands, Products and
Distribution




We market a broad line of specialty
supplements, vitamins and minerals under the Schiff brand, which has been
available to consumers for over 70 years. The Schiff brand emphasizes high
quality and natural ingredients, primarily consisting of tablet, capsule and
softgel product forms.




Our Schiff brand specialty supplements
are designed to provide consumers with targeted support for their wellness
efforts. Our specialty supplements include joint care products marketed under
the Schiff brand, including our Move Free and Glucosamine products. Our Move
Free product is one of the leading joint care products in the mass market
channel. Move Free net sales were $82.6million, $83.8 million and $86.2
million, respectively, for fiscal 2008, 2007 and 2006 and represented
approximately47%, 48% and 48%, respectively, of total
net sales for fiscal 2008, 2007 and 2006. Our concentration in this brand and
the joint care category is significant. We cannot assure you that Move Free or
other of our products currently experiencing strong popularity and growth will
maintain sales levels over time. A significant decrease in Move Free or joint
care category sales would have a material adverse effect on our results of
operations and financial condition. Other specialty supplement products
include:




●
            specialty formulas for men and
      women, such as Prostate Health and Folic
  Acid;




●
            other specialty formulas, such as
      Melatonin Plus, Niacin, Lutein and Sam-ePlus;
  and




●
            omega-3products, such asFish Oiland MegaRed®.




Our Schiff brand
vitamin products are designed to provide consumers with essential vitamins and
minerals as supplements to healthy diet and exercise. Schiff brand vitamin
products include:




●
            multivitamins, such as Single
      Day;




●
            individual vitamins, such as
      Vitamin B,Vitamin Cand Vitamin D;
  and




●
            minerals, such as
      Calciumand
      Iron.




The Schiff brand is
marketed primarily in the mass market retail channel, with additional limited
distribution in health food stores. Our products are sold domestically in
leading retail outlets in all 50 states. Our mass market customers
include:




●
            warehouse clubs, such as Costco,
      Sam’s Club and BJ’s;




●
            mass merchandisers, such as
      Wal-Mart and Target;




●
            drug stores, such as Walgreens,
      CVS, Rite Aid and Longs;
  and




●
            supermarkets, such as Fred Meyer,
      Giant, Kroger, Publix, Safeway, Stop & Shop, H-E-B and
      Raley’s.




We also manufacture
and distribute private label products for certain retail customers where we sell
our branded products. Private label products are sold to key retailers for
distribution under their store brand names. Private label products include
specialty supplements, vitamins and minerals, such as joint care products,
Vitamin B, Calcium, Vitamin E and Fish Oil. We service the health food market
primarily through sales to leading health food retailers and
distributors.







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Our largest
customers are Costco and Wal-Mart. Combined, these two customers accounted for
approximately 74%, 69% and 70%, respectively, of total net sales for fiscal
2008, 2007 and 2006. Our concentration in these customers is significant. Retail
customers in our industry generally do not enter into long-term supply contracts
with their suppliers, particularly for branded products. Consequently, we do not
have supply contracts with either Costco or Wal-Mart and therefore cannot assure
you that either Costco or Wal-Mart will continue to be significant customers in
the future. The loss of either Costco or Wal-Mart as a customer, or a
significant reduction in purchase volume by Costco or Wal-Mart, would have a
material adverse effect on our results of operations and financial
condition.




We also export
certain Schiff products, particularly in the joint care category, to various
international markets. In certain countries where we have an existing
relationship with a retailer, such as Costco, we sell our products directly to
the retailer. We sell to independent distributors in countries where we do not
have direct relationships with retailers. See Note 1 of the Notes to
Consolidated Financial Statements for domestic and international net sales
amounts. See “Item1– Business – Government
Regulation” and “Item 1A – Risk Factors” for additional information relating to
our export business.




We also market a
line of nutrition bar products under the Tiger’s Milk and Fi-Bar® brands. The
Tiger’s Milk product line includes several nutrition bars that supply protein,
vitamins and other essential nutrients with fewer calories than a traditional
candy bar. The Fi-Bar product line is comprised of snack bars that are free of
hydrogenated oils and trans fat, made with wholesome ingredients such as grains,
oats, nuts and fruit, and coated with white, semi-sweet or milk chocolate. The
Tiger’s Milk and Fi-Bar brands are intended to provide consumers with a healthy
alternative to traditional snack foods and candy bars and are sold primarily
through warehouse clubs, mass market retailers and convenience stores, with
additional limited distribution in health food stores.




We believe our
business, which consists of the aggregation of the foregoing product-based
operating segments, represents our only reportable segment.  See Item
7, “Management's Discussion and Analysis of Financial Condition and Results of
Operation,” and the notes to our consolidated financial statements in this
Annual Report, for more information concerning reportable segments and the
geographic areas and channels in which we conduct our
business.




Sales and Marketing




Our sales force
consists of dedicated sales professionals who are assigned to specific accounts,
classes of trade and/or geographic territories. These sales professionals work
directly with retailers and distributors to increase knowledge of our products
and general nutritional supplement benefits, solicit orders for our products,
maximize our shelf presence and provide related product sales assistance. We
also utilize brokers to sell our products in certain accounts and classes of
trade.




We market our
products using a mix of trade and consumer promotions; television, internet,
newspaper and print media advertising; and consumer education efforts. Our
advertising and marketing expenditures, excluding sales incentives reflected as
reductions in net sales or increases in cost of goods sold, were approximately
$18.0 million, $19.4 million and $18.3 million, respectively, for fiscal 2008,
2007 and 2006. Classification of promotional costs as a sales reduction or
increase in cost of goods sold is required when the promotion effectively
represents a price reduction.




During fiscal 2008,
we maintained our focus on brand building support for our core brands,
particularly relating to our Schiff Move Free brand and other joint care
products. We continued to employ television, internet, magazine and other media
in fiscal 2008, along with several targeted direct mail, public relations and
sampling campaigns. During fiscal 2008, our advertisements appeared in various
magazines and other publications.




Another key
component of our marketing strategy is to educate consumers about innovative,
safe and beneficial nutritional supplement products. We participate in consumer
education at conferences and trade and consumer shows. Our web sites,
includingwww.schiffvitamins.com and
www.movefreeadvanced.com, also provide additional
educational information to consumers and customers.




Product Research and
Development




We are committed to
research and development to create safe and efficacious new products and
existing product line extensions, and develop more effective and efficient means
of processing ingredients for use in products. New product development and
process improvements are important to the nutritional supplement industry to
create new market opportunities, meet consumer demand and strengthen
relationships with customers.




We maintain an
extensive research library and employ a variety of industry relationships to
identify new research and development projects offering health and wellness
benefits. To support our research and development efforts, we maintain a staff
of scientific and technical personnel, invest in formulation, processing and
packaging development, perform product quality and stability studies, invest in
product efficacy and safety studies, and conduct consumer market research to
sample consumer opinions on product concepts, product design, packaging,
advertising and marketing campaigns. For research and development initiatives,
we conduct research and development in our own facility and with third parties.
Product research and development expenses were approximately $4.2 million, $3.7
million and $2.9 million, respectively, for fiscal 2008, 2007 and
2006.





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Manufacturing and Product
Quality




We manufacture the
majority of our products in a capsule and tablet manufacturing facility in Salt
Lake City, Utah, which includes our main distribution center and primary
administrative offices and also contains our nutrition bar manufacturing
operations. Our Salt Lake City capsule and tablet facility is designed and
operated to meet United States Pharmacopeia (“USP”) compliance standards. We
participate in the USP Dietary Supplement Verification Program, pursuant to
which our manufacturing facility has been certified as being compliant with good
manufacturing practices (“GMPs”) promulgated by USP. We are also registered with
NSF International (“NSF”) as being certified compliant with NSF GMPs as set
forth in NSF/ANSI Standard 173-2003, Dietary Supplements, Section
8.




Our manufacturing
process generally consists of the following operations: (i) sourcing ingredients
for products, (ii) testing and warehousing raw ingredients, (iii) measuring
ingredients for inclusion in such products, (iv) granulating, blending and
grinding ingredients into a mixture with a homogeneous consistency, (v)
encapsulating, tableting, pouring, pouching, bagging or boxing the blended
mixture into the appropriate dosage form using either automatic or semiautomatic
equipment, and (vi) testing finished products prior to
distribution.




Our bottling and
packaging, counting, check weighing and filling operations are automated to
promote accuracy and compliance with weights and measures regulations. We have
invested in production line flexibility to accommodate various filling sizes,
weights or counts of product and final shipped unit configurations to fulfill
customer and ultimate consumer needs. The distribution center features a
high-rise racked warehouse and a fully automated “order-pick” system using
optical readers that interpret bar coded labels on each shipping
container.




We maintain and
operate a Manufacturing Resource Planning (“MRP”) system that is integrated with
distribution, warehousing and quality control, which provides real-time lot and
quality tracking of raw materials, work in progress and finished goods. We
manufactured over 95% of our branded products in fiscal 2008, based on net
sales. By manufacturing the majority of our own products, we believe that we
maintain better control over product quality and availability, while also
reducing production costs. We also have a working relationship with numerous
outside manufacturers, including softgel manufacturers and packagers, and
utilize these outside sources from time to time. Manufacturing backlogs, to the
extent they may occasionally exist, do not have a material impact on delivery
time to the customer.




Our quality
management systems are detailed and comprehensive, and include a supplier
selection and certification process, raw material verification, analytical
testing, weight deviation measurement, facility and process audits, and other
procedures. The quality management systems also include a professionally
equipped and staffed laboratory, enabling analysis of raw materials and finished
goods for compliance to specifications. Our products are also subject to
extensive shelf life stability testing through which we determine the effects of
aging on our products. Outside laboratories are used routinely to evaluate our
internal test laboratory performance and to supplement our internal testing
procedures and capabilities.




We employ a
purchasing staff that works with marketing, product development and quality
control personnel to source raw materials for our products. Raw materials are
sourced principally from China and the United States. We seek to mitigate the
risk of a shortage of raw materials through our relationships with our principal
suppliers, including identification and qualification of alternative suppliers
for the same, or similar, raw materials where available.




We have a long-term
supply and license agreement with a third-party supplier for a key ingredient
used in our Move Free Advanced product. While we have a contract in place
providing for the continuing supply of this ingredient, we cannot assure you
that the supplier will continue to supply this ingredient in the quantities or
on the terms we require, or at all. See “Item 1 – Business – Intellectual
Property.”




Competition




The market for the
sale of nutritional supplements is highly fragmented and competitive. We believe
that competition is based principally upon price, quality and efficacy of
products, customer service, brand name and marketing support, and new
products.




Our competition
includes numerous nutritional supplement companies that are highly fragmented in
terms of geographic market coverage, distribution channels and product
categories. In addition, large pharmaceutical companies and packaged food and
beverage companies compete with us in the nutritional supplement market. These
companies and certain nutritional supplement companies have broader product
lines and/or larger sales volumes than us and have greater financial and other
resources available to them and possess extensive manufacturing, distribution
and marketing capabilities. Private label products of our customers, which in
recent years have significantly increased in certain nutrition categories
(including the joint care category), compete directly with our products. In
several product categories, private label items have become the market share
leaders. Increased competition from such companies and from private label
pressures, particularly relating to the joint care category, could have a
material adverse effect on our results of operations and financial
condition.







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Many companies
within the industry are privately-held. Therefore, we are unable to assess the
size of all of our competitors or where we rank in comparison to such
privately-held competitors with respect to sales to retailers. As the
nutritional supplement industry continues to evolve, we believe retailers will
align themselves with suppliers who are financially stable, market a broad
portfolio of products and offer superior customer service. We believe that we
compete favorably with other nutritional supplement companies because of our
financial stability, brand names, customer service, competitive pricing, sales
and marketing support and quality of our product lines.




GovernmentRegulation




The formulation,
manufacturing, packaging, labeling, advertising, distribution and sale of our
products are subject to the laws and regulations of federal governmental
agencies, including the Food and Drug Administration (“FDA”), the Federal Trade
Commission (“FTC”), the U.S. Department of Agriculture, the U.S. Consumer
Products Safety Commission, the Environmental Protection Agency and the Postal
Service, and also various agencies of the states, localities and countries in
which we operate and sell our products.




The FDA regulates
foods and dietary supplements through the Food, Drug and Cosmetic Act (“FDCA”)
and amendments thereto, including the Dietary Supplement Health and Education
Act of 1994, as amended (“DSHEA”), which is intended to promote access to safe,
quality dietary supplements and information about dietary supplements. DSHEA
establishes a statutory class of dietary supplements, including vitamins,
minerals, herbs, amino acids and other dietary substances for human use to
supplement the diet, as well as concentrates, metabolites, extracts or
combinations of such dietary ingredients. Generally, under DSHEA, dietary
ingredients on the market before October 15, 1994 may be used without further
notification to the FDA. However, dietary ingredients not marketed prior to
October 15, 1994 may be “new dietary ingredients” under DSHEA and may require a
submission to the FDA at least 75 days prior to marketing such ingredient
evidencing a history of use or other evidence of safety to establish that the
ingredient will reasonably be expected to be safe. We cannot assure you that the
FDA will accept the evidence of safety for any new dietary ingredients that we
may want to market, and the FDA’s refusal to accept such evidence could prevent
the marketing of such dietary ingredients. In addition, increased FDA
enforcement could lead the FDA to challenge dietary ingredients already on the
market as “illegal” under the FDCA because of the failure to file a new dietary
ingredient notification.




DSHEA permits
statements of “nutritional support” for dietary supplements that may describe
how particular dietary ingredients affect the structure, function or general
well-being of the body or describe the mechanism of action by which dietary
ingredients affect the foregoing. These statements of nutritional support, or
“structure/function claims,” may not make a health claim or disease claim,
meaning that a statement may not claim to diagnose, treat, prevent, cure or
mitigate an illness or disease unless the claim was authorized by the FDA. A
structure/function claim in advertising or on a product label must have
substantiation that the claim is truthful and not misleading, and have a
disclaimer that the statement has not been evaluated by the FDA and that the
product is not intended to diagnose, treat, cure or prevent any disease. We
cannot assure you that a regulatory agency, court or other third party will
not deem one or more of our product claims or labels to be impermissible and
take adverse action against us.




In addition, DSHEA
provides that certain "third-party literature," such as a reprint of a
peer-reviewed scientific publication linking a particular dietary ingredient
with health benefits, may be used "in connection with the sale of a dietary
supplement to consumers" without the literature being subject to the same
regulation as labeling. Such literature must not be false or misleading; the
literature may not "promote" a particular manufacturer or brand of dietary
supplement; and a balanced view of the available scientific information on the
subject matter must be presented. We cannot assure you that all third-party
literature that we would like to disseminate in connection with our products
will satisfy each of these requirements, and failure to satisfy all requirements
could prevent use of the literature or subject us to adverse actions by
regulatory agencies or other third parties.




In June 2007, the
FDA published final GMPs specifically for the dietary supplement industry. The
effective compliance date for companies like ours with fewer than 500 employees
is June 22, 2009. These GMPs are more detailed than the GMPs currently
applicable to us and may result in increased expenses, changes to our processes
or products and/or implementation of additional recordkeeping and administrative
procedures. Among other things, these GMPs: (a) require identity testing on
all incoming dietary ingredients, (b) call for a "scientifically valid
system" for ensuring finished products meet all specifications, (c) include
requirements related to process controls, including statistical sampling of
finished batches for testing and requirements for written procedures, and (d)
require extensive recordkeeping. We are reviewing our manufacturing processes
and procedures, and taking steps to pursue compliance. We do not currently
expect the incremental cost of compliance efforts to be material. While we
believe we will be in compliance on or before the compliance date applicable to
our company, there can be no assurance that our operations or those of our
suppliers will be in compliance in all respects at all times. Additionally,
there is a potential risk of increased audits as the FDA and other regulators
seek to ensure compliance with the GMPs.




In December 2006,
Congress passed legislation requiring companies that manufacture or distribute
over-the-counter products (“OTC”) or dietary supplements to report serious
adverse events allegedly associated with their products to the FDA and institute
recordkeeping procedures for all alleged adverse events (serious and
non-serious). The legislation requires manufacturers and distributors of OTCs or
dietary supplements to report to the FDA any serious adverse event reports
received, even if the party making the report provides no medical or other
information to the manufacturer or distributor. There is a risk that consumers,
the press or government regulators could misinterpret reported serious adverse
events as evidence of causation by the ingredient or product complained of,
which could lead to consumer confusion, additional regulations, banned
ingredients or products, increased insurance costs and a potential increase in
product liability litigation, among other things. Any of the foregoing could
have a material adverse effect on our results of operations and financial
condition.







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Although most of
our products are classified as dietary supplements, some of our products are
conventional foods, which are also subject to the Nutrition Labeling and
Education Act of 1990 (“NLEA”). The NLEA also prohibits health claims being made
for a food without prior FDA approval and establishes requirements for
ingredient and nutrition labeling.




The FTC exercises
jurisdiction over the advertising of nutritional and dietary supplements under
the Federal Trade Commission Act. In November 1998, the FTC published an
advertising guideline for the dietary supplement industry entitled “Dietary
Supplements: An Advertising Guide for Industry.”  These guidelines
reiterate many of the policies regarding dietary supplements the FTC has
periodically announced over the years, particularly with respect to the
substantiation of claims made in advertising of dietary supplement products. In
the past several years, the FTC has instituted several enforcement actions
against dietary supplement companies alleging false and misleading advertising
of certain products. These enforcement actions have resulted in consent decrees
and/or the payment of fines by certain of the companies involved. We entered
into a consent decree with the FTC effective November 2000 governing diet and
weight loss claims and certain disease, safety and comparative health benefit
claims.




The National
Advertising Division ("NAD") of the Council of Better Business Bureaus oversees
an industry-sponsored self-regulatory system that permits competitors to resolve
disputes over advertising claims. The NAD also has its own advertising
monitoring program, and initiates its own challenges to advertising that it has
reviewed. The NAD has no enforcement authority of its own, but may refer matters
that the NAD views as violating FTC rules, regulations or guidance to the FTC
for further action. We cannot assure you that the NAD will not deem one or more
of our advertising claims to be impermissible.




Federal agencies,
primarily the FDA and FTC, have a variety of procedures and enforcement remedies
available to them, including initiating investigations, issuing warning letters
and cease and desist orders, requiring reformulation of products, requiring
corrective labeling or advertising, requiring consumer redress (for example,
requiring that a company offer to repurchase products previously sold to
consumers), seeking injunctive relief or product seizures, and imposing civil
penalties or commencing criminal prosecution. In addition, certain state
agencies have similar authority. These federal and state agencies have in the
past used these remedies in regulating participants in the dietary supplement
industry.




Our international
activities are subject to regulation in each country in which we sell or
distribute our products. In markets outside the United States, before commencing
operations or marketing our products, we may be required to obtain approvals,
licenses or certifications from a country’s ministry of health or comparable
agency. Approvals or licensing may be conditioned on reformulation of products
or may be unavailable with respect to certain products or product ingredients.
We must also comply with product labeling and packaging regulations that vary
from country to country. Furthermore, the regulations of these countries may
conflict with those in the United States and with each other, sometimes causing
higher costs and expenses, product reformulations, and delay. In countries in
which we do not have direct relationships with retailers, independent
distributors generally have responsibility for compliance with applicable
foreign laws and regulations. These distributors are independent contractors
over whom we have limited control.




As a result of our
efforts to comply with applicable statutes and regulations, from time to time we
have reformulated, eliminated or relabeled certain of our products and revised
certain aspects of our sales, marketing and advertising programs. We cannot
assure you that we will not have to make such changes or revisions in the
future, which could have a material adverse effect on our results of operations
and financial condition.




We may be subject
to additional laws or regulations by the FDA or other federal, state, county,
local or foreign regulatory authorities, the repeal of laws or regulations which
we consider favorable, such as DSHEA, or more stringent interpretations of
current laws or regulations, from time to time in the future. We are unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can we predict what effect additional governmental
regulations, legal proceedings or administrative orders, when and if promulgated
or initiated, would have on our business in the future. Such changes could,
however, require the reformulation of certain products to meet new standards,
the recall or discontinuance of certain products not able to be reformulated,
additional recordkeeping requirements, expanded documentation of the properties
of certain products, new or different labeling, additional scientific
substantiation, additional personnel, or new or additional processes, procedures
or requirements. Any or all of such changes or requirements and the related
costs to comply with such changes or requirements could have a material adverse
affect on our results of operations and financial condition.




Intellectual
Property




We own, or have
filed for, over 50 trademarks registered with the United States Patent and
Trademark Office for our Schiff and Tiger’s Milk brands and certain of our
products (including Move Free) and slogans. We also license rights for names
material to our business, including Move Free, and for the use of our brand
names, including Schiff and Tiger’s Milk, in certain countries outside of North
America. However, the protection available in foreign jurisdictions may not be
as extensive as the protection available to us in the United
States.







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We rely on common
law trademark rights to protect our unregistered trademarks. Common law
trademark rights do not provide us with the same level of protection as afforded
by a United States federal registration of a trademark. In addition, common law
trademark rights are limited to the geographic area in which the trademark is
actually used.




Our Move Free
Advanced product contains a key ingredient, the rights for which we license from
a third-party supplier pursuant to a long-term supply and license agreement. The
term of the agreement extends through May 2009, with automatic one-year
extensions unless terminated by us or by the supplier upon our breach of the
agreement and failure to cure the breach within a prescribed time period. Our
supplier has patents and patents pending relating to the key ingredient, and has
granted us exclusive rights to market and sell the ingredient for joint care
purposes in certain territories and classes of trade. However, our supplier is
currently in litigation with third parties alleging patent infringement in
connection with the sale of the key ingredient by third parties in products
similar to our Move Free Advanced product. We cannot assure you that our
supplier will prevail in such litigation or be successful in preventing third
parties from selling the key ingredient in their competing products. This could
have a material adverse effect on our results of operations and financial
condition.




Employees




At May 31, 2008, we
employed approximately 431 persons, of whom approximately 190 were in
management, sales, purchasing, logistics and administration and approximately
241 were in manufacturing operations. In addition, we utilize temporary
employees in some of our manufacturing operations. We are not party to any
collective bargaining arrangements and believe that our relationship with our
employees is good.




ITEM
1A.          RISK FACTORS




A significant
portion of our total net sales are dependent upon our Move Free product and the
joint care category, and a significant decrease in sales of these products would
have a material adverse effect on our results of operations and financial
condition.Certain products and product lines (particularly in the joint care
category) account for a significant amount of our total net sales. Net sales of
our Schiff Move Free brand were approximately 47%, 48% and 48%, respectively, of
total net sales for fiscal 2008, 2007 and 2006. We cannot assure you that Move
Free or other of our products currently experiencing strong popularity and
growth will maintain sales or margin levels over time. A significant decrease in
Move Free or joint care category sales would have a material adverse effect on
our results of operations and financial condition.




Two of our
customers account for a substantial portion of our net sales, and the loss of
one or both of these customers would have a material adverse effect on our
results of operations and financial condition. Our largest customers are
Costco and Wal-Mart. Combined, these two customers accounted for approximately
74%, 69% and 70%, respectively, of total net sales for fiscal 2008, 2007 and
2006. Our concentration in these customers has generally increased in recent
years. We do not have supply contracts with either Costco or Wal-Mart and
therefore cannot assure you that either Costco or Wal-Mart will continue to be
significant customers in the future. The loss of either Costco or Wal-Mart as a
customer, or a significant reduction in purchase volume by Costco or Wal-Mart,
would have a material adverse effect on our results of operations and financial
condition.




Unfavorable
publicity or consumer perception of our products and any similar products
distributed by other companies could have a material adverse effect on our
results of operations and financial condition. We believe sales of our
products are highly dependent on consumer perception of the safety, quality and
efficacy of our products as well as similar or other nutritional supplement
products distributed and sold by other companies. Consumer perception of our
products can be significantly influenced by scientific research or findings,
regulatory investigations, litigation, national media attention, and other
publicity regarding our products and other nutritional supplements, including
publicity regarding the legality or quality of particular ingredients or
products or the nutritional supplement market in general. From time to time,
there is unfavorable publicity, scientific research, litigation, regulatory
proceedings and other media attention regarding our industry. There has recently
been unfavorable publicity regarding items imported from China, where we source
a large amount of our raw materials. There can be no assurance that future
publicity, scientific research or findings, litigation, regulatory proceedings,
or media attention will be favorable to the nutritional supplement market or any
particular product or ingredient, or consistent with earlier favorable
publicity, research, findings, litigation, proceedings or media attention.
Adverse publicity, media attention, research, findings, litigation, proceedings
or other reports, whether or not accurate, could have a material adverse effect
on our results of operations and financial condition and may lead to increased
scrutiny of our operations by federal, state or other regulatory agencies,
requiring further management attention and potential legal fees and other
expenses. In addition, adverse publicity, reports or other media attention
regarding the safety, quality, or efficacy of our products or ingredients or
nutritional supplement products or ingredients in general, or associating the
consumption of our products or ingredients or nutritional supplement products or
ingredients in general with illness or other adverse effects, whether or not
scientifically supported or accurate, could have a material adverse effect on
our results of operations and financial condition.




We operate in a
highly competitive industry, in which increased competition and pricing
pressures could have a material adverse effect on our results of operations and
financial condition. The market for the sale of
nutritional supplements is highly competitive. Many of our principal competitors
have greater financial and other resources available to them and possess
extensive manufacturing, distribution and marketing capabilities. Additional
national or international companies may enter or increase their presence
(through acquisition or organic growth) in our industry. Private label products
of our customers, the number of which in recent years has significantly
increased in certain nutrition categories (including joint care), also create
significant pricing pressure and competition with our products. Because
nutritional supplements can be purchased in various channels of distribution, we
also compete with products sold outside of the mass market retail channel,
including health food stores, direct sales, direct mail and internet
distribution channels. Increased competition from competitors, including
expansion of private label products, or increased pricing pressure, could have a
material adverse effect on our results of operations and financial
condition.







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Among other
factors, competition among manufacturers, distributors and retailers of
nutritional supplements is based upon price. Because of the high degree of price
competition, we generally have not been able to pass on increases in raw
material prices to our customers. If one or more of our competitors
significantly reduce their prices in order to gain market share (particularly
relating to the joint care category), or if raw material prices increase and we
are unable to pass along the increased cost to our customers (particularly
relating to the joint care category), our results of operations and financial
condition could be materially adversely affected.




Increases in
prices of raw materials could adversely affect our results of operations and
financial condition. Raw materials account for a significant portion of
our manufacturing costs. We have encountered material fluctuations in the
pricing of key raw materials in the past, particularly relating to joint care
category products. During fiscal 2005 and continuing into fiscal 2006, we
experienced margin volatility due to several factors, including significant raw
material pricing increases in the joint care category. During fiscal 2005 and
early fiscal 2006, as a result of the raw material pricing volatility and the
inability to secure acceptable price increases from customers, we discontinued
certain private label (contract manufacturing) business. During fiscal 2006 and
continuing into fiscal 2007, raw material pricing in the joint care category
decreased and appeared to be relatively stable. However, beginning in late
fiscal 2008 and continuing into fiscal 2009, the prices of raw materials
(particularly those sourced from China, including many joint care category
ingredients) have increased and may continue to increase significantly.
Historically, we generally have not been able to pass along raw material price
increases, and may not be able to do so in the future. Significant increases in
raw material prices, particularly relating to the joint care category, could
have a material adverse effect on our results of operations and financial
condition.




We are dependent
on third-party suppliers. We acquire all of our raw materials for the
manufacture of our products from third parties. A considerable portion of our
raw materials relates to our joint care category, which accounts for a
significant amount of our total net sales. We cannot assure you that suppliers
will provide the raw materials we need in the quantities requested, at a price
we are willing to pay or that meet our quality standards and labeling
requirements.  This could cause product shortages and back orders,
damaging our reputation and resulting in a loss of net sales and
profitability.




We typically do not
enter into long-term contracts with our suppliers. However, we have a long-term
supply and license agreement with a third-party supplier for a key ingredient
used in our Move Free Advanced product. While the contract provides for the
continuing supply of this ingredient, we cannot assure you that the supplier
will continue to supply this ingredient in the quantities or on the terms we
require, or at all. See “Item 1 – Business – Intellectual Property” and “Item 1A
– Risk Factors – Risks Associated with Intellectual Property Rights and
Proprietary Techniques.”  In addition, from time to time, we enter
into forward purchase commitments regarding certain raw materials, primarily
relating to the joint care category. We cannot assure you that the suppliers
will supply the raw materials in accordance with the terms of the forward
purchase commitments, or at all. For certain ingredients, we do not have
alternate suppliers.  Any significant failure to supply or changes in
the material terms of supply by the Move Free Advanced key ingredient supplier
or our other raw materials suppliers could have a material adverse effect on our
results of operations and financial condition.




We are subject to
potential delays in the delivery of raw materials caused by events beyond our
control, including, among other factors, strikes or labor disputes,
transportation interruptions, weather-related events, natural disasters or other
catastrophic events, and changes in government regulations. Any significant
delay in or disruption of the supply of raw materials could, among other things,
substantially increase the cost of such materials, require reformulation or
repackaging of products, require the qualification of new suppliers, or result
in our inability to meet customer demands for certain products. The occurrence
of any of the foregoing, particularly with respect to raw materials needed for
our joint care products, could have a material adverse effect on our results of
operations and financial condition.




We
acquire a significant amount of key ingredients for our products from foreign
suppliers, and may be negatively affected by the risks associated with
international trade and importation issues. We acquire a significant
amount of key ingredients for a number of our products (particularly joint care
products) from suppliers outside of the United States, particularly China.
Accordingly, the acquisition of these ingredients is subject to the risks
generally associated with importing raw materials, including, among other
factors, delays in shipments, changes in economic and political conditions,
quality assurance, nonconformity to specifications or laws and regulations,
tariffs, trade disputes and foreign currency fluctuations. While we have a
supplier certification program and periodically audit and inspect our suppliers’
facilities both in the United States and internationally, we cannot assure you
that raw materials received from suppliers outside of the United States will
conform to all specifications, laws and regulations. There has recently been
quality and safety issues with certain items imported from China, where we
source a large amount of our raw materials. We may incur additional expenses and
experience shipment delays due to preventative measures adopted by the Chinese
and U.S. governments, our suppliers and our company.




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In addition, the
discovery of Bovine Spongiform Encephalopathy, commonly referred to as “mad cow
disease,” in a country from which we obtain a significant amount of our raw
materials (particularly related to the joint care category) derived from bovine
sources could prevent us from purchasing such raw materials in the required
quantities, at an acceptable price or at all. The occurrence of any of the
foregoing, particularly with respect to raw materials needed for our joint care
products, could have a material adverse effect on our results of operations and
financial condition.




Our
inability or failure to protect our intellectual property and proprietary
techniques or our infringement of others' intellectual property could have a
materially adverse effect on our results of operations and financial condition.Although the nutritional supplement industry has historically been
characterized by products with naturally occurring ingredients in capsule or
tablet form, it has become more common for suppliers and competitors to apply
for patents or develop proprietary technologies and processes. Although we make
efforts not to infringe the intellectual property rights of others, there can be
no assurance that third parties will not assert intellectual property
infringement claims against us or our intellectual property licensors. Such
claims of intellectual property infringement may require us to enter into costly
royalty or license agreements, which we may be unable to obtain on terms
acceptable to us or at all.  These claims could also be costly, could cause
reputational injury and could divert the attention of management and key
personnel. To the extent that these developments prevent us from, or
increase the cost of, offering or supplying competitive products or our licensed
proprietary ingredient in the marketplace, or result in litigation or threatened
litigation against us related to alleged or actual infringement of third-party
rights, these developments could have a material adverse effect on our results
of operations and financial condition.




We protect our
intellectual property related to investments in research and development by
relying on trade secret laws and confidentiality agreements with third parties
who have access to information about our research and development activities.
When we license our trademarks, proprietary ingredients or other intellectual
property from a third party, we typically have contractual rights to require the
licensor to adequately protect our intellectual property interests.
Nevertheless, we cannot guarantee that such measures will be sufficient to
protect our interests. Our Move Free Advanced product contains a key ingredient,
the rights for which we license from a third-party supplier pursuant to a
long-term supply and license agreement. Our supplier has patents and patents
pending relating to the key ingredient, and has granted us exclusive rights to
market and sell the ingredient for joint care purposes in certain territories
and classes of trade. However, our supplier is currently in litigation with
third parties alleging patent infringement in connection with the sale of the
key ingredient by third parties in products similar to our Move Free Advanced
product. We cannot assure you that our supplier will prevail in such litigation
or be successful in preventing third parties from selling the key ingredient in
their competing products. This could have a material adverse effect on our
results of operations and financial condition. See “Item 1 – Business –
Manufacturing and Product Quality” and —
“Intellectual Property.”




In addition, we
own, or have filed for, over 50 trademarks registered with the United States
Patent and Trademark Office for our Schiff and Tiger's Milk brands and certain
of our products (including Move Free) and slogans, and have rights to use names
material to our business in certain countries outside of North America. 
Our policy is to pursue registrations for certain trademarks associated with our
key products (though we continue to rely on common law trademark rights to
protect our unregistered marks) and to protect our trademarks against
infringement.  However, there can be no assurance that infringing products
could not be marketed without our knowledge or consent.  Further, to the
extenet we rely upon foreign or common law protections for our marks, we may not
be provided with as extensive protection as is afforded by a United States
federal registration.  If we are unable to effectively protect our
trademark rights, it could have a material adverse effect on our results of
operations and financial condition.  See "Item 1 – Business – Intellectual
Property."




Our
international sales expose us to certain risks associated with international
commerce which could adversely affect our business. Our international
sales efforts are comprised of selling products, particularly our joint care
products, from the United States on an export basis to retail customers or
distributors abroad. Operating in international markets exposes us to certain
risks, including, among others, difficulty in understanding and complying with
foreign regulations, changes in or interpretations of foreign regulations that
may further limit our ability to sell certain products or ingredients in certain
countries, the potential imposition of trade or foreign exchange restrictions or
increased tariffs, difficulties in enforcement of contractual obligations,
difficulty in collecting international accounts receivable, potentially longer
payment cycles, and political instability. We are often required to reformulate
our products before commencing distribution in a given country. We must comply
with various and changing local labeling, customs and other regulations.
Trademark rights are often difficult to obtain and enforce in countries outside
the United States. There is also no assurance that we will be able to obtain and
retain the necessary permits and approvals required for our international
efforts. The importance of these and other risks relating to exporting goods to
foreign countries increases as our export business grows and expands. We are
attempting to increase our distribution of joint care products in international
markets. Our inability to successfully launch and maintain sales (especially in
the joint care category) outside of the United States while maintaining the
integrity of the products sold and complying with local regulations could have a
material adverse effect on our results of operations and financial
condition.




Our
failure to appropriately respond to changing consumer preferences and demand for
new products or our failure to develop and/or sustain new product launches could
adversely affect our business.
We believe our ability to grow in existing markets is partially dependent upon
our ability to introduce new and innovative products and product enhancements.
The development and commercialization process, particularly relating to
innovative products, is both time-consuming and costly and involves a high
degree of business risk. Although we seek to introduce additional products each
year, the success of new products or product enhancements is subject to a number
of variables, including developing products that will appeal to customers,
accurately anticipate consumer needs, be successfully commercialized in a timely
manner, be priced competitively, be differentiated from those of our
competitors, and comply with applicable regulations. The inability to
successfully implement or maintain marketing and spending programs or strategic
initiatives in support of our branded products or product enhancements could
have a material adverse effect on our results of operations and financial
condition. We cannot assure you that our efforts to develop and introduce new
products or existing product innovations will be successful, that customers will
accept new products, or, if accepted, that customers will continue to sell the
new products. The failure to successfully launch, gain distribution or maintain
distribution for new product offerings or product enhancements could have a
material adverse effect on our results of operations and financial
condition.




If
we experience material product liability claims or other litigation, it could
have a material adverse effect on our results of operations and financial
condition.
As a manufacturer and distributor of products designed to be ingested, we face
an inherent risk of exposure to product liability claims and litigation if our
products are alleged to have caused significant loss or injury. In addition, the
manufacture and sale of our products involve the risk of injury to consumers due
to tampering by unauthorized third parties or product contamination. Our
products consist of vitamins, minerals, herbs, and other ingredients that are
classified as dietary supplements or foods, and generally are not subject to
pre-market regulatory approval in the United States. Some of our products
contain ingredients that do not have long histories of human consumption, and
may not have the effects intended. Previously unknown adverse reactions
resulting from human consumption of these, other of our ingredients, or
combinations of ingredients could occur. We have been, and in the future may be,
subject to various product liability claims, including, among others, that our
products caused injury or illness, that our products include inadequate
instructions for use, or that our products include inadequate warnings
concerning possible side effects or interactions with other substances. A
product liability claim against us could result in increased costs, could
adversely affect our reputation with our customers and consumers, and could have
a material adverse effect on our results of operations and financial
condition.







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We are party to
various lawsuits that arise in the ordinary course of business and may become
party to others. While none of the lawsuits in which we are involved as of the
date of this filing are reasonably believed to be material, it is possible that
future litigation could arise, or that developments could occur in existing
litigation, that could have a material adverse effect on our results of
operations and financial condition.




We
may be unable to obtain sufficient insurance coverage to cover losses we may
incur.We maintain insurance relating to the operation of our business,
including, among other coverages, property, general and product liability,
workers’ compensation, and directors’ and officers’ liability policies. However,
our insurance coverage is subject to large individual claim deductibles for
certain policies, individual claim and aggregate policy limits, exclusions, and
other terms and conditions. In addition, our current product liability coverage
excludes claims relating to certain categories of products and products that
contain certain ingredients. Certain damages in litigation, such as punitive
damages, also are generally not covered by insurance. We cannot assure you that
our insurance will be sufficient to cover our losses, that future insurance
coverage will not contain additional exclusions or limitations, that we will be
able to continue to obtain insurance coverage, or that insurance coverage will
be available at an economically reasonable cost. In the event that we do not
have adequate or any insurance, product liability claims, litigation or other
losses could have a material adverse effect on our results of operations and
financial condition.




Failure
to comply with existing or new regulations, both in the U.S. and abroad, or an
adverse action regarding product formulation, claims or advertising could have a
material adverse effect on our results of operations and financial
condition.
Our business operations, including the formulation, manufacturing, packaging,
labeling, advertising, distribution and sale of our products, are subject to
regulation by various foreign, federal, state and local government entities and
agencies, particularly the FDA and FTC in the United States. See “Item 1 -
Business - Government Regulation.”  From time to time we may be
subject to challenges to our marketing, advertising or product claims in
litigation or governmental, administrative or other regulatory
proceedings.  Failure to comply with applicable regulations or
withstand such challenges could result in changes in product labeling,
packaging, or advertising, product reformulations, additional recordkeeping
requirements, injunctions, product withdrawals, recalls, product seizures, fines
or criminal prosecution. Any of these actions could have a material adverse
effect on our results of operations and financial condition. As a result of our
efforts to comply with applicable statutes and regulations, from time to time we
have reformulated, eliminated or relabeled certain of our products and revised
certain aspects of our sales, marketing and advertising programs. We cannot
assure you that we will not have to make such changes or revisions in the
future, which could have a material adverse effect on our results of operations
and financial condition.




In June 2007, the
FDA published extensive GMPs for dietary supplements. See “Item 1 - Business -
Government Regulation.”  Based on our current number of employees, we
are required to comply with the new GMPs by June 2009. While we do not currently
expect the incremental cost of compliance efforts to be material, we cannot
assure you that, in complying with the new GMP requirements, we will not incur
substantial costs that may have a material adverse effect on our results of
operations and financial condition, or that our operations or those of our
suppliers will be in compliance in as respects at all
times.  Additionally, there is a potential risk of increased audits as
the FDA and other regulators seek to ensure compliance with the
GMPs.




In markets outside
the United States, before commencing operations or marketing our products, we
may be required to obtain approvals, licenses or certifications from a country’s
ministry of health or comparable agency. Approvals or licensing may be
conditioned on reformulation of products or may be unavailable with respect to
certain products or product ingredients. We must also comply with product
labeling and packaging regulations that vary from country to country.
Furthermore, the regulations of these countries may conflict with those in the
United States and with each other. The cost of complying with these various and
potentially conflicting regulations can be substantial and could have a material
adverse affect on our results of operations and financial
condition.




We may also be
subject to additional laws or regulations administered by federal, state or
foreign regulatory authorities, the repeal or amendment of laws or regulations
which we consider favorable, such as DSHEA, or more stringent interpretations of
current laws or regulations. Additional or more stringent legislation and
regulations regarding the nutritional supplement industry have been considered
from time to time. We are unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can we predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on our business in the future. Any or all of these
requirements and the related costs to comply with such requirements could have a
material adverse effect on our results of operations and financial
condition.




If
we experience product recalls, we may incur significant and unexpected costs,
and our business reputation could be adversely affected. Manufacturers
and distributors of products in our industry are sometimes subject to the recall
of their products for a variety of reasons, including product defects, such as
ingredient contamination, packaging safety and inadequate or inaccurate labeling
disclosure. If any of our products are recalled due to an alleged product defect
or for any other reason, we could be required to incur the unexpected expense of
the recall and any legal proceedings that might arise in connection with the
recall. In addition, a product recall may require significant management
attention. We acquire all of our raw materials for the manufacture of our
products from third parties. Although we have procedures in place for testing
raw materials used in our products, we cannot assure you that any quality,
potency or contamination problems will be detected in time to avoid unforeseen
product recalls or lawsuits. There can be no assurance that we would be able to
recover these expenses from our suppliers. Additionally, if
one of our significant brands were subject to recall, the image of that brand
and our company could be harmed. A recall for any of the foregoing reasons could
lead to decreased demand for our products and could have a material adverse
effect on our results of operations and financial
condition.  Additionally, product recalls may lead to increased
scrutiny of our operations by federal, state or other regulatory agencies,
requiring further management attention and potential legal fees and other
expenses.





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We
are dependent on a single manufacturing facility, and any material disruptions
could adversely affect our business.We manufacture most of our products
at our manufacturing facility in Salt Lake City, Utah. Accordingly, we are
highly dependent on the uninterrupted and efficient operation of our
manufacturing facility. Power failures, the breakdown, failure or substandard
performance of equipment, the improper installation or operation of equipment,
workforce disruptions, natural or other disasters, or the failure to comply with
laws or regulations or the requirements or directives of government agencies,
including the FDA, could disrupt our operations and have a material adverse
effect on our results of operations and financial condition. While we do carry
business interruption insurance, we cannot assure you that our coverage will be
sufficient to cover losses from these types of business disruptions or that this
insurance will continue to be available to us at an acceptable price, if at
all.




If
we are unable to consummate successful strategic transactions in the
future, our business could be adversely affected.An element of our
strategy includes expanding our product offerings, gaining shelf space,
enhancing business development and gaining access to new skills and other
resources through strategic acquisitions, investments or other transactions when
attractive opportunities arise. We cannot assure you that attractive transaction
opportunities will be available to us, that we will be able to obtain financing
for or otherwise consummate any transactions or that any transactions which are
consummated will prove to be successful.




If
we lose key personnel or are unable to attract and fill key positions, our
business could be adversely affected.Our continued success will
depend largely on the efforts and abilities of our executive officers and
certain other key employees.  The loss or limitation of the services of any
of our key management employees, or the inability to attract additional
qualified personnel could have a material adverse effect on our results of
operations and financial condition.




Interruptions
to our information technology systems could adversely affect our business.Our success is dependent on the accuracy, reliability and proper use of
sophisticated and dependable information processing systems and management
information technology. Our information technology systems are designed and
selected in order to facilitate order entry and customer billing, maintain
customer records, accurately track purchases, manage accounting, finance and
manufacturing operations, generate reports, and provide customer service and
technical support. Although off-site data back-up is maintained, a significant
interruption in these systems could have a material adverse effect on our
results of operations and financial condition.




We
are controlled by a principal stockholder.
WHF owns all of our outstanding shares of Class B common stock, representing
over 90% of the aggregate voting power of all outstanding shares of our common
stock. Three of our directors also serve on the board of directors of WHF. WHF
is in a position to exercise control over us and to determine the outcome of all
matters required to be submitted to stockholders for approval (except as
otherwise provided by law or by our amended and restated certificate of
incorporation or amended and restated bylaws) and otherwise to direct and
control our operations. Accordingly, we cannot engage in any strategic
transactions without the approval of WHF.




ITEM
1B.         UNRESOLVED STAFF
COMMENTS




We do not have any
unresolved comments from the SEC staff.




ITEM 2.PROPERTIES





At May 31, 2008, we
leased the following facility:




Location
            
            Function
            
            Approximate
              Square
      Feet
            
            Expiration
              Date
      of LeaseSalt Lake City,
      UT
            
            Company Headquarters,
      Manufacturing & Production, Warehouse &
      Distribution
            
            418,000
            
            March
  2013




We believe that
this facility is adequate to meet our current needs.




ITEM 3.LEGAL
PROCEEDINGS




From time to time,
we are involved in claims, legal actions and governmental proceedings that arise
from our business operations. Although ultimate liability cannot be determined
at the present time, based on available information, we do not believe the
resolution of these matters will have a material adverse effect on our results
of operations and financial condition. However, it is possible that future
litigation could arise, or that developments could occur in existing litigation,
that could have a material adverse effect on our results of operations and
financial condition.




ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS




We did not submit
any matters to the vote of security holders during the fiscal 2008 fourth
quarter.










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PART
II




ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES




Our Class A common stock is traded on
the New York Stock Exchange under the symbol “WNI.”  The high and low
closing prices of our Class A common stock for each quarter of fiscal
2008and 2007are set forth
below:




Fiscal Year Ended May 31,
      2008:
            
            High
            
            
            LowFirst
    Quarter
            
            $
            7.65
            
            
            $
            5.29Second
    Quarter
            
            
            5.99
            
            
            
            5.14Third
    Quarter
            
            
            6.35
            
            
            
            5.11Fourth
    Quarter
            
            
            6.32
            
            
            
            5.21





Fiscal Year Ended May 31,
      2007:
            
            High
            
            
            LowFirst
    Quarter
            
            $
            7.75
            
            
            $
            6.42Second
    Quarter
            
            
            7.11
            
            
            
            6.01Third
    Quarter
            
            
            6.90
            
            
            
            6.12Fourth
    Quarter
            
            
            7.09
            
            
            
            6.41




There is no active trading market for
our Class B common stock, which is owned entirely by WHF.




In July 2007, our
Board of Directors approved a $1.50 per share special cash dividend, which was
paid on August 13, 2007 to shareholders of record of Class A and Class B common
stock at the close of business on July 31, 2007.  In connection with
the declaration of the special dividend, our Board of Directors approved certain
dividend equivalent rights, allowing holders (employees and directors) of
certain equity awards, including stock options and restricted stock units, to
receive cash dividends on each share of common stock underlying the stock
options and restricted stock units.  In aggregate, at July 31, 2007,
the record date, we had outstanding approximately 29.9 million shares of common
stock (including shares of common stock underlying equity awards subject to
dividend equivalent rights), including approximately 26.6 million shares of
outstanding Class A and Class B common stock, approximately 1.8 million shares
of Class A common stock underlying outstanding stock options, and approximately
1.5 million shares of Class A common stock underlying outstanding restricted
stock units.  The aggregate amount of the special dividend was
approximately $44.9 million, presuming 100% vesting of shares underlying equity
awards; $22.4 million for holders of Class A common stock, including $4.9
million for Class A common stock underlying certain equity awards, and $22.5
million for the holder of Class B common stock.  Approximately 98% of
the stock options and restricted stock units had vested as of May 31,
2008.  To the extent these equity awards were unvested at May 31,
2008, the $1.50 per share dividend was not, and will not be, distributed until
after such equity awards become vested.




The special dividend was funded from
cash and liquidation of available-for-sale securities.Approximately $42.7million of the distributionhasoccurredas of May 31, 2008, andan additional $1.0 million has been
distributed subsequent to May 31, 2008.  Theremaining amount will be
distributed upon vesting of the stock optionsorupon issuance of the shares underlying
restricted stock units.




Our Board of
Directors will determine dividend policy in the future based upon, among other
factors, our results of operations, financial condition, contractual
restrictions and other factors deemed relevant at the time. In addition, our
credit facility contains certain customary financial covenants that may limit
our ability to pay dividends on our common stock. See Note 14 of Notes to
Consolidated Financial Statements. We can give no assurance that we will pay
dividends in the future.




The closing price
of our Class A common stock on August 18, 2008 was $6.40. The approximate number
of stockholders of record of our Class A common stock on August 18, 2008 was
270. WHF owns all of the 14,973,148 outstanding shares of our Class B common
stock.







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The following table
presents information about our Class A common stock that may be issued upon the
exercise of options, warrants and rights under existing equity compensation
plans at May 31, 2008:




Plan
      category
            
            Number
      of securities to be issued upon exercise of outstanding options,
      warrants and rights
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
            
            (b)
            
            (c)Equity
      compensation plans approved by security holders
            
            3,293,986(1)
            
            $2.84(1)
            
            1,740,721Equity
      compensation plans not approved by security holders
            
            —
            
            —
            
            —Total
            
            3,293,986
            
            $2.84
            
            1,740,721







(1)The number of securities to be issued
upon exercise of outstanding options, warrants and rights includes
1,504,502shares of restricted stock units, which
are excluded in determining the weighted-average exercise price of outstanding
options, warrants and rights.




We did not
repurchase any of our Class A common stock during the fiscal 2008 fourth
quarter.







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ITEM 6.SELECTED CONSOLIDATED FINANCIAL AND
OPERATING DATA




The following selected consolidated
financial data as of and for the fiscal years ended May 31, 2004through May 31, 2008, have been derived from our
consolidated financial statements. The balance sheet data as of May 31,
2007and 2008, and the related operating statement
data for the fiscal years ended May 31, 2004through 2008have been audited by Deloitte &
Touche LLP, our independent auditors. The financial data should be read in
conjunction with the consolidated financial statements and notes thereto,
included elsewhere in this Annual Report on Form 10-K. See“Item7- Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”




Fiscal
      Year Ended May 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Operating Statement Data
      (1)and(2):
            
            (in thousands, except per share
      data)Net sales
            
            $
            176,914
            
            
            $
            172,656
            
            
            $
            178,372
            
            
            $
            173,095
            
            
            $
            168,127Cost of goods
      sold
            
            
            102,491
            
            
            
            103,959
            
            
            
            119,303
            
            
            
            113,351
            
            
            
            107,472Gross
profit
            
            
            74,423
            
            
            
            68,697
            
            
            
            59,069
            
            
            
            59,744
            
            
            
            60,655Operating
      expenses
            
            
            58,090
            
            
            
            51,415
            
            
            
            46,693
            
            
            
            44,981
            
            
            
            46,733Reimbursement of import
      costs
            
            
            (31
            )
            
            
            (394
            )
            
            
            (2,665
            )
            
            
            —
            
            
            
            —Total operating
      expenses
            
            
            58,059
            
            
            
            51,021
            
            
            
            44,028
            
            
            
            44,981
            
            
            
            46,733Income from
      operations
            
            
            16,364
            
            
            
            17,676
            
            
            
            15,041
            
            
            
            14,763
            
            
            
            13,922Other income
      (expense):Interest,
    net
            
            
            1,917
            
            
            
            2,943
            
            
            
            1,840
            
            
            
            179
            
            
            
            (168
            )Foreign currency translation
      gain
            
            
            —
            
            
            
            —
            
            
            
            1,613
            
            
            
            —
            
            
            
            —Other, net
            
            
            13
            
            
            
            (8
            )
            
            
            (135
            )
            
            
            (135
            )
            
            
            72Total other income (expense),
      net
            
            
            1,930
            
            
            
            2,935
            
            
            
            3,318
            
            
            
            44
            
            
            
            (96
            )Income from continuing operations
      before income taxes
            
            
            18,294
            
            
            
            20,611
            
            
            
            18,359
            
            
            
            14,807
            
            
            
            13,826Income tax
      expense
            
            
            6,992
            
            
            
            8,175
            
            
            
            2,393
            
            
            
            2,751
            
            
            
            5,230Income from continuing
      operations
            
            
            11,302
            
            
            
            12,436
            
            
            
            15,966
            
            
            
            12,056
            
            
            
            8,596Income (loss) from discontinued
      operations, net of income taxes (1) and (2)
            
            
            —
            
            
            
            —
            
            
            
            (127
            )
            
            
            (5,487
            )
            
            
            291Net income
            
            $
            11,302
            
            
            $
            12,436
            
            
            $
            15,839
            
            
            $
            6,569
            
            
            $
            8,887Weighted average shares
      outstanding:Basic
            
            
            26,636
            
            
            
            26,532
            
            
            
            26,274
            
            
            
            25,817
            
            
            
            25,874Diluted
            
            
            28,000
            
            
            
            27,343
            
            
            
            26,999
            
            
            
            26,418
            
            
            
            26,771Net income per
      share:Basic
            
            $
            0.42
            
            
            $
            0.47
            
            
            $
            0.60
            
            
            $
            0.25
            
            
            $
            0.34Diluted
            
            $
            0.40
            
            
            $
            0.45
            
            
            $
            0.59
            
            
            $
            0.25
            
            
            $
            0.33Cash dividends declared per common share
            
            $
            1.50
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —





At
      May 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Balance Sheet Data (1) and
      (2):
            
            (in
    thousands)Cash and cash
      equivalents
            
            $
            45,979
            
            
            $
            34,463
            
            
            $
            24,899
            
            
            $
            11,358
            
            
            $
            7,449Working
    capital
            
            
            81,481
            
            
            
            104,869
            
            
            
            90,516
            
            
            
            66,012
            
            
            
            46,456Total
assets
            
            
            124,486
            
            
            
            145,079
            
            
            
            131,615
            
            
            
            128,266
            
            
            
            114,924Total debt
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,020
            
            
            
            1,224Total stockholders’
      equity
            
            
            99,487
            
            
            
            124,095
            
            
            
            107,507
            
            
            
            89,835
            
            
            
            75,813




(1)
            Effective March 1, 2005, we sold
      certain assets of our Active Nutrition Unit relating to our Weider branded
      business. In accordance with SFAS No. 144, fiscal years 2004 and 2005 have
      been restated to reflect the Weider branded business operating results as
      discontinued operations.




(2)
            Effective May 1, 2005, we sold our
      Haleko Unit. In accordance with SFAS No. 144, fiscal years 2004, 2005 and
      2006 have been restated to reflect the Haleko Unit operating results as
      discontinued operations. See Note 2 of the Notes to Consolidated Financial
      Statements.







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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS




The following discussion and analysis
should be read in conjunction with the consolidated financial statements,
including the notes thereto, appearing elsewhere in this Annual Report on Form
10-K.




Overview




Schiff Nutrition International, Inc.
develops, manufactures, markets and distributes branded and private label
vitamins, nutritional supplements and nutrition bars in the United States and
throughout the world. We offer a broad range of capsules, tablets and nutrition
bars. Our portfolio of recognized brands, including Schiff, Move Freeand Tiger’s Milk, is marketed primarily
through the mass market (including club) and, to a lesser extent, health food
store distribution channels.




During fiscal 2006, 2007 and 2008, we
continued to provide selling and marketing support intended both to defend our
overall Move Free business against competition, including private label, and
ultimately to increase our market share in the joint care product
category.  The introduction of Move Free Advanced into substantially
all of our significant retail accounts during the second half of fiscal 2006 was
substantially completed in the fiscal 2007 second quarter.  In
December 2007, we announced the fiscal 2008 third quarter introduction of
smaller tablets for our existing Move Free items as well as the launch of a Move
Free line extension.  Also during fiscal 2008, we increased the
distribution of our joint care products in international markets and expect to
continue to increase distribution in fiscal 2009.  During the
latter part of fiscal 2008, we introduced MegaRed, an omega-3 krill oil product,
into Costco.  Subject to
competitive joint care category pricing pressures, including private label, the
success ofincremental
private label and new product sales and the ability toincreaseour distribution in international
markets,weexpect an upper single-digit net sales
increase forfiscal
2009net sales,as compared to fiscal 2008net sales.




Our operating
results for fiscal 2008 were impacted by the declaration of a $1.50 per share
special cash dividend in July 2007.  In connection with the
declaration of the special dividend, our Board of Directors approved certain
dividend equivalent rights allowing holders (employees and directors) of certain
equity awards, including stock options and restricted stock units, to receive
cash dividends on each share of common stock underlying the stock options and
restricted stock units.  As a result, we recognized an approximate
$4.9 million non-cash compensation expense during fiscal 2008, together with a
corresponding increase in additional paid-in-capital. Fiscal 2008 operating
results were also unfavorably impacted by approximately $1.4 million in
unsuccessful merger and acquisition related costs.Our operating results for fiscal
2007and 2006, respectively, were favorably impacted
by approximately $0.4million and $2.7million in reimbursement of import
costs from certain suppliers. These reimbursements, resulting primarily from the
favorable outcome of litigation between one of our suppliers and the U.S.
Government, represent refunds of previously paid tariffs on imported raw
materials.In
addition, our fiscal 2007 and 2006 operating results were also impacted by
certain other unusual items.  Fiscal 2007 was favorably impacted by
litigation related settlements resulting in the reversal of approximately $0.6
million in contingent liabilities and the recognition of approximately $1.0
million in reimbursements of certain previously paid insurance premiums and
other expenses incurred in prior fiscal years.  Fiscal 2006 was
unfavorably impacted by approximately $0.4 million in severance
costs.




Factors affecting our historical
results, including the previous implementation of strategic initiatives as well
as continuing refinement of our growth and business strategies, are ongoing
considerations and processes. While the focus of these considerations is to
improve future profitability, we cannot assure you that our decisions relating
to these initiatives will not adversely impact our results of operations and
financial condition.







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Results of
Operations


Fiscal 2008Compared to Fiscal 2007




The following tables show comparative
results for selected items as reported and as a percentage of net sales for
fiscal 2008and 2007,(dollars in
thousands):




2008
            
            
            2007Net sales
            
            $
            176,914
            
            
            
            100.0
            %
            
            $
            172,656
            
            
            
            100.0
            %Cost of goods
      sold
            
            
            102,491
            
            
            
            57.9
            
            
            
            103,959
            
            
            
            60.2Gross
      profit
            
            
            74,423
            
            
            
            42.1
            
            
            
            68,697
            
            
            
            39.8Operating
      expenses:Selling and
      marketing
            
            
            31,366
            
            
            
            17.7
            
            
            
            32,031
            
            
            
            18.6General and
      administrative
            
            
            22,475
            
            
            
            12.7
            
            
            
            15,698
            
            
            
            9.1Research and
      development
            
            
            4,249
            
            
            
            2.4
            
            
            
            3,686
            
            
            
            2.1Reimbursement of import
      costs
            
            
            (31
            )
            
            
            —
            
            
            
            (394
            )
            
            
            (0.2
            )Total operating
      expenses
            
            
            58,059
            
            
            
            32.8
            
            
            
            51,021
            
            
            
            29.6Income from
      operations
            
            
            16,364
            
            
            
            9.3
            
            
            
            17,676
            
            
            
            10.2Other income,
      net
            
            
            1,930
            
            
            
            1.1
            
            
            
            2,935
            
            
            
            1.7Income tax
      expense
            
            
            (6,992
            )
            
            
            (4.0
            )
            
            
            (8,175
            )
            
            
            (4.7
            )Income from continuing
      operations
            
            $
            11,302
            
            
            
            6.4
            %
            
            $
            12,436
            
            
            
            7.2
            %




Net
Sales.Net salesincreased approximately 2.5% to $176.9million forfiscal2008, from $172.7million forfiscal2007, primarily due toan increase in branded and private label
sales volume and a decrease in product returns, substantially offset by an
increase in sales price reductions related to incremental promotional
incentives.  Classification of certain promotional costs as a sales
reduction is required when the promotion effectively represents a price
reduction.




Aggregate branded net salesincreased approximately 2.3%
to$139.2millionfor fiscal 2008, from$136.1million forfiscal2007.An approximate $9.2million, or5.1% increase in sales volume,primarily in our joint care category
business,and an
approximate $1.0 million reduction in sales returns, were partially offset by an
approximate $7.1million increase in promotional
incentives classified as sales price reductions.We are utilizing more
price-discount like promotions due to increased competition, including private
label, and to support and ultimately increase our market
share.Move Free
net sales were $82.6million and $83.8million, respectively, forfiscal2008 andfiscal2007. The decrease primarily resulted
from incremental promotional activity due to competitive joint care product
category pricing pressures,
which more than off-set an approximate $3.9 million, or 3.4%, increase in sales
volume.




Private label salesincreased approximately3.0% to $37.7million forfiscal2008, from $36.6million for thefiscal2007, primarily due to incremental
businessawarded in the
latter part of fiscal 2008.




Gross
Profit.Gross profit increased approximately8.3% to $74.4million forfiscal2008, from $68.7million forfiscal2007.Gross profit, as a percentage of net
sales, increased to42.1% forfiscal2008, from39.8% forfiscal2007, primarily due to an approximate
$12.0million decrease in joint care product
raw material costs, partially offset bythe$7.1million increase insales price reductions related to
incremental promotional incentives.Since certain of our
warehousing and distribution costs are included in general and administrative
expenses, our gross profit may not be comparable to other entities who may
include these expenses as a component of costs of goods
sold.




Operating
Expenses.Operating expenses increased
approximately13.8% to $58.1million forfiscal2008, from $51.0million forfiscal2007.Operating expenses, as a percentage of
net sales, were 32.8% and 29.6%, respectively, forfiscal2008 and 2007.The increase in operating expenses
resulted primarily from a substantial increase in general and administrative
expenses.In addition,fiscal2007 includes approximately $0.4
million in reimbursement from certain suppliers of previously recognized import
costsas compared to less
than $0.1 million in similar reimbursement for fiscal 2008.




Selling and marketing expenses,
including sales, marketing, advertising, freight and other costs,moderatelydecreased to approximately $31.4million forfiscal2008, from $32.0million forfiscal2007.Adecrease in advertising
costs,primarily resultingfrom a decision to shift certain
television advertising topromotional incentives reflected as
sales price reductions, was partially offset by the fiscal 2008 recognition of
approximately $0.5 million in incremental compensation expenses for the special
dividend and an increase in freight costs due to the sales volume increase and
increasing fuel costs.The special dividend compensation
expense represents a non-cash charge for dividend equivalent rights received by
holders (employees and directors) of certain equity awards, including stock
options and restricted stock units.







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General and
administrative expenses increased to approximately $22.5 million for fiscal
2008, from approximately $15.7 million for fiscal 2007, primarily due to the
fiscal 2008 recognition of approximately $4.4 million in incremental
compensation expense for the special dividend and approximately $1.4 million in
unsuccessful merger and acquisition related costs, together with the favorable
impact of certain unusual items in the comparable prior year
period.  Unusual items recognized during fiscal 2007 include
litigation related settlements resulting in the reversal of approximately $0.6
million in contingent liabilities and the recognition of approximately $1.0
million in reimbursements of certain previously paid insurance premiums and
other expenses incurred in prior fiscal years.




Research
and development costs increased to approximately $4.2million
forfiscal2008,
from $3.7million
forfiscal2007,
primarily due to an increase in personnel related costs, expenses associated
with product research, and product testing related to the registration of
products in international markets.




Other
Income/Expense.Other
income, net, was $1.9million
forfiscal2008,
compared to $2.9million
forfiscal2007.The
decrease was primarily due to a reduction in interest income resulting from a
decrease in cash and available-for-sale securities reflecting the impact of the
special dividend, which was funded from cash and liquidation of
available-for-sale securities.




Provision
for Income Taxes.Provision
for income taxes was $7.0million
forfiscal2008,
compared to $8.2million
forfiscal2007.The
effective tax rate was38.2%
and39.7%,
respectively, forfiscal2008
and 2007.The
fiscal 2007 tax rate was impacted by certain unusual items, including the
recapture of certain previously recognized tax losses, final adjustments to
certain tax gains and valuation allowances relating to the fiscal 2006 sale of
our Haleko unit, and the reduction of certain contingent tax
liabilities.




Results
of Operations


Fiscal
2007 Compared to Fiscal 2006




The
following tables show comparative results for selected items as reported and as
a percentage of net sales for fiscal 2007 and 2006,(dollars
in thousands):




2007
            
            
            2006Net sales
            
            $
            172,656
            
            
            
            100.0
            %
            
            $
            178,372
            
            
            
            100.0
            %Cost of goods
      sold
            
            
            103,959
            
            
            
            60.2
            
            
            
            119,303
            
            
            
            66.9Gross
profit
            
            
            68,697
            
            
            
            39.8
            
            
            
            59,069
            
            
            
            33.1Operating
      expenses:Selling and
      marketing
            
            
            32,031
            
            
            
            18.6
            
            
            
            28,957
            
            
            
            16.3General and
      administrative
            
            
            15,698
            
            
            
            9.1
            
            
            
            14,885
            
            
            
            8.3Research and
      development
            
            
            3,686
            
            
            
            2.1
            
            
            
            2,851
            
            
            
            1.6Reimbursement of import
      costs
            
            
            (394
            )
            
            
            (0.2
            )
            
            
            (2,665
            )
            
            
            (1.5
            )Total operating
      expenses
            
            
            51,021
            
            
            
            29.6
            
            
            
            44,028
            
            
            
            24.7Income from
      operations
            
            
            17,676
            
            
            
            10.2
            
            
            
            15,041
            
            
            
            8.4Other income,
      net
            
            
            2,935
            
            
            
            1.7
            
            
            
            3,318
            
            
            
            1.9Income tax
      expense
            
            
            (8,175
            )
            
            
            (4.7
            )
            
            
            (2,393
            )
            
            
            (1.3
            )Income from continuing
      operations
            
            $
            12,436
            
            
            
            7.2
            %
            
            $
            15,966
            
            
            
            9.0
            %




Net Sales.Net sales decreased
approximately 3.2% to $172.7 million for fiscal 2007, from $178.4 million for
fiscal 2006, primarily due to a decrease in aggregate branded net sales,
principally in our joint care category, which was partially offset by an
increase in private label sales volume.




Aggregate branded net sales decreased
approximately 6.3% to $136.1million for fiscal 2007, from $145.2
million for fiscal 2006. The decrease primarily resulted from an approximate
$5.9 million increase in sales price reductions related to incremental
promotional incentives for our branded joint care products, coupled with a
modest 1.8% decrease in sales volume, or approximately $3.2million. Classification of certain
promotional costs as a sales reduction is required when the promotion
effectively represents a price reduction. We are utilizing more price-discount
like promotions due to increased competition, including from private label, and
to support and ultimately increase our market share. Move Free net sales
decreased to $83.8 million for fiscal 2007, from $86.2 million for fiscal 2006.
An approximate $2.5 million increase in sales volume and a $1.3 million decrease
in allowances for product returns, was more than offset by approximately $6.2
million in incremental promotional incentives, or price-discount like sales
reductions.







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Private label sales increased
approximately 10.4% to $36.6 million for fiscal 2007, from $33.2 million for
fiscal 2006, primarily due to an increase in sales volume resulting from
securing incremental private label business in the latter part of fiscal 2006
and the early part of fiscal 2007.




Gross Profit.Gross profit increased
approximately 16.3% to $68.7 million for fiscal 2007, from $59.1 million for
fiscal 2006. Gross profit, as a percentage of net sales, was 39.8% and 33.1%,
respectively, for fiscal 2007 and 2006. The increase in gross profit was
primarily due to an approximate $19.0 million decrease in joint care raw
material costs, partially offset by the $5.9 million increase in sales price
reductions related to incremental promotional incentives. Gross profit was also
negatively impacted by an overall decrease in sales volume and a higher mix of
lower-margin private label sales.Since certain of our warehousing and
distribution costs are included in general and administrative expenses, our
gross profit may not be comparable to other entities who may include these
expenses as a component of costs of goods sold.




Operating Expenses.Operating expenses
increased approximately 15.9% to $51.0 million for fiscal 2007, from $44.0
million for fiscal 2006. Operating expenses, as a percentage of net sales, were
29.6% and 24.7%, respectively, for fiscal 2007 and 2006. The increase in
operating expenses resulted primarily from a significant increase in selling and
marketing expenses, modest increases in general and administrative and research
and development expenses, and an approximate $2.3 million reduction in
reimbursement of import costs.




Selling and marketing expenses,
including sales, marketing, advertising, freight and other costs, increased to
$32.0 million for fiscal 2007, from $29.0 million for fiscal 2006. Selling and
marketing expenses, as a percentage of net sales, were 18.6% and 16.3%,
respectively, for fiscal 2007 and 2006. The increase in selling and marketing
expenses resulted primarily from an approximate $1.5 million increase in
advertising support for Move Free Advanced, an approximate $0.6 million increase
in freight expense and an approximate $0.7 million increase in personnel related
costs primarily due to the adoption of a long-term management incentive plan
involving the grant of performance based restricted stock units (see Note
13of Notes to Consolidated Financial
Statements).




General and administrative expenses
increased to $15.7 million for fiscal 2007, from $14.9 million for fiscal 2006,
primarily due to an increase in personnel related costs of approximately $2.1
million, substantially offset by litigation settlements resulting in the
reversal of approximately $0.6 million in contingent liabilities and the
recognition of approximately $1.0 million in reimbursements of certain insurance
premiums and other expenses incurred in prior fiscal years. The increase in
personnel related costs includes approximately $2.4 million resulting from the
adoption of a long-term management incentive plan involving the grant of
performance based restricted stock units (see Note 13of Notes to Consolidated Financial
Statements) and the recognition of incremental stock-based compensation expense
of approximately $0.2 million due to the impact of adopting SFAS No. 123R
effectiveMarch 1,
2006, partially offset by
an approximate $0.4 million decrease in severance expense.




Research and development costs increased
to approximately $3.7 million for fiscal 2007, from $2.9 million for fiscal
2006, resulting primarily from an increase in personnel related expenses and
expenses associated with product research.




Other Income/Expense.Other income, net, was $2.9
million for fiscal 2007, compared to a $3.3 million for fiscal 2006. Interest
income increased by approximately $1.1 million in fiscal 2007, resulting
primarily from an increase in cash and available-for-sale securities. As a
result of the divestiture of our Haleko Unit, certain international operating
entities were substantially liquidated. Accordingly, an approximate $1.6 million
non-taxable net foreign currency translation gain, previously reported as other
accumulated comprehensive income in stockholders’ equity, was recognized during
fiscal 2006.




Provision for Income
Taxes.Provision for income
taxes was $8.2 million for fiscal 2007, compared to $2.4 million for fiscal
2006. The fiscal 2006 first quarter sale of our Haleko Unit resulted in the
recognition of a gain under Internal Revenue Service Code Section 987 (“Section
987”). We reduced our estimated deferred tax liability for Section 987
obligations by approximately $1.5 million, which is reflected as a decrease in
income tax expense for fiscal 2006. In addition, we reduced certain valuation
allowances and contingent tax liabilities by approximately $3.7 million during
fiscal 2006. During the fiscal 2007 fourth quarter, we recognized approximately
$0.8 million in incremental net tax liabilities resulting from the impact of
recapturing certain previously recognized tax losses, partially offset by
further adjustment of the Section 987 gain and valuation allowances, and the
reduction of certain contingent tax liabilities. As a result of the more
favorable impact of unusual items during fiscal 2006, and the favorable impact
of the non-taxable net foreign currency translation gain (see “Other
Income/Expense” above), our effective tax rate for fiscal 2007 was substantiallygreater than the effective
tax rate for fiscal 2006. Our effective tax rate was 39.7% for fiscal 2007,
compared to 13.0% for fiscal 2006.




Liquidity and Capital
Resources




Working capital
decreased approximately $23.4 million to $81.5 million at May 31, 2008, from
$104.9 million at May 31, 2007, primarily due to a decrease of approximately
$31.0 million in cash and available-for-sale securities for payment of the
fiscal 2008 first quarter special dividend.  Receivables increased
approximately $4.8 million due to an increase in net sales for the fiscal 2008
fourth quarter as compared to the fiscal 2007 fourth quarter, and an approximate
$2.0 million increase in refundable income taxes.Inventories increased approximately
$5.5million, which reflects an increase in
finished goods for new products, includingbothprivate labeland branded products, as well as a decision to build up
quantities of certain other inventory components.Current liabilities increased
approximately $2.3million primarily due to an increase in
accounts payable, resulting from increased inventories, and dividends payable
on restricted stock units, substantially offset by a decrease in income
taxes payable.





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As
a result of current negative liquidity and uncertainty in financial credit
markets, we elected to liquidate our investments in Auction Rate Securities
("ARS") and other variable rate debt securities.Proceeds
from the sale of these available-for-sale securities were invested in money
market accounts, certificates of deposits, United States Treasury Bills with
maturities of three months or less, and high-quality commercial paper, all of
which are reflected in cash and cash equivalents.AtMay
31,
2008, we held approximately $4.6million
in available-for-sale securities; consisting of approximately $2.1million
in ARS, other variable rate debt securities and commercial paper.Subsequent
toMay
31,
2008, we liquidated $0.8million
of ARS.The
remaining $1.3million
in ARS consist primarily of fully insured, AAA rated municipal or state agency
issued securities.Although
we have experienced at least one failed auction with each of our remaining ARS,
and will therefore not be able to access our funds invested in these ARS until
future auctions of these investments are successful or the securities are called
by the issuer, we believe we will be able to successfully liquidate these
investments in a reasonable period of time.However,
we believe the unsuccessful liquidation of some, or all, of these securities
over the next twelve months will not significantly impact our current liquidity
needs.




On June 30, 2004, we entered into,
through our wholly-owned direct operating subsidiary Schiff Nutrition Group,
Inc.(“SNG”), a $25.0 million revolving
credit facility (the “Credit Facility”) with KeyBank National Association, as
Agent.In August 2006, we extended the maturity
of the Credit Facility fromJune 30, 2007toJune 30, 2009.The Credit Facility contains customary
terms and conditions, including, among others, financial covenants that may
limit our ability to pay dividends on our common stock and certain other
restrictions.Our obligations under the Credit
Facility are secured by a first priority security interest on all of the capital
stock of SNG.If our total coverage ratio exceeds a
certain limit, our obligations will also be secured by a first priority security
interest in all of our domestic assets.In the event we exceed certain other
ratio limits, we will be subject to a borrowing base and will be able to borrow
up to a lesser of $25.0 million or the sum of (i) 85% of eligible accounts
receivable and (ii) 65% of eligible inventory.Borrowings under the Credit Facility
bear interest at floating rates based on the KeyBank National Association prime
rate or the Federal Funds effective rate.The Credit Facility can be used to fund
our normal working capital and capital expenditure requirements, with
availability to fund certain permitted strategic transactions.AtMay 31, 2008, there were no amounts
outstanding and $25.0 million was available for borrowing under the Credit
Facility.




In July 2007, our Board of Directors
approved a $1.50 per share special cash dividend, which was paid on August 13,
2007 to shareholders of record of Class A and Class B common stock at the close
of business on July 31, 2007.In connection with the declaration of
the special dividend, our Board of Directors approved certain dividend
equivalent rights, allowing holders (employees and directors) of certain equity
awards, including stock options and restricted stock units, to receive cash
dividends on each share of common stock underlying the stock options and
restricted stock units.In aggregate, atJuly 31, 2007, the record date, the Company had
outstanding approximately 29.9 million shares of common stock (including shares
of common stock underlying equity awards subject to dividend equivalent rights),
including approximately 26.6 million shares of outstanding Class A and Class B
common stock, approximately 1.8 million shares of Class A common stock
underlying outstanding stock options, and approximately 1.5 million shares of
Class A common stock underlying outstanding restricted stock units.The aggregate amount of the special
dividend was approximately $44.9 million, presuming 100% vesting of shares
underlying equity awards; $22.4 million for holders of Class A common stock,
including $4.9 million for Class A common stock underlying certain other equity
awards, and $22.5 million for the holder of Class B common stock.Approximately98% of the stock options and restricted
stock units had vested as ofMay 31, 2008.To the extent these equity awards were
unvested atMay
31, 2008, the $1.50 per
share dividend was not, and will not be, distributed until after such equity
awards become vested.




The special dividend was funded from
cash and liquidation of available-for-sale securities.Approximately $42.7million of the distributionhasoccurredas of May 31, 2008, andan additional $1.0 million has been
distributed subsequent to May 31, 2008.  Theremaining amount will be distributed
upon vesting of the stock optionsorupon issuance of the shares underlying
restricted stock units.




We believe that our cash and cash
equivalents, cash flows from operations and the financing sources discussed
above will be sufficient to meet our normal cash operating requirements during
the next twelve months.However, we continue to review
opportunities to acquire or invest in companies, product rights and other
investments that are compatible with or complimentary to our existing
business.We could use cash and financing sources
discussed herein, or financing sources that subsequently become available, to
fund acquisitions or investments.In addition, we may consider issuing
additional debt or equity securities in the future to fund potential
acquisitions or growth, or to refinance existing debt.If a material acquisition, divestiture
or investment is completed, our operating results and financial condition could
change materially in future periods.However, no assurance can be given that
additional funds will be available on satisfactory terms, or at all, to fund
such activities.







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Our Board of
Directors will determine dividend policy in the future based upon, among other
factors, results of operations, financial condition, contractual restrictions
and other factors deemed relevant at the time.  In addition, our
Credit Facility contains certain customary financial covenants that may limit
our ability to pay dividends on our common stock.  We can give no
assurance that we will pay dividends in the future.




Off-Balance Sheet
Arrangements




We have no off-balance sheet arrangements.  For
information relating to certain contractual cash obligations see
below.




Contractual
Obligations




A summary of our outstanding contractual
obligations atMay
31, 2008 is as follows (in
thousands):


Contractual
      Cash Obligations
              
              Total
      Amounts Committed
              
              
              Less
      than
                1
      Year
              
              
              1-3
                Years
              
              
              3-5
                Years
              
              
              More
      than
                5
      YearsOperating
      leases
              
              $
              11,356
              
              
              $
              2,452
              
              
              $
              4,667
              
              
              $
              4,237
              
              
              $
              —Purchase obligations(1)
              
              
              18,367
              
              
              
              18,367
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
      obligations
              
              $
              29,723
              
              
              $
              20,819
              
              
              $
              4,667
              
              
              $
              4,237
              
              
              $
              —


(1) Purchase obligations consist primarily
of open purchase orders for goods and services, including primarily raw
materials, packaging and outsourced contract manufacturing
commitments.




Critical Accounting Policies and
Estimates




In preparing our consolidated financial
statements, we make assumptions, estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported
periods.We periodically evaluate our estimates
and judgments related to the valuation ofavailable-for-sale securities,inventories and intangible
assets, allowances for doubtful accounts, notes receivable, sales returns and
discounts, uncertainties related to certain tax benefits, valuation of deferred
tax assets, valuation of share-based payments and recoverability of long-lived
assets.Note 1 of Notes to the Consolidated
Financial Statements describes the accounting policies governing each of these
matters.Our estimates are based on historical
experience and on our future expectations that are believed to be
reasonable.The combination of these factors forms
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.Actual results may differ from our
current estimates and those differences may be material.




We believe the following accounting
policies affect some of our more significant estimates and judgments used in
preparation of our consolidated financial statements:




·
            We provide for valuation
      adjustments for changes in the fair values of our available-for-sale
      securities.  Fair values are based upon quoted market prices
      and/or other considerations, including fair values determined by financial
      institutions, current credit rating of the debt securities, insurance
      provisions and discounted cash flow analysis as deemed
      appropriate.  Changes in valuation adjustments for declines in
      the fair values of our available-for-sales securities did not
      significantly impact net income for fiscal 2008, 2007 or
      2006.




·
            We provide for inventory valuation
      adjustments for estimated obsolescence or unmarketable inventory equal to
      the difference between the cost of inventory and the estimated market
      value based upon assumptions about future demand, market conditions and/or
      liquidation value.Forboth fiscal2008 and 2007, inventory
      valuation adjustments resulted in a decrease in our gross profit and
      operating income of approximately $0.9million.If actual demand and/or market
      conditions are less favorable than those projected by management,
      additional inventory write-downs would be
  required.




·
            We maintain allowances for
      doubtful accounts, sales returns and discounts for estimated losses
      resulting from customer exposures, including among others, product
      returns, inability to make payments and expected utilization of offered
      discounts.Changes in our
      allowances for doubtful accounts, sales returns and discounts did not
      significantly impact our gross profit and operating income for fiscal 2008
      and 2007.  For fiscal 2006, changes intheseallowances resulted in an
      increase in our gross profit and operating income of approximately
      $0.7million.AtMay 31, 2008 and 2007, our allowances
      for doubtful accounts, sales returns and discounts amounted to
      approximately $1.5million and $2.2 million,
      respectively.Actual results may differ from our
      current estimates, resulting in adjustment of the respective
      allowance(s).




·
            We currently have deferred tax
      assets resulting from temporary differences between financial and income
      tax reporting.These deferred tax assets are
      subject to periodic recoverability assessments.The realization of these deferred
      tax assets is primarily dependent on future operating results.For fiscal 2007 and
      2006, respectively, changes in these valuation allowances resulted in an
      increase in net income of approximately $0.7 million and $3.1 million.Changes in these
      valuation allowances did not significantly impact net income forfiscal2008.AtMay 31, 2008 and 2007, deferred tax
      asset valuation allowances were not
  significant.







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·
            We recognize tax benefits relative
      to certain tax positions in which we may be uncertain as to whether that
      tax position will ultimately be sustained as filed in our tax
      return.The recognition or derecognition
      of these tax benefits is subject to periodic evaluation of the
      sustainability of the tax position based upon changes in facts,
      circumstances or available information.Changes in the recognition of
      these tax benefits did not significantly impact net income forfiscal2008,2007and 2006.




·
            We recognize compensation expense
      for certain performance based equity instrument awards (share-based
      payments) over the performance period based on a periodic assessment of
      the probability that the performance criteria will be
      achieved.Our periodic assessment of the
      probability that the performance criteria will be achieved considers such
      factors as historical financial results and future financial expectations,
      including an analysis of sales trends and operating margins; as well as
      changes in the nutritional supplements industry and competitive
      environment.Forfiscal2008, 2007 and 2006, we recognized compensation
      expense related to these awards of approximately $3.4million, $3.4 millionand $0.5million,
      respectively.AtMay 31, 2008,there was no unrecognized
      compensation expense since the performance criteria was achieved and the
      equity instruments were fully vested.




·
            We have certain intangible assets,
      primarily consisting of goodwill, which are tested for impairment at least
      annually.The determination of whether or
      not goodwill is impaired involves significant judgment.Changes in strategy or market
      conditions could significantly impact our judgment and require adjustment
      to the recorded goodwill
balance.




Impact of Inflation




Inflation affects the cost of raw
materials, goods and services we use.In recent years, inflation has been
modest.We seek to mitigate the adverse effects
of inflation primarily through improved productivity, strategic buying
initiatives, and cost containment programs.However, the nutritional supplement
industry competitive environment limits our ability to recover higher costs
resulting from inflation by raising prices.See further discussion of raw material
pricing matters in the “General” and “Results of Operations” sections
above.




Seasonality




Our business is not inherently seasonal;
however, we experience fluctuations in sales resulting from timing of marketing
and promotional activities, customer buying patterns and consumer spending
patterns.In addition, as a result of changes in
product sales mix, competitive conditions, raw material pricing pressures and
other factors, as discussed above, we experience fluctuations in gross profit
and operating margins on a quarter-to-quarter basis.




Recently Issued Accounting
Standards




In
July 2006, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN No.
48”), which establishes guidelines for recognizing, measuring and disclosing
uncertainties relating to tax benefits reflected in an enterprise’s financial
statements.  FIN No. 48 establishes a “more-likely-than-not”
recognition threshold that must be met before a tax benefit, relative to a tax
position in which the enterprise may be uncertain as to whether it will
ultimately be sustained as filed in its tax return, can be recognized in the
financial statements.  We were required to apply the provisions of FIN
No. 48 on June 1, 2007.  The cumulative effect of adopting FIN No. 48
resulted in a decrease in retained earnings of approximately $0.1 million. The
total amount of unrecognized tax benefits at June 1, 2007 was approximately $0.5
million, which includes unrecognized tax benefits of approximately $0.1 million
that, if recognized, would favorably affect the effective tax
rate.  As of June 1, 2007, we had less than $0.1 million for the
payment of accrued interest recognized in our consolidated balance
sheet.  The adoption of FIN No. 48 resulted in the reclassification of
less than $0.1 million in deferred taxes, approximately $0.4 million in income
taxes payable and approximately $0.1 million in retained earnings, in aggregate
to other long-term liabilities.




In September 2006,
the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurement,” that defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements.  SFAS No. 157 retains the exchange price notion in
defining fair value and clarifies that the exchange price is the price in an
orderly transaction between market participants to sell the asset or transfer
the liability in the market in which the reporting entity would transact for the
asset or liability.  The definition focuses on the price that would be
received to sell the asset or paid to transfer the liability (an exit price),
not the price that would be paid to acquire the asset or received to assume the
liability (an entry price).  SFAS No. 157 expands disclosure about the
use of fair value to measure assets and
liabilities in interim and annual periods subsequent to initial
recognition.  The additional disclosure focuses on the inputs used to
measure fair value and the effect of the measurements on net income for the
reporting period.  The fair value measurement and disclosure
provisions of SFAS No. 157 are effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years.  In February 2008, the FASB issued Staff Position
("FSP") 157-2.  FSP 157-2 delays the effective date of SFAS No. 157
for all non-financial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  FSP
157-2 is effective for fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years.  We have not yet determined
the impact of adopting SFAS No. 157 on our results of operations and financial
condition.




In February 2007,
the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities,” which permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value.  SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities.  The measurement and
disclosure provisions of SFAS No. 159 are effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  We
have not yet determined whether we will elect to measure any financial
instruments or other items at fair value.
  In December
2007, the FASB issued SFAS No. 141(R), "Business Combinations," that requires
all business combinations completed after the effective date to be accounted for
by applying the acquisition method (previously referred to as the purchase
method).  SFAS No. 141(R) requires that the acquirer be identified and that
the acquirer recognize the fair values of the assets acquired, liabilities
assumed, and any noncontrolling interests in the acquiree at the acquisition
date.  In the case of a bargain purchase the acquirer is required to
reevaluate the measurements of the recognized assets and liabilities at the
acquisition date and recognize a gain on that date if an excess remains. 
SFAS 141(R) becomes effective for fiscal periods beginning after December 15,
2008.  We have not yet determined the impact of adopting SFAS No. 141(R) on
our results of operations and financial condition.


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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
  The following discussion involves
forward-looking statements of market risk which assume that certain adverse
market conditions may occur.Actual future market conditions may
differ materially from such assumptions.Accordingly, the forward-looking
statements should not be considered our projections of future events or
losses.


Our cash flows and net earnings may be
subject to fluctuations resulting from changes in interest rates.Our current policy does not allow
speculation in derivative instruments for profit or execution of derivative
instrument contracts for which there is no underlying exposure.We do not use financial instruments for
trading purposes.We measure market risk, related to our
holdings of financial instruments, based on changes in interest rates utilizing
a sensitivity analysis.Our Credit Facility, under which
borrowings bear interest at floating rates, had no amounts outstanding atMay 31, 2008.Interest income earned on our short-term
investments is impacted by changes in interest rate.We do not believe that a hypothetical
10% change in interest rates would have a material effect on our pretax earnings
or cash flows.




ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA




The consolidated financial statements
and supplementary data and the report of Deloitte & Touche LLP, our
independent registered public accountants, are on the following pages F-1
through F-20 and are incorporated herein by reference.




ITEM 9.CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE




None.




ITEM 9A.CONTROLS AND
PROCEDURES




We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure.In designing and evaluating the
disclosure controls and procedures, we recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we are
required to apply our judgment in evaluating the cost-benefit relationship of
possible controls and procedures.




As required by Exchange Act Rule
13a-15(b), we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the fiscal quarter covered
by this report.Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective.




There has been no
change in our internal controls over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.




Management's
Report on Internal Control over Financial Reporting




Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:




·
              Pertain to
      the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;
  ·
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and
  ·
              Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.
  Internal control
over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations.  Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures.  Internal
control over financial reporting also can be circumvented by collusion or
improper management override.  Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting.  However, these
inherent limitations are known features of the financial reporting
process.  Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, the risk.  Management is
responsible for establishing and maintaining adequate internal control over our
financial reporting.
  Management has used the framework
set forth in the reportentitled “Internal Control-Integrated Framework”
published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission to evaluate the effectiveness of its internal control over financial
reporting.  Management has concluded that its internal control over
financial reporting was effective as of the end of the most recent fiscal
year.
  This Annual Report
does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting.  Management’s
report was not subject to attestation by the company’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
  The foregoing has
been approved by our management, including our Chief Executive Officer and Chief
Financial Officer, who have been involved with the assessment and analysis of
our internal controls over financial reporting.





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PART
III




ITEM 9B.OTHER
INFORMATION




None.




ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE




See our 2008Definitive Proxy Statement,
incorporated by reference in Part III of this Annual Report on Form 10-K, under
the headings “Board of Directors and Corporate Governance Information,”
“Nominees for Election to our Board of Directors,” “Executive Officers” and
“Section 16(a) Beneficial Ownership Reporting
Compliance.”  Information regarding our Code of Business Conduct and
Ethics is also incorporated by reference to our 2008Definitive Proxy Statement under the
heading “Board of Directors and Corporate Governance
Information.”




We have filed the certifications of our
Chief Executive Officer and Chief Financial Officer required pursuant to Section
302 of the Sarbanes - Oxley Act of 2004 as exhibits to this Annual Report on
Form 10-K.




On November 14, 2007, we submitted to
the New York Stock Exchange the Annual CEO Certification required pursuant to
Section 303A.12(a) of the New York Stock Exchange Listed Company
Manual.




ITEM 11.EXECUTIVE
COMPENSATION




See our 2008Definitive Proxy Statement,
incorporated by reference in Part III of this Annual Report on Form 10-K, under
the headings “Board of Directors and Corporate Governance Information,”
“Executive Compensation,” “Compensation Committee Report” and “Certain
Relationships and Related Transactions.”




ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS




See the information set forth under Item
5 herein and in our 2008Definitive Proxy Statement,
incorporated by reference in Part III of this Annual Report on Form 10-K, under
the heading “Stock Ownership of Beneficial Owners, Directors and
Management.”




ITEM 13.CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE




See our 2008Definitive Proxy Statement,
incorporated by reference in Part III of this Annual Report on Form 10-K, under
the heading “Certain Relationships and Related
Transactions.”




ITEM 14.PRINCIPAL ACCOUNTING FEES AND
SERVICES




See our 2008Definitive Proxy Statement,
incorporated by reference in Part III of this Annual Report on Form 10-K, under
the heading “Fees Paid to Independent Public Accountants.”







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PART
IV




ITEM 15.EXHIBITS, FINANCIAL STATEMENT
SCHEDULES




(a)
            Documents filed as part of this
      report




1)
            Financial
      Statements




See “Item 8. Financial Statements and
Supplementary Data” for Financial Statements included with this Annual Report on
Form 10-K.




2)
            Financial Statement
      Schedules




Schedule II - Valuation and Qualifying
Accounts. All other schedules have been omitted because they are not required,
not applicable, or the information is otherwise set forth in the financial
statements or notes thereto.




3)
            Exhibits





3.1.
            Amended and Restated Certificate
      of Incorporation of Schiff Nutrition International, Inc.
      (1)3.2.
            Amended and Restated Bylaws of
      Weider Nutrition International, Inc. (2)4.1.
            Revolving Credit Agreement dated
      as of June 30, 2004 between Schiff Nutrition Group, Inc. and KeyBank
      National Association. (3)4.2.
            Form of specimen Class A common
      stock certificate. (4)10.1.
            Build-To-Suit Lease Agreement
      dated March 20, 1996, between SCI Development Services Incorporated and
      Weider Nutrition Group, Inc. (2)10.2.
            1997 Equity Participation Plan of
      Weider Nutrition International, Inc. (5)*10.3.
            Form of Tax Sharing Agreement by
      and among Weider Nutrition International, Inc. and its subsidiaries and
      Weider Health and Fitness and its subsidiaries.
  (5)10.4.
            License Agreement dated as of
      December 1, 1996 between Mariz Gestao E Investmentos Limitada and Weider
      Nutrition Group, Inc. (5)10.5.
            Amendments to 1997 Equity
      Participation Plan of Weider Nutrition International, Inc.
      (6)*10.6.
            Consulting Agreement dated as of
      February 1, 2004 between Weider Nutrition Group, Inc. and Gustin Foods,
      LLC.(7)10.7.
            Schiff Nutrition International,
      Inc. 2004 Incentive Award Plan.(8)*10.8.
            Amendment effective as of March 1,
      2005 to License Agreement between Mariz Gestao E Investmentos Limitada and
      Weider Nutrition Group, Inc.(9)10.9.
            Stock and Asset Purchase Agreement
      effective as of March 1, 2005 among Weider Nutrition International, Inc.,
      Weider Nutrition Group, Inc. and Weider Global Nutrition, LLC.(9)10.10.
            Promissory Note of Weider Global
      Nutrition, LLC payable to Weider Nutrition Group, Inc.(9)10.11.
            Guarantee by Weider Health and
      Fitness in favor of Weider Nutrition International, Inc. and Weider
      Nutrition Group, Inc.(9)10.12.
            Share Sale and Transfer Agreement
      dated June 17, 2005 among Weider Nutrition GmbH, Haleko Management GmbH,
      Atlantic Grupa d.o.o., Hopen Investments BV and Svalbard Investments GmbH.(10)10.13.
            Form of Indemnification Agreement
      between Weider Nutrition Group, Inc. and certain of its executives and
      directors.(11)*10.14.
            Form of Restricted Stock Unit
      Award Grant Notice, Restricted Stock Unit Award Agreement and Deferral
      Election between Schiff Nutrition International, Inc. and certain of its
      executives.(12)*10.15.
            Amendment No. 1 to the Schiff
      Nutrition International, Inc. 2004 Incentive Award Plan.(13)*10.16.
            Amended and Restated License and
      Product Supply Agreement dated as of October 13, 2006 between Unigen
      Pharmaceuticals, Inc. and Schiff Nutrition Group, Inc.(14)10.17.
            Form of Director Restricted Stock
      Unit Agreement and Deferral Election.(15)*10.18.
            Form of Director Restricted Stock
      Agreement.(15)*10.19.
            Employment and Change in Control
      Agreement dated as of June 1, 2007 between Schiff Nutrition Group, Inc.
      and Bruce J. Wood (16)*10.20.
            Form of Amended and Restated
      Agreement between Schiff Nutrition Group, Inc. and certain of its
      executives. (16)*10.21.
            License
      Agreement dated as of September 19, 2007 between Mariz Gestao E
      Investimentos Limitada and Schiff Nutrition Group, Inc. (16)21.1.
            Subsidiaries
      of Schiff Nutrition International, Inc. (17)23.1.
            Consent of
      Independent Registered Public Accounting Firm.(17)31.1.
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.(17)31.2.
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.(17)32.1.
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act.(18)





(1)
            Previously
      filed in the Company’s Quarterly Report on Form 10-Q filed on January 17,
      2006 and incorporated herein by reference.(2)
            Previously
      filed in the Company's Registration Statement on Form S-1/A (File No.
      333-12929) filed on October 16, 1996 and incorporated herein by
      reference.(3)
            Previously filed in the Company's
      Current Report on Form 8-K filed on July 8, 2004 and incorporated herein
      by reference.(4)
            Previously filed in the Company’s
      Annual Report on Form 10-K filed on August 29, 2006 and incorporated
      herein by reference.(5)
            Previously filed in the Company’s
      Registration Statement on Form S-1/A (File No. 333-12929) filed on March
      20, 1997 and incorporated herein by reference.(6)
            Previously filed in the Company's
      Quarterly Report on Form 10-Q filed on January 14, 2002 and incorporated
      herein by reference.(7)
            Previously filed in the Company's
      Quarterly Report on Form 10-Q filed on April 14, 2004 and incorporated
      herein by reference.(8)
            Previously filed in the Company's
      Definitive Proxy Statement on Form 14A filed on September 28, 2004 and
      incorporated herein by reference.(9)
            Previously filed in the Company's
      Current Report on Form 8-K filed on April 4, 2005 and incorporated herein
      by reference.(10)
            Previously filed in the Company's
      Current Report on Form 8-K filed on June 23, 2005 and incorporated herein
      by reference.(11)
            Previously filed in the Company's
      Current Report on Form 8-K filed on August 10, 2005 and incorporated
      herein by reference.(12)
            Previously filed in the Company’s
      Current Report on Form 8-K filed on March 23, 2006 and incorporated herein
      by reference.(13)
            Previously filed in the Company’s
      Definitive Proxy Statement on Form 14A filed on September 27, 2006 and
      incorporated herein by reference.(14)
            Previously filed in the Company’s
      Quarterly Report on Form 10-Q filed on October 16, 2006 and incorporated
      herein by reference.(15)
            Previously filed in the Company’s
      Current Report on Form 8-K filed on October 30, 2006 and incorporated
      herein by reference.(16)
            Previously filed in the Company’s
      Current Report on Form 8-K filed onSeptember 25, 2007and incorporated herein by
      reference.(17)
            Filed
    herewith.(18)
            Furnished
      herewith.*
            Management
      contract.




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SIGNATURES




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




Schiff Nutrition International,
      Inc.By:
            /s/ Bruce J.
      WoodBruce J.
    WoodDated:August 20,
    2008
            Chief Executive Officer and
      President




Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Name
            
            Title
            
            Date/s/ Eric
    Weider
            
            Chairman of the
      Board
            
            August 20,
    2008Eric Weider
            
            and
Director/s/ Bruce J.
      Wood
            
            Chief Executive
      Officer,
            
            August 20,
    2008Bruce J.
    Wood
            
            President and
      Director(Principal Executive
      Officer)/s/ Joseph W.
      Baty
            
            Executive Vice President
      and
            
            August 20,
    2008Joseph W.
    Baty
            
            Chief Financial
      Officer(Principal Financial Officer and
      Principal Accounting Officer)/s/ Ronald L.
      Corey
            
            Director
            
            August 20,
    2008Ronald L.
    Corey/s/ Roger H.
      Kimmel
            
            Director
            
            August 20,
    2008Roger H.
    Kimmel/s/ George F.
      Lengvari
            
            Vice Chairman of the
      Board
            
            August 20,
    2008George F.
      Lengvari
            
            and
Director/s/ Brian P.
      McDermott
            
            Director
            
            August 20,
    2008Brian P.
      McDermott/s/ H. F.
      Powell
            
            Director
            
            August 20,
    2008H. F.
Powell/s/ Glenn
      Schaeffer
            
            Director
            
            August 20,
    2008Glenn
    Schaeffer








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SCHIFF NUTRITION INTERNATIONAL, INC.


INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




















Report of
      Independent Registered Public Accounting Firm
            F - 2Consolidated Balance Sheets at May 31, 2008 and
      2007
            F - 3Consolidated Statements of Income, Years Ended May
      31, 2008, 2007 and 2006
            F - 4Consolidated
      Statements of Stockholders’ Equity, Years Ended May 31, 2008, 2007 and
      2006
            F - 5Consolidated
      Statements of Cash Flows, Years Ended May 31, 2008, 2007 and
      2006
            F - 6Notes to
      Consolidated Financial Statements
            F -
  7














F - 1
 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM




















The Board of
Directors




Schiff Nutrition
International, Inc. and Subsidiaries:




We have audited the
accompanying consolidated balance sheets of Schiff Nutrition International, Inc.
and subsidiaries (collectively, the “Company”) as of May 31, 2008 and 2007, and
the related consolidated statements of income, stockholders’ equity and cash
flows for each of the three years in the period ended May 31, 2008. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.




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




In our opinion,
such consolidated financial statements present fairly, in all material respects,
the financial position of Schiff Nutrition International, Inc. and subsidiaries
at May 31, 2008 and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended May 31, 2008 in conformity
with accounting principles generally accepted in the United States of
America.




DELOITTE & TOUCHE
LLP














Salt Lake City, Utah


August19, 2008



















F - 2
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 SCHIFF NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 MAY 31, 2008 AND 2007
 (dollars in thousands, except share
data)





ASSETS2008
            
            
            2007Current
      assets:Cash
      and cash equivalents
            
            $
            45,979
            
            
            $
            34,463Available-for-sale
      securities (Note 3)
            
            
            3,298
            
            
            
            45,817Receivables,
      net (Note 4)
            
            
            22,536
            
            
            
            17,732Inventories
      (Note 5)
            
            
            29,233
            
            
            
            23,698Prepaid
      expenses and other
            
            
            1,948
            
            
            
            2,151Deferred
      taxes, net (Note 9)
            
            
            1,761
            
            
            
            1,992Total
      current assets
            
            
            104,755
            
            
            
            125,853Property
      and equipment, net (Note 6)
            
            
            13,567
            
            
            
            14,438Other
      assets:Goodwill
      (Note 7)
            
            
            4,346
            
            
            
            4,346Available-for-sale
      securities (Note 3)
            
            
            1,265
            
            
            
            —Deposits
      and other assets
            
            
            12
            
            
            
            105Deferred
      taxes, net (Note 9)
            
            
            541
            
            
            
            337Total
      other assets
            
            
            6,164
            
            
            
            4,788Total
      assets
            
            $
            124,486
            
            
            $
            145,079LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            11,075
            
            
            $
            7,962Accrued
      expenses (Note 8)
            
            
            11,153
            
            
            
            10,542Dividends
      payable
            
            
            1,046
            
            
            
            —Income
      taxes payable
            
            
            —
            
            
            
            2,480Total
      current liabilities
            
            
            23,274
            
            
            
            20,984Long-term
      liabilities:Dividends
      payable
            
            
            1,201
            
            
            
            —Other(Note
      9)
            
            
            524
            
            
            
            —Total
      long-term liabilities
            
            
            1,725
            
            
            
            —Commitments
      and contingencies (Note14)Stockholders’
      equity:Preferred
      stock, par value $.01 per share; shares authorized-10,000,000; no shares
      issued and outstanding
            
            
            —
            
            
            
            —Class
      A common stock, par value $.01 per share; shares authorized - 50,000,000;
      shares issued and outstanding -11,782,390(2008)
      and 11,664,284(2007)
            
            
            118
            
            
            
            116Class
      B common stock, par value $.01 per share; shares authorized - 25,000,000;
      shares issued and outstanding -14,973,148
            
            
            150
            
            
            
            150Additional
      paid-in capital
            
            
            89,393
            
            
            
            92,640Retained
      earnings
            
            
            9,826
            
            
            
            31,189Total
      stockholders’ equity
            
            
            99,487
            
            
            
            124,095Total
      liabilities and stockholders’ equity
            
            $
            124,486
            
            
            $
            145,079







See notes to consolidated financial
statements.





F - 3
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 SCHIFF NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME
 YEARS ENDED MAY 31, 2008, 2007 AND
2006
 (dollars
in thousands, except share data)





2008
            
            
            2007
            
            
            2006Net
      sales
            
            $
            176,914
            
            
            $
            172,656
            
            
            $
            178,372Cost
      of goods sold
            
            
            102,491
            
            
            
            103,959
            
            
            
            119,303Gross
      profit
            
            
            74,423
            
            
            
            68,697
            
            
            
            59,069Operating
      expenses:Selling
      and marketing
            
            
            31,366
            
            
            
            32,031
            
            
            
            28,957General
      and administrative
            
            
            22,475
            
            
            
            15,698
            
            
            
            14,885Research
      and development
            
            
            4,249
            
            
            
            3,686
            
            
            
            2,851Reimbursement
      of import costs(Note
      1)
            
            
            (31
            )
            
            
            (394
            )
            
            
            (2,665
            )Total
      operating expenses
            
            
            58,059
            
            
            
            51,021
            
            
            
            44,028Income
      from operations
            
            
            16,364
            
            
            
            17,676
            
            
            
            15,041Other
      income (expense):Interest
      income
            
            
            2,045
            
            
            
            3,118
            
            
            
            2,005Interest
      expense
            
            
            (128
            )
            
            
            (175
            )
            
            
            (165
            )Foreign
      currency translation gain(Note
      1)
            
            
            —
            
            
            
            —
            
            
            
            1,613Other,
      net
            
            
            13
            
            
            
            (8
            )
            
            
            (135
            )Total
      other income, net
            
            
            1,930
            
            
            
            2,935
            
            
            
            3,318Income
      from continuing operations before income taxes
            
            
            18,294
            
            
            
            20,611
            
            
            
            18,359Income
      tax expense
            
            
            6,992
            
            
            
            8,175
            
            
            
            2,393Income
      from continuing operations
            
            
            11,302
            
            
            
            12,436
            
            
            
            15,966Loss
      from discontinued operations, net of income taxes (Note
      2)
            
            
            —
            
            
            
            —
            
            
            
            (127
            )Net
      income
            
            $
            11,302
            
            
            $
            12,436
            
            
            $
            15,839Weighted
      average shares outstanding:Basic
            
            
            26,636,315
            
            
            
            26,531,682
            
            
            
            26,274,066Diluted
            
            
            27,999,755
            
            
            
            27,343,264
            
            
            
            26,999,240Income
      per share - basic:Income
      from continuing operations
            
            $
            0.42
            
            
            $
            0.47
            
            
            $
            0.61Loss
      from discontinued operations
            
            
            —
            
            
            
            —
            
            
            
            (0.01
            )Net
      income
            
            $
            0.42
            
            
            $
            0.47
            
            
            $
            0.60Income
      per share - diluted:Income
      from continuing operations
            
            $
            0.40
            
            
            $
            0.45
            
            
            $
            0.59Loss
      from discontinued operations
            
            
            —
            
            
            
            —
            
            
            
            —Net
      income
            
            $
            0.40
            
            
            $
            0.45
            
            
            $
            0.59














See notes to consolidated financial
statements.





F - 4
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 SCHIFF NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
 YEARS ENDED MAY 31, 2008, 2007 AND
2006
 (in thousands)




Deferred
              
              OtherCommon
      Stock
              
              Add’l
              
              Compen-
              
              Accum.Class
      A
              
              Class
      B
              
              Paid-In
              
              sation
              
              Comp.
              
              RetainedShares
              
              Amount
              
              Amount
              
              Capital
              
              Costs
              
              Income
              
              Earnings
              
              TotalBalance
      at June 1, 2005
              
              11,310
              
              $
              113
              
              $
              150
              
              $
              86,857
              
              $
              (366
              )
              $
              167
              
              $
              2,914
              
              $
              89,835Comprehensive
      income:Net
      income
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              15,839
              
              
              15,839Foreign
      currency translation adjustments (Note 11)
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (167
              )
              
              —
              
              
              (167
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,672Cancellation
      of restricted stock (Note 13)
              
              (28
              )
              
              —
              
              
              —
              
              
              (45
              )
              
              45
              
              
              —
              
              
              —
              
              
              —Stock
      options exercised
              
              354
              
              
              3
              
              
              —
              
              
              965
              
              
              —
              
              
              —
              
              
              —
              
              
              968Excess
      tax benefit from equity instruments
              
              —
              
              
              —
              
              
              —
              
              
              406
              
              
              —
              
              
              —
              
              
              —
              
              
              406Stock
      received for payment of income taxes on restricted stock compensation
      (Note 13)
              
              (30
              )
              
              —
              
              
              —
              
              
              (143
              )
              
              —
              
              
              —
              
              
              —
              
              
              (143
              )Amortization
      of deferred compensation costs
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              117
              
              
              —
              
              
              —
              
              
              117Stock-based
      compensation
              
              —
              
              
              —
              
              
              —
              
              
              652
              
              
              —
              
              
              —
              
              
              —
              
              
              652Adoption
      of SFAS No. 123R (Note 1)
              
              —
              
              
              —
              
              
              —
              
              
              (204
              )
              
              204
              
              
              —
              
              
              —
              
              
              —Balance
      atMay
      31, 2006
              
              11,606
              
              
              116
              
              
              150
              
              
              88,488
              
              
              —
              
              
              —
              
              
              18,753
              
              
              107,507Comprehensive
      income:Net
      income
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              12,436
              
              
              12,436Other
      comprehensive income (Note 11)
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,436Cancellation
      of restricted stock (Note 13)
              
              (2
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Stock
      options exercised
              
              84
              
              
              —
              
              
              —
              
              
              292
              
              
              —
              
              
              —
              
              
              —
              
              
              292Excess
      tax benefit from equity instruments
              
              —
              
              
              —
              
              
              —
              
              
              136
              
              
              —
              
              
              —
              
              
              —
              
              
              136Stock
      received for payment of income taxes on restricted stock compensation
      (Note 13)
              
              (24
              )
              
              —
              
              
              —
              
              
              (170
              )
              
              —
              
              
              —
              
              
              —
              
              
              (170
              )Stock-based
      compensation
              
              —
              
              
              —
              
              
              —
              
              
              3,894
              
              
              —
              
              
              —
              
              
              —
              
              
              3,894Balance
      atMay
      31, 2007
              
              11,664
              
              
              116
              
              
              150
              
              
              92,640
              
              
              —
              
              
              —
              
              
              31,189
              
              
              124,095Comprehensive
      income:Net
      income
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              11,302
              
              
              11,302Other
      comprehensive income(Note
      11)
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,302Stock
      options exercised
              
              77
              
              
              1
              
              
              —
              
              
              259
              
              
              —
              
              
              —
              
              
              —
              
              
              260Excess
      tax benefit from equity instruments
              
              —
              
              
              —
              
              
              —
              
              
              407
              
              
              —
              
              
              —
              
              
              —
              
              
              407Stock
      received for payment of income taxes on restricted stock compensation
      (Note 13)
              
              (23
              )
              
              —
              
              
              —
              
              
              (120
              )
              
              —
              
              
              —
              
              
              —
              
              
              (120
              )Special
      cash dividend(Note
      10)
              
              —
              
              
              —
              
              
              —
              
              
              (12,340
              )
              
              —
              
              
              —
              
              
              (32,577
              )
              
              (44,917
              )Special
      dividend stock-based compensation expense (Note10)
              
              —
              
              
              —
              
              
              —
              
              
              4,857
              
              
              —
              
              
              —
              
              
              —
              
              
              4,857Restricted
      shares issued
              
              64
              
              
              1
              
              
              —
              
              
              (1
              )
              
              —
              
              
              —
              
              
              —
              
              
              —Stock-based
      compensation
              
              —
              
              
              —
              
              
              —
              
              
              3,691
              
              
              —
              
              
              —
              
              
              —
              
              
              3,691Adoption
      of FIN 48 (Note 1)
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (88
              )
              
              (88
              )Balance
      atMay
      31, 2008
              
              11,782
              
              $
              118
              
              $
              150
              
              $
              89,393
              
              $
              —
              
              $
              —
              
              $
              9,826
              
              $
              99,487













See notes to consolidated financial
statements.





F - 5
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document)
 SCHIFF NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 YEARS ENDED MAY 31, 2008, 2007 AND
2006
 (dollars
in thousands)





2008
            
            
            2007
            
            
            2006Cash
      flows from operating activities:Net
      income
            
            $
            11,302
            
            
            $
            12,436
            
            
            $
            15,839Adjustments
      to reconcile net income to net cash provided by operating
      activities:Changes
      in provision for bad debts
            
            
            —
            
            
            
            (54
            )
            
            
            (109
            )Deferred
      taxes
            
            
            65
            
            
            
            (706
            )
            
            
            2,664Depreciation
      and amortization
            
            
            3,475
            
            
            
            3,331
            
            
            
            3,049Amortization
      of financing fees
            
            
            15
            
            
            
            39
            
            
            
            55Loss
      on disposition of net assets held for sale and property and
      equipment
            
            
            —
            
            
            
            8
            
            
            
            137Stock-based
      compensation
            
            
            8,548
            
            
            
            3,894
            
            
            
            769Excess
      tax benefit from equity instruments
            
            
            (407
            )
            
            
            (136
            )
            
            
            358Foreign
      currency translation gain
            
            
            —
            
            
            
            —
            
            
            
            (1,613
            )Other
            
            
            (3
            )
            
            
            1
            
            
            
            —Changes
      in operating assets and liabilities:Receivables
            
            
            (2,835
            )
            
            
            2,353
            
            
            
            (4,841
            )Inventories
            
            
            (5,535
            )
            
            
            (183
            )
            
            
            862Prepaid
      expenses and other
            
            
            203
            
            
            
            293
            
            
            
            609Deposits
      and other assets
            
            
            78
            
            
            
            10
            
            
            
            281Accountspayable
            
            
            3,672
            
            
            
            (2,746
            )
            
            
            2,184Accrued
      expenses
            
            
            611
            
            
            
            (930
            )
            
            
            1,361Income
      taxes payable
            
            
            (3,691
            )
            
            
            1,323
            
            
            
            (3,922
            )Other
      long-term liabilities
            
            
            47
            
            
            
            —
            
            
            
            —Net
      cash provided by operating activities
            
            
            15,545
            
            
            
            18,933
            
            
            
            17,683Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (3,200
            )
            
            
            (4,351
            )
            
            
            (2,894
            )Proceeds
      from disposition of net assets held for sale and property and
      equipment
            
            
            35
            
            
            
            19
            
            
            
            10Proceeds
      from sales of Haleko Unit (Note 2)
            
            
            —
            
            
            
            —
            
            
            
            13,683Purchase
      of available-for-sale securities
            
            
            (33,590
            )
            
            
            (42,189
            )
            
            
            (52,011
            )Proceeds
      from sale of available-for-sale securities
            
            
            74,844
            
            
            
            36,492
            
            
            
            36,103Collection
      of notes receivable
            
            
            —
            
            
            
            400
            
            
            
            600Net
      cashprovided
      by (used
      in)investing
      activities
            
            
            38,089
            
            
            
            (9,629
            )
            
            
            (4,509
            )Cash
      flows from financing activities:Proceeds
      from debt
            
            
            1,350
            
            
            
            1,996
            
            
            
            1,693Payments
      on debt
            
            
            (1,350
            )
            
            
            (1,996
            )
            
            
            (2,194
            )Dividends
      paid
            
            
            (42,670
            )
            
            
            —
            
            
            
            —Proceeds
      from stock options exercised
            
            
            260
            
            
            
            292
            
            
            
            968Purchase
      and retirement of common stock
            
            
            (120
            )
            
            
            (170
            )
            
            
            (143
            )Excess
      tax benefit from equity instruments
            
            
            407
            
            
            
            136
            
            
            
            48Net
      cash provided by(used
      in)financing
      activities
            
            
            (42,123
            )
            
            
            258
            
            
            
            372Effect
      of exchange rate changes on cash
            
            
            5
            
            
            
            2
            
            
            
            (5
            )Increase
      in cash and cash equivalents
            
            
            11,516
            
            
            
            9,564
            
            
            
            13,541Cash
      and cash equivalents, beginning of year
            
            
            34,463
            
            
            
            24,899
            
            
            
            11,358Cash
      and cash equivalents, end of year
            
            $
            45,979
            
            
            $
            34,463
            
            
            $
            24,899













See notes to consolidated financial
statements.





F - 6
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document)
 SCHIFF NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 (dollars in thousands, except share
data)





1.SIGNIFICANT ACCOUNTING
POLICIES




Description of
Business–We develop, manufacture, market and
distribute branded and private label vitamins, nutritional supplements and
nutrition bars in the United States and throughout the world. We offer a broad
range of capsules, tablets and nutrition bars. Our portfolio of recognized
brands, including Schiff, Move Free and Tiger’s Milk, is marketed primarily
through the mass market (including club) and, to a lesser extent, health food
store distribution channels.




At our 2005 annual meeting of
stockholders in October 2005, our stockholders approved a corporate name change
from Weider Nutrition International, Inc. to Schiff Nutrition International,
Inc.




Principles of
Consolidation–Our consolidated financial statements
include the accounts of Schiff Nutrition International, Inc. and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated. We are a majority-owned subsidiary of Weider
Health and Fitness (“WHF”).




Use of Estimates and
Assumptions in Preparing Financial Statements–In preparing our consolidated financial
statements, we make assumptions, estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported periods. We
periodically evaluate our estimates and judgments related tothevaluation ofavailable-for-sale securities,inventories and intangible
assets, allowances for doubtful accounts, notes receivable, sales returns and
discounts,uncertainties
related to certain tax benefits,valuation of deferred tax assets,
valuation of share-based payments and recoverability of long-lived assets. Our
estimates are based on historical experience and on our future expectations that
are believed to be reasonable. The combination of these factors forms the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from our
current estimates and those differences may be material.




Cash Equivalents–Cash equivalents include highly liquid
investments with an original maturity of three months or
less.




Available-for-Sale
Securities–Available-for-sale securities,
consisting of equity and debt securities, are carried at their fair value based
upon the quoted market pricesor other valuation methodsat period end. Accordingly, unrealized
gains and losses, net of income taxes, are computed on the basis of specific
identification and included in other accumulated comprehensive income in
stockholders’ equity until realized. We periodically evaluate whether any
declines in the fair values of our available-for-sale securities are other-than
temporary. This evaluation consists of a review of qualitative and quantitative
factors, including available quoted market prices; recent financial results and
operating trends of the company that issued the securities; other publicly
available information; implied values from any recent financing by the company
that issued the security; or other conditions that indicate the value of our
investments.




Receivables –Receivables are reported at estimated net realizable
values.  Accordingly, we estimate allowances for doubtful accounts,
sales returns and discounts.  The allowance for doubtful accounts is
estimated by reviewing delinquency status, determined by classifying, or aging,
individual invoices in terms of the length of the period past due, and analyzing
historical account write-off rates relative to receivable
balances.  Receivables are written off when determined to be
uncollectible.  The allowance for sales returns is estimated by
reviewing open sales return authorizations granted to customer and analyzing
historical return rates relative to sales.  Allowances for cash
discounts are estimated by reviewing customer payment terms and historical
remittances.  Accounts with credit balances are reported as current
liabilities in the balance sheet.




Inventories–Inventories, primarily consisting of
direct materials, direct labor and manufacturing overhead, are stated at the
lower of cost (on a first-in, first-out basis) or market
value.




Property and
Equipment–Property and equipment are stated at
cost less accumulated depreciation. Depreciation expense was $3,475(2008), $3,331 (2007) and $3,027 (2006), computed using the straight-line
method over the estimated useful lives of 2 to 10 years for furniture and
equipment and 3 to16years for leasehold improvements.
Leasehold improvements are depreciated over the shorter of their useful life or
of the lease term.




Intangible Assets–Goodwill and other intangible assets
with indefinite lives are tested for impairment, at least annually during the
fourth quarter of each fiscal year, rather than amortized. Other intangibles
with definite lives are amortized using the straight-line method over estimated
useful lives of 2 to 5 years.





F - 7
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document)
 SCHIFF NUTRITION INTERNATIONAL, INC. AND
SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (continued)
 (dollars in thousands, except share
data)





Long-Lived
Assets–We
evaluate the carrying value of long-lived assets based upon current and
anticipated undiscounted cash flows, and recognize an impairment when such
estimated cash flows will be less than the carrying value of the asset. This
evaluationis
performed whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Measurement of the amount of
impairment, if any, is based upon the difference between carrying value and fair
value.




Income
Taxes–We
record deferred income tax liabilities and assets for temporary differences in
the basis of assets and liabilities as reported for financial statement purposes
and income tax purposes. Deferred tax assets arereduced
by a valuation allowance when, in our opinion, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.




Capital
Structure – We have two classes of common stock
outstanding.  Both classes of common stock generally have identical
rights and privileges, with the exception of voting and conversion, or transfer
rights.  Each holder of Class A or Class B common stock is entitled to
share ratably in any dividends, liquidating distributions or consideration
resulting from certain business combinations.  However, each holder of
Class A common stock is entitled to one vote for each share held while each
holder of Class B common stock is entitled to ten votes for each share
held.  The holders of the Class A common stock and Class B common
stock vote together as a single class.  Class A common stock cannot be
converted into any other securities of the Company, while Class B common stock
holders have the right to convert their shares into Class A common stock on a
one-to-one basis. In addition, generally, any shares of Class B common stock
that are transferred will automatically convert into shares of Class A common
stock on a one-to-one basis.




Operating Segments– We believe our
business, which consists of the aggregation of several product based operating
segments, represents our only reportable segment.




Revenue
Recognition–Sales
are recognized when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services have
been rendered; (3) the seller’s price to the buyer is fixed or determinable;
and, (4) collectibility is reasonably assured. Although we utilize a variety of
shipping terms, our primary shipping terms are “FOB
Destination.”




Net
sales represent products at gross sales price, less estimated returns and
allowances for which provisions are made at the time of sale and less certain
other discounts, allowances and sales incentives. We utilize various types of
sales incentives and promotions in marketing our products; including, price
reductions, coupons, rebate offers, slotting fees and free product. Generally,
the cost of these sales incentives and promotions, with the exception of free
product, are accounted for as a direct reduction of sales. The cost of free
product is classified as cost of goods sold.




Sales
by Geographic Area–Total
domestic and international, primarily Asia and Mexico, net sales amounted
to $168,979and
$7,935,
respectively, for fiscal 2008;
$167,422and
$5,234,
respectively, for fiscal 2007;
and $173,165and
$5,207,
respectively, for fiscal 2006.
Net sales are attributed to the country in which our customer is
located.




Advertising
Costs–Advertising
costs, including cooperative advertising payments to retailers, are charged to
expense in the period that the advertising first takes place. Cooperative
advertising payments to retailers are generally accounted for as an operating
expense; however, the portion of the cost in excess of the estimated fair value
of the benefit received is classified as a direct reduction of sales. Total
advertising costs,included
in selling and marketing expenses,were
$12,669,
$13,828 and $12,026, respectively, for fiscal 2008,
2007and
2006.




Costs
of Goods Sold andShipping
and Handling Costs–Costs
of goods sold include expenses incurred to acquire and produce inventory for
sales, including product costs, purchasing costs, freight-in, import costs,
internal transfer costs, quality assurance costs and certain warehousing, or
handling, costs associated with the receiving or manufacturing of goods for
sale.




Shipping
and certain warehousing, or handling, costs which are not associated with the
receiving or manufacturing of goods for sale are excluded from cost of goods
sold.Shipping
costs,included
in selling and marketing expenses,were
$4,833,
$4,423and
$3,803, respectively, for fiscal 2008,
2007and
2006.
Handling costs,included
in general and administrative expenses,were
$2,716,
$2,663 and $2,364, respectively, for fiscal 2008,
2007and
2006.




Concentrationof
CreditRiskand
Significant Customers and Products–Financial
instruments that potentially subject us to significant concentrations of credit
risk consist primarily of cash and cash equivalents, available-for-sale
securities and accounts receivable.  Historically, we invested our
excess cash in high quality, liquid money market accounts, commercial paper,
auction rate securities (“ARS”) and other variable rate debt and equity
securities. While the underlying securities generally have contractual
maturities between 20 and 30 years, the interest rates on ARS typically reset at
intervals between 7 to 35 days.  Despite the underlying long-term
maturity of these securities, from the investor’s perspective, such securities
were priced and subsequently trade as short-term investments because of the
interest rate reset feature.  As a result, we generally had the
ability to quickly liquidate these securities.





F - 8
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 SCHIFF NUTRITION INTERNATIONAL, INC. AND
SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (continued)
 (dollars in thousands, except share
data)





As a result of
current negative liquidity and uncertainty in financial credit markets, we
elected to liquidate our investments in ARS and other variable rate debt
securities.  Proceeds from the sale of these available-for-sale
securities were invested in money market accounts, certificates of deposit,
United Sates Treasury Bills with maturities of three months or less, and
high-quality commercial paper.  These investments, totaling
approximately $41,732 at May 31, 2008, are included in cash and cash
equivalents.  Generally, our cash and cash equivalents exceed Federal
Deposit Insurance Corporation limits on insurable amounts; thus exposing us to
certain credit risk.  We minimize our risk by investing in or through
major financial institutions.  We have not experienced any realized
losses on our cash equivalents and available-for-sale securities.




At May 31, 2008, we
held approximately $4,563 in available-for-sale securities; consisting of
approximately $2,065 in ARS, along with other variable rate debt securities and
commercial paper.  Subsequent to May 31, 2008, $800 of ARS were
liquidated by the issuer.  The remaining $1,265 in ARS consist
primarily of fully insured, AAA rated municipal or state agency issued
securities.  In determining the fair value of our available-for-sale
securities at May 31, 2008, we have taken into consideration fair values
determined by the financial institutions, current credit rating of the debt
securities, insurance provisions, discounted cash flow analysis, as deemed
appropriate, and our current liquidity position.  Although we believe
the remaining ARS and variable rate debt securities will ultimately be
liquidated at or near our cost basis, any substantial impairment in the value of
these securities could adversely impact our results of operations and financial
condition.




With respect to
accounts receivable, we perform ongoing credit evaluations of our customers and
monitor collections from customers continuously.  We maintain an
allowance for doubtful accounts which is based upon historical experience as
well as specific customer collection issues.  Historically, bad debt
expense have not been significant and have been within expectations and
allowances established.  However, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the
past.  If the financial condition of one or more of our customers were
to deteriorate, additional allowances may be required.




The combined net
sales to our two largest customers are significant.  At May 31, 2008
and May 31, 2007, respectively, amounts due from Customer A represented
approximately 53% and 40%, and amounts due from Customer B represented
approximately 24% and 24%, of total trade accounts receivable.  For
fiscal 2008, 2007 and 2006, respectively, Customer A accounted for approximately
39%, 35% and 33% and Customer B accounted for approximately 35%, 34% and 37% of
total net sales.  Of total net sales, our Schiff®
Move Free®
brand accounted for approximately 47%, 48% and 48%, respectively, for fiscal
2008, 2007 and 2006.




Stock-Based
Compensation–Effective
March 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
No.123R,
“Share-Based Payment,” using the modified prospective method and began
recognizing compensation expense for all awards granted afterMarch
1, 2006,
and for the unvested portion of previously granted awards that were outstanding
atMarch
1, 2006.
Compensation expense is recognized over the vesting period based on the computed
fair value on the grant date of the award.




Prior
to March 1, 2006, we disclosed the effect of SFAS No. 123, “Accounting for
Stock-Based Compensation,” on a proforma basis and continued to follow
Accounting Principles Board (“APB”) OpinionNo.25
(as permitted by SFASNo.123)
as it relates to stock-based compensation.




Proforma
information regarding net income and net income per share is required by
SFASNo.123R
and has been determined as if we had accounted for our employee stock options
under the fair value method of SFASNo.123R.
For the purposes of proforma disclosure, the estimated fair value of the stock
options is amortized to expense over the options vesting period. Proforma net
income and net income per share for fiscal 2006 is as follows:




2006Net
      income, as reported
            
            $
            15,839Deduct
      stock-based employee compensation expense determined under fair-value
      basedmethod,
      net of relatedincometax
      effects
            
            
            (232
            )Net
      income, proforma
            
            $
            15,607Basic
      net income per share, as reported
            
            $
            0.60Diluted
      net income per share, as reported
            
            
            0.59Basic
      net income per share, proforma
            
            
            0.59Diluted
      net income per share, proforma
            
            
            0.58





F - 9
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document)
 SCHIFF NUTRITION INTERNATIONAL, INC. AND
SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (continued)
 (dollars in thousands, except share
data)








Net Income Per Share–Basic net income per share is computed
using the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed using the weighted average
number of common shares and potentially diluted common shares outstanding during
the period. Potentially dilutive common shares consist of common stock options,
restricted stock and restricted stock units (“Common Stock Equivalents”) (Note
12).




Financial Instruments–Our financial instruments, including
primarily cash and cash equivalents, available-for-sale securities, accounts
receivable and accounts payable, when valued using market interest rates,
would not be materially different from the amounts presented in the consolidated
financial statements.




Foreign Currency
Translation–We consider the local currency as the
functional currency for our foreign operations. Assets and liabilities are
translated at period-end exchange rates and all statements of income amounts are
translated using average monthly rates. As a result of the divestitures of our
Haleko Unit and Weider branded business, certain international operating
entities became substantially liquidated. Accordingly, during fiscal 2006, we
recognized non-taxable foreign currency translation gainof $1,613, previously reportedin stockholders’ equityas other accumulated comprehensive
income.




Hedging Activities–We account for hedging activities in
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities.”  Derivatives are recognized as either assets or
liabilities in the balance sheet and measured at fair value. At May 31, 2008 and
2007, we were not party to any derivatives.




Reimbursement of
Import Costs–Our operating results for fiscal2008,2007 and 2006 were favorably impacted by$31,$394 and $2,665, respectively, in
reimbursement of import costs from certain suppliers. These reimbursements,
resulting primarily from the favorable outcome of litigation between one of our
suppliers and the U.S. Government, represent refunds of previously paid tariffs
on imported raw materials.




Recently Issued
Accounting Standards– In July 2006, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (“FIN No. 48”), which establishes guidelines for
recognizing, measuring and disclosing uncertainties relating to tax benefits
reflected in an enterprise’s financial statements.  FIN No. 48
establishes a “more-likely-than-not” recognition threshold that must be met
before a tax benefit, relative to a tax position in which the enterprise may be
uncertain as to whether it will ultimately be sustained as filed in its tax
return, can be recognized in the financial statements.  We were
required to apply the provisions of FIN No. 48 on June 1, 2007.  The
cumulative effect of adopting FIN No. 48 resulted in a decrease in retained
earnings of approximately $88.  The total amount of unrecognized tax
benefits at June 1, 2007 was $473, which includes unrecognized tax benefits of
$88 that, if recognized, would favorably affect the effective tax
rate.  As of June 1, 2007, we had approximately $29 for the payment of
interest recognized in our consolidated balance sheet.  The adoption
of FIN No. 48 resulted in the reclassification of $38 in deferred taxes, $351 in
income taxes payable and $88 in retained earnings, in aggregate to other
long-term liabilities.




In September 2006,
the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurement,” that defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements.  SFAS No. 157 retains the exchange price notion in
defining fair value and clarifies that the exchange price is the price in an
orderly transaction between market participants to sell the asset or transfer
the liability in the market in which the reporting entity would transact for the
asset or liability.  The definition focuses on the price that would be
received to sell the asset or paid to transfer the liability (an exit price),
not the price that would be paid to acquire the asset or received to assume the
liability (an entry price).  SFAS No. 157 expands disclosure about the
use of fair value to measure assets and
liabilities in interim and annual periods subsequent to initial
recognition.  The additional disclosure focuses on the inputs used to
measure fair value and the effect of the measurements on net income for the
reporting period.  The fair value measurement and disclosure
provisions of SFAS No. 157 are effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years.  In February 2008, the FASB issued Staff Position
("FSP") 157-2.  FSP 157-2 delays the effective date of SFAS No. 157
for all non-financial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  FSP
157-2 is effective for fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years.  We have not yet determined
the impact of adopting SFAS No. 157 on our results of operations and financial
condition.




In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,”
which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value.  SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities.  The measurement and disclosure provisions of SFAS No.
159 are effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007.  We did not elect to measure any
existing financial instruments or other items at fair value.









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2.DIVESTITURES




Effective May 1, 2005 (the first day of
Haleko’s fiscal 2006), we sold our Haleko Unit to Atlantic Grupa of Zagreb,
Croatia and certain of its subsidiaries for $15,089 in cash. The transaction
included the sale of the capital stock and partnership interests of the
international subsidiaries that operate the Haleko Unit. In connection with the
sale, we incurred transaction related costs of $687 and relinquished cash of
$719. In accordance with SFAS No. 144, we recognized an impairment loss of
$9,346 in fiscal 2005 as the cash proceeds, net of the transaction related costs
and including a realized foreign currency translation loss of $723, were less
than the carrying value of our Haleko Unit’s long-lived assets.Historical operating results for our
Haleko Unit are reflected as discontinued operations in ourfiscal 2006financial statements, including the
notes thereto for all periods presented.




Summarized
financial information included in discontinued operations for fiscal 2006, is as
follows:




Net sales
            
            $
            —Pre-tax
loss
            
            
            (199
            )Income tax
      benefit
            
            
            (72
            )Net loss
            
            
            (127
            )




3.AVAILABLE-FOR-SALE
SECURITIES




Available-for-sale securities consist
primarily ofARS, long-term variable rate bonds tied to
short-term interest rates that are reset through a “dutch auction” process which
occurs every 7 to 35 days, and other variable rate debt and equity
securities.




Available-for-sale securities at fair
value, which approximates unamortized cost, consist of the following at May
31:




2008
            
            
            2007Federal, state and municipal debt
      securities
            
            $
            3,764
            
            
            $
            32,529Corporate debt
      securities
            
            
            799
            
            
            
            9,038Corporate equity
      securities
            
            
            —
            
            
            
            4,250$
            4,563
            
            
            $
            45,817Less long-term
      portion
            
            
            1,265
            
            
            
            —Total
            
            $
            3,298
            
            
            $
            45,817




Despite the underlying long-term
contractual maturity of ARS, there has generally been a ready liquid market for
these securities based on the interest reset mechanism.  Historically,
these securities were classified as current assets due to our intent and ability
to sell these securities as necessary to meet current liquidity
needs.  However, as a result of current negative liquidity and
uncertainty in financial credit markets, we have experienced “failed” auctions
associated with certain of our remaining ARS.  In the case of a failed
auction, the ARS become illiquid long-term bonds (until a future auction is
successful or the security is called prior to the contractual maturity date by
the issuer) and the rates are reset in accordance with terms in the
prospectus/offering circular.  At May 31, 2008, total
available-for-sale securities included $2,065 in ARS; $800 of which were
liquidated by the issuer subsequent to May 31, 2008 and are included in current
assets, and $1,265 of which experienced remarketing failures and are included in
long-term assets. The remaining ARS consist primarily of fully insured, AAA
rated municipal or state agency issued securities.  Contractual
maturities of debt securities at May 31, 2008are as follows:




Less than one
      year
            
            $
            2,498One to five
      years
            
            
            —Over five
    years
            
            
            2,065$
            4,563








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In determining the fair value of our
available-for-sale securities at May 31, 2008, we have taken into consideration
fair values determined by the financial institutions, current credit rating of
the debt securities, insurance provisions, discounted cash flow analysis, as
deemed appropriate and our current liquidity position.  The amount of
unrealized gains or losses for fiscal 2008, 2007 and 2006 was not
significant.




4.RECEIVABLES,
NET




Receivables, net, consist of the
following at May 31:




2008
            
            
            2007Trade
    accounts
            
            $
            21,938
            
            
            $
            19,467Refundable income
      taxes
            
            
            1,969
            
            
            
            —Other
            
            
            162
            
            
            
            42624,069
            
            
            
            19,893Less allowances for doubtful
      accounts, sales returns and discounts
            
            
            (1,533
            )
            
            
            (2,161
            )Total
            
            $
            22,536
            
            
            $
            17,732




5.INVENTORIES




Inventories consist of the following at
May 31:




2008
            
            
            2007Raw
    materials
            
            $
            9,458
            
            
            $
            8,960Work in
    process
            
            
            1,897
            
            
            
            2,340Finished
    goods
            
            
            17,878
            
            
            
            12,398Total
            
            $
            29,233
            
            
            $
            23,698




6.PROPERTY AND EQUIPMENT,
NET




Property and equipment, net, consists of
the following at May 31:




2008
            
            
            2007Furniture and
      equipment
            
            $
            34,203
            
            
            $
            33,018Leasehold
      improvements
            
            
            11,822
            
            
            
            11,727Construction in
      progress
            
            
            672
            
            
            
            45246,697
            
            
            
            45,197Less accumulated depreciation and
      amortization
            
            
            (33,130
            )
            
            
            (30,759
            )Total
            
            $
            13,567
            
            
            $
            14,438




Purchase of property and equipment included in
accounts payable amounted to $561, $158and $230, respectively, for fiscal
2008, 2007and 2006.





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7.GOODWILL AND INTANGIBLE ASSETS,
NET




Goodwill and intangible assets, net,
consist of the following at May 31:




2008
            
            
            2007Gross
      Carrying Amount
            
            
            Accumul.
      Amortiz.
            
            
            Net
      Book Value
            
            
            Gross
      Carrying Amount
            
            
            Accumul.
      Amortiz.
            
            
            Net
      Book ValueGoodwill
            
            $
            4,346
            
            
            $
            —
            
            
            $
            4,346
            
            
            $
            4,346
            
            
            $
            —
            
            
            $
            4,346Intangible assets - patents and
      trademarks
            
            $
            2,090
            
            
            $
            (2,090
            )
            
            $
            —
            
            
            $
            2,090
            
            
            $
            (2,090
            )
            
            $
            —




Estimated amortization expense, assuming
no changes in our intangible assets, is zero for all future fiscal
years.




8.ACCRUED
EXPENSES




Accrued expenses consist of the
following at May 31:




2008
            
            
            2007Accrued personnel related
      costs
            
            $
            4,011
            
            
            $
            3,495Accrued promotional
      costs
            
            
            5,117
            
            
            
            4,642Other
            
            
            2,025
            
            
            
            2,405Total
            
            $
            11,153
            
            
            $
            10,542







9.INCOME
TAXES




The components of income tax expense for
fiscal 2008, 2007and 2006, are as follows:




2008
            
            
            2007
            
            
            2006Federal:Current
            
            $
            6,246
            
            
            $
            8,097
            
            
            $
            2,647Deferred
            
            
            58
            
            
            
            (178
            )
            
            
            682Change in valuation
      allowance
            
            
            —
            
            
            
            (654
            )
            
            
            (1,185
            )Foreign:Current
            
            
            —
            
            
            
            —
            
            
            
            —Deferred
            
            
            —
            
            
            
            —
            
            
            
            1,847Change in valuation
      allowance
            
            
            —
            
            
            
            —
            
            
            
            (1,847
            )State and
      local:Current
            
            
            681
            
            
            
            784
            
            
            
            192Deferred
            
            
            7
            
            
            
            126
            
            
            
            135Change in valuation
      allowance
            
            
            —
            
            
            
            —
            
            
            
            (78
            )Total
            
            $
            6,992
            
            
            $
            8,175
            
            
            $
            2,393





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Income tax expense (benefit) differs
from a calculated income tax at the Federal statutory rate as
follows:




2008
            
            
            2007
            
            
            2006Computed Federal income tax
      expense at the statutory rate of35% (2008 and 2007)and 34%
    (2006)
            
            $
            6,403
            
            
            $
            7,214
            
            
            $
            6,242Change in valuation
      allowance
            
            
            —
            
            
            
            (654
            )
            
            
            (3,110
            )State income tax
      expense
            
            
            688
            
            
            
            910
            
            
            
            327Tax exempt
      interest
            
            
            (292
            )
            
            
            (504
            )
            
            
            (275
            )Foreign currency
      translation
            
            
            —
            
            
            
            —
            
            
            
            (548
            )Recapture of previously recognized
      tax losses, and other
            
            
            193
            
            
            
            1,209
            
            
            
            (243
            )Total
            
            $
            6,992
            
            
            $
            8,175
            
            
            $
            2,393




During fiscal 2006,as a result of the completion of an IRS
audit and a German tax audit,we recognizedanincome tax benefit of approximately
$1,672, which includes reversal ofavaluation allowance and other contingent
liabilities previously establishedagainst certain net operating loss
carryforwards. In addition,
we recognized income tax benefit of approximately $1,503, due to the adjustment
of the IRS Code Section 987 gain recognized as a result of the sale of our
Haleko Unit.




During fiscal 2007, we recognized
approximately $757 in incremental net tax liabilities resulting from the impact
of recapturing certain previously recognized tax losses, partially offset by
further adjustment of the IRS Code Section 987 gain and valuation allowances,
and the reduction of certain contingent tax liabilities.




Net cash income tax payments amounted to
$10,574, $7,553 and $2,318, respectively, for
fiscal 2008, 2007and 2006.




Net deferred income taxes consist of the
following at May 31:




2008
              
              
              2007Current
              
              
              Long-Term
              
              
              Current
              
              
              Long-TermAssets:Accounts
      receivable allowances
              
              $
              464
              
              
              $
              —
              
              
              $
              703
              
              
              $
              —Inventories
      adjustment
              
              
              834
              
              
              
              74
              
              
              
              735
              
              
              
              —Accrued
      vacation, bonuses,
      dividendsand
      other
              
              
              1,176
              
              
              
              2,101
              
              
              
              759
              
              
              
              1,758Total
              
              
              2,474
              
              
              
              2,175
              
              
              
              2,197
              
              
              
              1,758Liabilities:Basis
      differences in fixed and intangible assets
              
              
              —
              
              
              
              (1,603
              )
              
              
              —
              
              
              
              (1,421
              )Prepaid
      insurance
              
              
              (511
              )
              
              
              —
              
              
              
              —
              
              
              
              —Other
              
              
              (202
              )
              
              
              (31
              )
              
              
              (205
              )
              
              
              —Total
              
              
              (713
              )
              
              
              (1,634
              )
              
              
              (205
              )
              
              
              (1,421
              )Deferred
      income taxes, net
              
              $
              1,761
              
              
              $
              541
              
              
              $
              1,992
              
              
              $
              337




At May 31, 2008, we have no net operating loss, capital
loss or tax credit carryforwards. The amount of the deferred tax assets
considered realizable, could be reduced or increased in the near-term if facts,
including the amount of taxable income, differs from our
estimates.







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We adopted the
provisions of FIN No. 48 on June 1, 2007.  A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as
follows:




Balance at June 1,
      2007
            
            $
            444Additions based on the tax
      positions related to the current year
            
            
            37Additions for tax positions of
      prior years
            
            
            —Balance at May 31,
      2008
            
            $
            481




Approximately $85
of the total unrecognized tax benefits as of May 31, 2008, if recognized, would
affect the effective tax rate.  It is anticipated that unrecognized
tax benefits for certain timing differences related to the fiscal 2005
disposition of the Weider branded business will decrease by approximately
$384 within the next 12 months due to the lapse of applicable statute of
limitations.  We recognize interest and penalties accrued related to
unrecognized tax benefits in income tax expense.  During fiscal 2008, we
recognized $14 in interest and penalties and we had $43 in interest and
penalties accured at May 31, 2008.  We file income tax returns in the U.S.
federal jurisdiction, and in various state and local
jurisdictions.  We are no longer subject to U.S. federal income tax
examinations for years prior to fiscal 2004, and we are no longer subject to
state and local income tax examinations for years prior to fiscal
2003.




10.CASH
DIVIDEND




In July 2007, our
Board of Directors approved a $1.50 per share special cash dividend, which was
paid on August 13, 2007 to shareholders of record of Class A and Class B common
stock at the close of business on July 31, 2007.  In connection with
the declaration of the special dividend, our Board of Directors approved certain
dividend equivalent rights, allowing holders (employees and directors) of
certain equity awards, including stock options and restricted stock units, to
receive cash dividends on each share of common stock underlying the stock
options and restricted stock units.  In aggregate, at July 31, 2007,
the record date, the Company had outstanding approximately 29.9 million shares
of common stock (including shares of common stock underlying equity awards
subject to dividend equivalent rights), including approximately 26.6 million
shares of outstanding Class A and Class B common stock, approximately 1.8
million shares of Class A common stock underlying outstanding stock options, and
approximately 1.5 million shares of Class A common stock underlying outstanding
restricted stock units.  The aggregate amount of the special dividend
was approximately $44,917, presuming 100% vesting of shares underlying equity
awards; $22,457 for holders of Class A common stock, including $4,883 for Class
A common stock underlying certain equity awards, and $22,460 for the holder of
Class B common stock.  Approximately 98% of the stock options and
restricted stock units had vested as of May 31, 2008.  To the extent
these equity awards were unvested at May 31, 2008, the $1.50 per share dividend
was not, and will not be, distributed until after such equity awards become
vested.




In connection with
the dividends paid or payable on the dividend equivalent rights received by
holders (employees and directors) of stock options and certain restricted stock
units, we recognized non-cash compensation expense and corresponding increase in
additional paid-in capital of $4,857, and cash compensation expense of $63,
during fiscal 2008.  Subject to future vesting of these equity awards,
compensation expense of approximately $27, together with a corresponding
increase in additional paid-in capital will subsequently be
recognized.




11.OTHER ACCUMULATED COMPREHENSIVE
INCOME




We had no other comprehensive income for
fiscal2008 and2007. For fiscal 2006, the
components of other comprehensive income are as follows:




Pre-taxIncome
            
            
            Tax
      Expense
            
            
            Net
      IncomeForeign currency translation
      adjustments:Unrealized
      gains
            
            $
            —
            
            
            $
            —
            
            
            $
            —Reclassification adjustment for
      realized loss (gain )
            
            
            688
            
            
            
            855
            
            
            
            (167
            )Net unrealized gain
      (loss)
            
            $
            688
            
            
            $
            855
            
            
            $
            (167
            )





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12.EARNINGS PER
SHARE




The reconciliation
of numerators and denominators basic and diluted earnings per share computations
for fiscal 2008, 2007 and 2006, are as follows:




2008
            
            
            2007
            
            
            2006Income available to common
      shareholders (numerator):Income from continuing
      operations
            
            $
            11,302
            
            
            $
            12,436
            
            
            $
            15,966Adjustments
            
            
            —
            
            
            
            —
            
            
            
            —Income on which basic and diluted
      earnings per share are calculated
            
            $
            11,302
            
            
            $
            12,436
            
            
            $
            15,966Weighted-average number of common
      shares outstanding (denominator):Basic
            
            
            26,636,315
            
            
            
            26,531,682
            
            
            
            26,274,066Add-incremental shares from
      restricted stock
            
            
            5,024
            
            
            
            49,912
            
            
            
            141,990Add-incremental shares from
      restricted stock units
            
            
            676,461
            
            
            
            —
            
            
            
            —Add-incremental shares from stock
      options
            
            
            681,955
            
            
            
            761,670
            
            
            
            583,184Diluted
            
            
            27,999,755
            
            
            
            27,343,264
            
            
            
            26,999,240




Options to purchase
32,000 shares of Class A common stock at prices ranges from $6.00 to $7.05 per
share were outstanding during fiscal 2008 but were not included in the
computation of diluted earnings per share because the options’ exercise prices
were greater than the average market price of the common shares.




13.STOCK-BASED COMPENSATION
PLANS




Our 1997 Equity Participation Plan, as
amended (the “1997 Plan”), provided for the granting of stock options, stock
appreciation rights, restricted or deferred stock and other awards (“Awards”) to
officers, directors and key employees responsible for the direction and
management of our company and to non-employee consultants. Such Awards were
granted at fair value as of the date of grant. Under the 1997 Plan, a total of
3,500,000 shares of Class A common stock (or the equivalent in other equity
securities) were reserved for issuance.




On October 26, 2004, our stockholders
adopted the Schiff Nutrition International, Inc. 2004 Incentive Award Plan, as
amended, (the “2004 Plan”). Our 2004 Plan provides for the grant of incentive
stock options, nonqualified stock options, restricted stock, stock appreciation
rights, performance shares, performance stock units, dividend equivalents, stock
payments, deferred stock, restricted stock units, other stock-based awards, and
performance-based awards to officers, directors, employees and consultants of
our company and its subsidiaries.




Shares available for grant include
3,200,000 shares of Class A common stock reserved for issuance under the 2004
Plan, plus the number of shares of Class A common stock that as of the date of
adoption of the 2004 Plan were, or thereafter would otherwise become, available
for issuance under the 1997 Plan.




Stock options granted under the 1997
Plan and 2004 Plan primarily become exercisable after one to five years from the
date of grant in equal, ratable amounts on each successive anniversary date.
Stock options expire no later than eight years after the date of grant under the
1997 Plan and no later than ten years after the date of grant under the 2004
Plan.




Prior to March 1, 2006, we applied APB
Opinion No. 25 in accounting for our stock options. All stock options issued
prior toMarch 1,
2006were granted with an
exercise price equal to the fair value on the date of grant and, accordingly, no
compensation expense was recognized in the accompanying consolidated financial
statements. EffectiveMarch
1, 2006, we adopted the
measurement and recognition provisions of SFAS No. 123R in accounting for stock
options granted after the adoption date. For purposes of applying SFAS No. 123
for stock options granted prior to the adoption of SFAS No. 123R, and for stock
options granted after the adoption of SFAS No. 123R, the fair value for these
options was estimated at the date of grant using a Binomial Option pricing model
with the following weighted average assumptions for fiscal2008, 2007 and 2006, respectively.





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2008
            
            
            
            2007
            
            
            
            2006Expected
      volatility
            
            
            48.92
            
            %
            
            
            49.57
            
            %
            
            
            54.10
            
            %Expected
    term
            
            
            3.67
            
            years
            
            
            4.00
            
            years
            
            
            3.00
            
            yearsRisk-free interest
      rate
            
            
            4.46
            
            %
            
            
            4.57
            
            %
            
            
            4.36
            
            %Dividend
    yield
            
            
            0.00
            
            %
            
            
            0.00
            
            %
            
            
            0.00
            
            %




Expected volatility is based on
historical volatility of our stock. The expected term, which represents the
period of time that options granted are expected to be outstanding, is based on
historical data and other factors; including, exercise behavior patterns of
differing groups of employees. The risk-free interest rate is based on the U.S.
treasury yield curve in effect at the time of the grant.




Information
relating to stock options issued under the 1997 Plan and 2004 Plan is as
follows:




Number
      of Shares
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Contractual Term (in years)
            
            Aggregate
              Intrinsic
      ValueOptions outstanding,June1, 2005
            
            
            2,246,169
            
            $
            2.85Granted
            
            
            94,000
            
            
            5.13Exercised
            
            
            (354,096
            )
            
            2.74Canceled, forfeited and/or
      expired
            
            
            (85,488
            )
            
            2.04Options outstanding,May 31,
2006
            
            
            1,900,585
            
            
            2.78Granted
            
            
            10,000
            
            
            7.01Exercised
            
            
            (83,934
            )
            
            3.49Forfeited and/or
      expired
            
            
            —
            
            
            —Options outstanding, May 31,
      2007
            
            
            1,826,651
            
            
            2.77Granted
            
            
            45,000
            
            
            5.97Exercised
            
            
            (77,167
            )
            
            3.38Canceled, forfeited and/or
      expired
            
            
            (5,000
            )
            
            3.00Options outstanding, May 31,
      2008
            
            
            1,789,484
            
            $
            2.84
            
            
            2.93
            
            $
            6,155Exercisable options, May 31,
      2008
            
            
            1,756,485
            
            $
            2.79
            
            
            2.84
            
            $
            6,127




The weighted average grant-date fair
value of options granted was $2.90, $3.06 and $2.04, respectively, for
fiscal 2008, 2007and 2006. The total intrinsic value of options
exercised was $183, $242and $881, respectively, for fiscal
2008, 2007and 2006. We received $260, $292and $968, respectively, for stock
options exercised during fiscal 2008, 2007and 2006.




Effective August 16, 2002, we issued
640,000 restricted shares of Class A common stock to certain officers and
employees. The aggregate value of the restricted shares at issuance was $1,038,
which we are expensing on a straight-line basis over the accompanying five-year
vesting period. During fiscal2008, 2007 and 2006, respectively,83,800,86,200and 106,200 restricted shares vested.
Concurrent with the annual vesting during fiscal2008, 2007 and 2006, respectively, we reacquired (and
ultimately retired)22,676,23,443and 29,813 shares from certain employees
in connection with the payment of individual income taxes. As a result of the
termination of certain employees,2,400and 28,000, respectively, of these
restricted shares were cancelled during fiscal 2007 and 2006. As of May 31, 2008, of the 640,000 restricted shares
originally issued,528,800shares have vested, of which103,338shares were reacquired (and retired),
111,200 shares have been cancelled.




During fiscal 2008 and 2007,
respectively, we granted 114,157 and 32,360 restricted shares and restricted
stock units to employee or non-employee directors at an average grant date fair
value of $5.74 and $6.18 per share.  The shares generally vest over
three years.  Unvested shares were 133,144 and 32,360, respectively,
at May 31, 2008 and 2007.





F - 17
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 SCHIFF NUTRITION INTERNATIONAL, INC. AND
SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (continued)
 (dollars in thousands, except share
data)





Stock-based compensation expense for
stock options, restricted stock units and restricted shares amounted to
$327, $473and $242, respectively, and the related tax
benefit was approximately $125, $189and $96, respectively, for fiscal2008, 2007 and 2006. At May 31, 2008, total unrecognized compensation cost
related to these non-vested share-based compensation awards was approximately
$634, which is expected to be recognized
over a weighted average period of1.9years.




On March 17, 2006, the Compensation
Committee of our Board of Directors, pursuant to our 2004 Plan, approved the
adoption of a long term incentive plan involving the grant of performance based
restricted stock units (the “Units”). OnMarch 20, 2006, a total of 1,437,200 Units were issued
to certain officers and employees. Each Unit represents the right to receive one
share of the Company’s Class A common stock, subject to certain performance
based vesting requirements. The Units vest based on the Company’s performance in
relation to certain specified pre-established performance criteria targets over
a performance period beginning on January 1, 2006 and expiring on May 31, 2008.
The performance criteria upon which the Units vest is based upon a “Business
Value Created” formula, which is comprised of two performance criteria
components: operating earnings and return on net capital.Based upon the amount of Business Value
Credited in accordance with the formula, the Units were vested in full at May
31, 2008.The
grant date fair value of each Unit was $5.11. We recognize compensation expense
over the performance period based on a periodic assessment of the probability
that the performance criteria will be achieved. For fiscal2008,2007 and 2006, respectively, we
recognized compensation expense of$3,364,$3,421 and $514, and the related tax
benefit was approximately$1,286,$1,364 and $205.




14.COMMITMENTS AND
CONTINGENCIES




Leases—We lease warehouse and office
facilities, manufacturing and production facilities, transportation equipment
and other equipment under operating lease agreements expiring through 2013. At
May 31, 2008, future minimum payments of
$11,356under these non-cancelable operating
leases are due as follows: $2,452(2009), $2,351(2010), $2,316(2011), $2,311(2012),and $1,926(2013). Rental expense was $2,584, $2,413 and $2,344, respectively, for
fiscal 2008, 2007and 2006.




Purchase Commitments—We are committed to future purchases
primarily for inventory related items, including raw materials, packaging and
outsourced contract manufacturing, under open purchase orders for specified
quantities with fixed price provisions aggregating $18,367at May 31, 2008.




Credit Facility—On June 30, 2004, we entered into,
through our wholly-owned direct operating subsidiary Schiff Nutrition Group,
Inc. (“SNG”) (formerly Weider Nutrition Group, Inc.), a $25,000 revolving credit
facility (the “Credit Facility”) with KeyBank National Association, as Agent. OnAugust 23, 2006we extended the maturity of the Credit
Facility fromJune 30,
2007toJune 30, 2009. The Credit Facility contains customary
terms and conditions, including, among others, financial covenants that may
limit our ability to pay dividends on our common stock and certain other
restrictions. Our obligations under the Credit Facility are secured by a first
priority security interest on all of the capital stock of SNG. If our total
coverage ratio exceeds a certain limit, our obligations will also be secured by
a first priority security interest in all of our domestic assets. In the event
we exceed certain other ratio limits, we will be subject to a borrowing base and
will be able to borrow up to a lesser of $25,000 or the sum of (i) 85% of
eligible accounts receivable and (ii) 65% of eligible inventory. Borrowings
under the Credit Facility bear interest at floating rates based on the KeyBank
National Association prime rate or the Federal Funds effective rate. The Credit
Facility can be used to fund our normal working capital and capital expenditure
requirements, with availability to fund certain permitted strategic
transactions. At May 31, 2008, there were no amounts outstanding and
$25,000 was available for borrowing under the Credit
Facility.




Cash interest payments amounted to
$113, $136 and $110, respectively, for
fiscal 2008, 2007and 2006.




Litigation –From time to time, we are
involved in claims, legal actions and governmental proceedings that arise from
our business operations. Although ultimate liability cannot be determined at the
present time, based on available information, we do not believe the resolution
of these matters will have a material adverse effect on our results of
operations and financial condition. However, it is possible that future
litigation could arise, or that developments could occur in existing litigation,
that could have a material adverse effect on our results of operations and
financial condition.




Royalties
-Pursuant to an agreement
with WHF and certain other parties, Mariz Gestao E Investimentos Limitada
(“Mariz”) obtained the exclusive international rights to use the trademarks and
brand names used by WHF and its affiliates on or prior to December 1996. Mariz
is a company incorporated under the laws of Portugal and owned by a trust of
which the family members of a director are included among the beneficiaries.
Pursuant to a sublicense agreement with Mariz dated as ofDecember 1, 1996, we obtained the exclusive
international worldwide rights to use these trademarks and brand names outside
the United States, Canada, Mexico, Spain and Portugal (for which countries we
have the rights outside of the Mariz sublicense), except in Japan.(see discussion below)Certain terms of the sublicense were
amended and the rights under the sublicense to the Weider name and certain
related trademarks were transferred as of March 1, 2005 in connection with the
sale of our Weider branded business to Weider Global Nutrition, LLC ("WGN"), a
wholly owned subsidiary of WHF.





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 SCHIFF NUTRITION INTERNATIONAL, INC. AND
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 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (continued)
 (dollars in thousands, except share
data)








Under the terms of the amended
sublicense agreement, we are required to make annual royalty payments to Mariz
on sales of products covered by the agreement in countries other than those
listed above. The royalty payments, as amended, are equal to (i) 4% of sales up
to $7,000 (ii) 3.5% of sales greater than $7,000 and less than $14,000; (iii)
3.0% of sales greater than $14,000 and less than $21,000; and (iv) 2.5% of sales
over $21,000. The sublicense agreement includes an irrevocable buy-out option,
exercisable by us afterFebruary 28, 2009, for a purchase price equal to the
greater of $2,000 or 6.5 times the aggregate royalties paid by us in the royalty
year immediately preceding the date of the exercise of the option. In addition,
if the Schiff trademark is sold to a third party prior toFebruary 28, 2009, the sublicense agreement provides that
the buyer must also purchase all of Mariz’s rights to the trademarks for a
purchase price equal to $2,000.




On September 19, 2007, we entered into a
license agreement with Mariz providing for non-exclusive rights to use the
Schiff and Move Free trademarks in connection with the sale of joint care
products to Costco Wholesale Corporation (“Costco”) in Japan.  The
initial term of the license agreement is for three years following the launch of
our product into Japan.  We may renew the license agreement for two
successive three-year terms if certain minimum sales levels are achieved during
the third and sixth years following the product launch.  The license
agreement provides that we pay royalties equal to 5% of joint care product sales
to Costco in Japan with guaranteed minimum annual royalties ranging from $100 to
$225 for each year the agreement is in effect.  Each party has certain
termination rights, and depending on which party terminates and the reason for
the termination, we may continue to owe the guaranteed minimum royalties for a
period following termination of the license agreement.




Royalty expense, related to the Mariz
licensing agreements, amounted to $286, $135 and $155, respectively, for
fiscal 2008, 2007and 2006. In addition, during fiscal 2007, we
also reimbursed Mariz approximately $108 for certain costs and expenses incurred
by Mariz at our request in connection with certain litigation and the
acceleration of obtaining certain intellectual property rights in the United
Kingdom relating to the Move Free trademark.




Retirement Plan -We sponsor a contributory
401(k) savings plan covering all employees who have met minimum age and service
requirements. We make discretionary contributions of 50% of the employee’s
contributions up to the first six percent(seven percent effective January 1,
2008)of the employee’s
compensation. Contribution expense amounted to $457, $423 and $395, respectively, for
fiscal 2008, 2007and 2006.




Income and Other
Taxes -We have recorded
certain contingent liabilities for uncertainties relating to tax benefits
reflected in our financial statements. These contingent tax liabilities total
approximately $129and $480, respectively, at May 31, 2008 and
2007.




15.RELATED PARTY
TRANSACTIONS




Significant related party transactions,
not otherwise disclosed, are summarized below.




We provide contract manufacturing
services toWGN. For fiscal 2008, 2007and 2006, respectively, net sales to WGN were
$1,308, $2,175 and $2,658, with a gross profit
of $120, $204 and $317. In addition, we
received $465, $559and $613 (reflected as a reduction in
operating expenses), respectively, for certain general and administrative,
research and development, and logistics services provided to WGN during fiscal
2008, 2007and 2006.At May 31, 2008 and 2007,
respectively, net receivables from WGN totaled $377 and
$429.






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 SCHIFF NUTRITION INTERNATIONAL, INC. AND
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 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS – (continued)
 (dollars in thousands, except share
data)








16.QUARTERLY RESULTS
(UNAUDITED)




Quarterly results (unaudited) for fiscal
2008and 2007are as follows:




Quarter
      EndedAug.
      31
            
            
            Nov.
      30
            
            
            Feb.
      29
            
            
            May
      312008:Net
      sales
            
            $
            40,727
            
            
            $
            39,535
            
            
            $
            46,208
            
            
            $
            50,444Gross
      profit
            
            
            16,421
            
            
            
            16,561
            
            
            
            20,414
            
            
            
            21,027Income
      from operations
            
            
            1,852
            
            
            
            4,127
            
            
            
            6,143
            
            
            
            4,242Income
      tax expense
            
            
            1,002
            
            
            
            1,725
            
            
            
            2,524
            
            
            
            1,741Net
      income
            
            
            1,648
            
            
            
            2,803
            
            
            
            4,043
            
            
            
            2,808Basic
      net income per share
            
            
            0.06
            
            
            
            0.11
            
            
            
            0.15
            
            
            
            0.10Diluted
      net income per share
            
            
            0.06
            
            
            
            0.10
            
            
            
            0.14
            
            
            
            0.10





Quarter
      EndedAug.
      31
            
            
            Nov.
      30
            
            
            Feb.
      28
            
            
            May
      312007:Net
      sales
            
            $
            45,652
            
            
            $
            38,817
            
            
            $
            44,999
            
            
            $
            43,188Gross
      profit
            
            
            17,116
            
            
            
            16,177
            
            
            
            16,429
            
            
            
            18,975Income
      from operations
            
            
            4,332
            
            
            
            2,646
            
            
            
            4,485
            
            
            
            6,213Income
      tax expense
            
            
            1,754
            
            
            
            1,125
            
            
            
            1,960
            
            
            
            3,336Net
      income
            
            
            3,263
            
            
            
            2,249
            
            
            
            3,241
            
            
            
            3,683Basic
      net income per share
            
            
            0.12
            
            
            
            0.08
            
            
            
            0.12
            
            
            
            0.15Diluted
      net income per share
            
            
            0.12
            
            
            
            0.08
            
            
            
            0.12
            
            
            
            0.13














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 SCHIFF NUTRITION
INTERNATIONAL, INC. AND SUBSIDIARIES
 VALUATION AND QUALIFYING ACCOUNTS
 YEARS ENDED MAY 31,2008, 2007 and 2006
 (in thousands)








Description
            
            Balance
      at Beginning of Year
            
            
            Reductions
      Charged to Costs / Expenses
            
            
            Additions
      Charged to Net Sales
            
            
            Reductions
      due to Divestiture
            
            
            Deductions
      / Write-offs
            
            
            Balance
      at End of YearALLOWANCE FOR DOUBTFUL
      ACCOUNTS:2006
            
            $
            1,270
            
            
            $
            (109
            )
            
            $
            —
            
            
            $
            (669
            )
            
            $
            (61
            )
            
            $
            4312007
            
            $
            431
            
            
            $
            (54
            )
            
            $
            —
            
            
            $
            —
            
            
            $
            3
            
            
            $
            3802008
            
            $
            380
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (59
            )
            
            $
            321ALLOWANCE FOR SALES RETURNS AND
      DISCOUNTS:2006
            
            $
            3,492
            
            
            $
            —
            
            
            $
            7,369
            
            
            $
            (88
            )
            
            $
            (7,884
            )
            
            $
            2,8892007
            
            $
            2,889
            
            
            $
            —
            
            
            $
            6,993
            
            
            $
            —
            
            
            $
            (8,101
            )
            
            $
            1,7812008
            
            $
            1,781
            
            
            $
            —
            
            
            $
            7,069
            
            
            $
            —
            
            
            $
            (7,638
            )
            
            $
            1,212DEFERRED TAXES VALUATION
      ALLOWANCE:2006
            
            $
            3,764
            
            
            $
            (3,110
            )
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            6542007
            
            $
            654
            
            
            $
            (654
            )
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —2008
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —