** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K/A**

**(AmendmentNo. 1)**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**ForThe Fiscal Year Ended December 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                           to                           **

**CommissionFile No: 000-24567**

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

| **Delaware**              |   | **95-3560780**                        |
|---------------------------|--------|---------------------------------------|
| (State of  Incorporation) |   | (I.R.S. Employer  Identification No.) |

 

**21411Prairie Street**

**Chatsworth,California 91311**

(Address of principalexecutive offices)

**(818)739-6000**

(Registrant’stelephone number, including area code)

Securities registered pursuant to section12(b) of the Act: 

| Title of Class             | ** ** | **Name of Exchange on which registered** |
|----------------------------|------------|------------------------------------------|
| Common Stock               |       | Nasdaq Global  Market                    |
| par value, $.01  per share |       |                                     |

 

Securitiesregistered pursuant to Section 12(g) of the Act: **None**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.  Yes o   No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 orSection 15(d) of the Act.  Yes o   No x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Registration S-K is not contained herein, andwill not be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10 K or any amendment to this Form 10 K.  Yes o   No x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).  Yes o   No x

The aggregate market value of the shares of the registrant’scommon stock held by non-affiliates of the registrant on June 30, 2006 wasapproximately $14.2 million, based upon the closing price per share of theregistrant’s common stock as reported on the Nasdaq Global Market on such date.The calculation of holdings by non-affiliates is based upon the assumption,that executive officers, directors, and persons holding 10% or more of theoutstanding common stock are affiliates.

As of April 15, 2007 the registrant had 14,152,227shares of common stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

None.

 

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**EXPLANATORY NOTE**

Natrol, Inc. is filing this Amendment No. 1 to its Annual Report onForm 10-K for the fiscal year ended December 31, 2006 to amend and restate PartIII to include the information required in Part III, rather than incorporatingthis information from Natrol’s definitive proxy statement for the 2007 annualmeeting of stockholders.  This AmendmentNo. 1 only amends and restates Part III of the Annual Report on Form 10-K,other than the filing of exhibits 31.1 and 31.2, which are being filedherewith.  Additionally, except asspecifically referenced herein, this Amendment No. 1 does not reflect any eventoccurring after March 31, 2007, the date of filing of the original AnnualReport on Form 10-K.

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**TABLEOF CONTENTS**
|                   | ** ** | ** **                                                                                      | ** ** | **Page** |
|-------------------|------------|-------------------------------------------------------------------------------------------------|------------|----------|
| PART III     |       |                                                                                            |       | 1        |
|              |       |                                                                                            |       |     |
| Item 10.          |       | Directors,  Executive Officers and Corporate Governance                                         |       | 1        |
|              |       | Information about our Directors                                                                 |       | 1        |
|              |       | Information about our Executive Officers                                                        |       | 2        |
|              |       | Section 16(a) Beneficial Ownership Reporting  Compliance                                        |       | 3        |
|              |       | Code of  Ethics                                                                                 |       | 4        |
|              |       | Audit Committee and Audit Committee Financial Experts                                           |       | 4        |
|              |       |                                                                                            |       |     |
| Item 11.          |       | Executive  Compensation                                                                         |       | 4        |
|              |       | Compensation, Discussion and Analysis                                                           |       | 4        |
|              |       | Compensation  Committee Report                                                                  |       | 12       |
|              |       | Compensation Committee Interlocks and Insider  Participation                                    |       | 13       |
|              |       | 2006 Summary Compensation Table                                                                 |       | 13       |
|              |       | 2006 Grants of Plan Based Awards                                                                |       | 14       |
|              |       | Outstanding Equity Awards at 2006 Fiscal Year End                                               |       | 15       |
|              |       | 2006 Option Exercises and Stock Vested Table                                                    |       | 15       |
|              |       | Potential Payments Upon Termination or Change of  Control                                       |       | 16       |
|              |       | Director  Compensation for 2006                                                                 |       | 16       |
|              |       |                                                                                            |       |     |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters |       | 17       |
|              |       | Equity Compensation Plan Information                                                            |       | 20       |
|              |       |                                                                                            |       |     |
| Item 13.          |       | Certain  Relationships and Related Transactions, and Director Independence                      |       | 20       |
|              |       | Related  Party Transactions                                                                     |       | 20       |
|              |       | Review, Approval or Ratification of Transactions with  Related Persons                          |       | 20       |
|              |       | Director  Independence                                                                          |       | 21       |
|              |       |                                                                                            |       |     |
| Item 14.          |       | Principal  Accountant Fees and Services                                                         |       | 21       |
|              |       | 2006 and 2005 Audit and other Fees                                                              |       | 21       |
|              |       | Pre-Approval of Audit and Non-Audit Services                                                    |       | 22       |
|              |       |                                                                                            |       |     |
| Signature         |       |                                                                                            | S-1        |
| Index to Exhibits |       |                                                                                            |

 

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**PART III**

**Item 10.         Directors, Executive Officers and Corporate Governance.**

# **Information about our Directors**

The following table provides information about themembers of our board of directors at April 15, 2007.
| Name                                | ** ** | **Age** | ** ** | **Director  Since** | ** ** | **Position**                                     | ** ** |
|-------------------------------------|------------|---------|------------|---------------------|------------|--------------------------------------------------|------------|
| Elliott Balbert                     |       | 61      |       | 1980                |       | Executive  Chairman and Director                 |       |
| Wayne M. Bos                        |       | 41      |       | 2006                |       | President,  Chief Executive Officer and Director |       |
| Dennis W. DeConcini (1) (2)  (3)    |       | 69      |       | 1999                |       | Director                                         |       |
| Thomas L. Doorley, III  (1) (2) (3) |       | 62      |       | 2006                |       | Lead  Director                                   |       |
| Joel A. Katz                        |       | 62      |       | 2006                |       | Director                                         |       |
| James R. Peters (1) (2)  (3)        |       | 60      |       | 2006                |       | Director                                         |       |
| Ralph R. Simon (1) (2) (3)          |       | 60      |       | 2006                |       | Director                                         |       |

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(1) Member ofAudit Committee.

(2) Member ofCompensation Committee.

(3) Member of Governance and Nominating Committee.

**Elliott Balbert**,Executive Chairman, founded the company in 1980 and served as President, ChiefExecutive Officer and Chairman of the Board until March 2006, when he becameExecutive Chairman.  He has been activelyinvolved in the dietary supplement industry for more than 25 years. Mr. Balbertis currently a board member of the Dietary Supplement Education Alliance(DSEA), where he also served as the first President, the Vitamin Angel Allianceand Board of Regents of Bastyr University. Mr. Balbert is active in lobbying efforts on behalf of the dietarysupplement industry, including providing testimony before Congress and hostingbi-partisan caucuses in the House of Representatives.

**Wayne M. Bos**,President, Chief Executive Officer and Director, joined us in February 2006 andhas held his current executive officer positions since March  2006. Since 2004, Mr Bos has served as a director of Ansett Flight SimulatorCentre, an Australian private company.  Since 2001, Mr. Bos has served as a director and CEO of Dama Equities, aprivate investment company.  During 2001,Mr. Bos served as a director and CEO of Tomorrow Corporation, an Australianpublic investment company in the information technology industry. From 1998 to2001, Mr. Bos was a director and CEO of Sausage Software, an Australian publiccompany.  From 1996 to 1999, Mr. Bos wasthe Director of Symex, a management buyout of Uniqema from Imperial ChemicalIndustries.  From 1988 to 1998, Mr. Bosfounded and developed Technology Business Integrators and Spectre Management,two technology management, consulting and project management businesses.

**Dennis W. DeConcini**,Director, has served as a partner in the lobbying firm of Parry, Romani andDeConcini, P.C., as well as a partner of the law firm DeConcini, McDonald,Yetwin & Lacy, P.C, positions he has held since 1995.  From 1977 to 1995, Mr. DeConcini servedas a United States Senator from Arizona.

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**Thomas L. Doorley, III,**Director,is a founding partner and CEO of Sage Partners, a strategic leadership andgovernance advisory firm, a position he has held since June 2001.  From 1984 to June 2001, Mr. Doorley was apartner at Deloitte & Touche LLP (previously Touche Ross).  From 1977 to 1984, Mr. Doorley was a founderand managing partner of Braxton Associates, which merged with Touche Ross(later to become Deloitte & Touche LLP). Mr. Doorley also serves as a board member for StratBridge (US) andAdvance Ticketing Systems (UK) and is on the Dean’s Advisory Board at ThePennsylvania State University, where he chairs the Chemical EngineeringCommittee.

**Joel A. Katz**,Director, is currently co-managing shareholder and global chair of theinternational entertainment practice at Greenberg Traurig, LLP, Atlanta, aposition he has held since July 1998.  Heis a leader in the field of entertainment law.

**James R. Peters**,Director, has a distinguished 35-year career in the audit practice of Ernst& Young where he worked with public and private companies in diverseindustries from August 1971 to July 2006. He also currently serves on the Board of Directors of FzioMed, Inc.  Mr. Peters served as a faculty member of theDirectors’ Certification Program at the Anderson School of Business of theUniversity of California, Los Angeles, from 1999 to 2005 and as Advisory Boardmember of the Entrepreneurial Studies Program of the University of SouthernCalifornia from 1997 to 2003.   He hasbeen a frequent speaker on entrepreneurship, mergers and acquisitions and auditcommittee best practices.

**Ralph R. Simon**, Director, is the Chairman Emeritusof****The Mobile Entertainment Forum **—**Americas, a position he has held since 2005. Since 2004, Mr. Simon also has served as President and CEO of TheMobilium Group — London.  From 1999 to2003, he served as Chairman and CEO of Yourmobile/Moviso.  In 1998, he co-founded and fundedYourmobile/Moviso, the first ring tone company in the United States, GreatBritain, and Europe, now known as Infospace Mobile.

There are nofamily relationships among any of our directors or executive officers.

##### **Informationabout our Executive Officers**

The following table provides information about of ourexecutive officers at April 15, 2007.
| Name                | ** ** | **Age** | ** ** | **Position**                                                     | ** ** |
|---------------------|------------|---------|------------|------------------------------------------------------------------|------------|
| Elliott Balbert     |       | 61      |       | Executive  Chairman and Director                                 |       |
| Wayne M. Bos        |       | 41      |       | President,  Chief Executive Officer and Director                 |       |
| Craig D. Cameron    |       | 50      |       | Chief  Operating Officer                                         |       |
| Dennis R. Jolicoeur |       | 59      |       | Chief  Financial Officer, Treasurer and Executive Vice President |       |
| Steven S. Spitz     |       | 39      |       | Vice  President and General Counsel                              |       |
| Michael S. Surmeian |       | 42      |       | Vice President of Sales                                          |       |

 

Our executive officers are elected by and serve at thediscretion of our board of directors. Set forth below is a brief description of the business experience of allexecutive officers, with the exception of Messrs. Balbert and Bos, whosebusiness experience is set forth above in “Information about our Directors”.

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**Craig D. Cameron**,Chief Operating Officer, joined us in February 2006 and has served in hiscurrent position since April 2006.  FromJuly 2004 to December 2005, Mr. Cameron served as Chairman and CEO of QuipozPty Ltd, a software services company. From March 2004 to February 2006, he has also CEO of RoamAD Pty Ltd, awireless network software company.  FromApril 2003 to March 2004, Mr. Cameron was principal of Navda Pty Ltd, atechnology consulting company.  Duringthis same period, he was also Director of Newport Capital, a technologyadvisory firm.  From August 1994 to April2003, he held a number of senior executive positions with Telstra Corporation,an Australian telecommunications company. His positions included Group Director Strategy, Marketing and BusinessDevelopment, Managing Director Wireless Data, CEO of Advantra Pty Ltd, an ITservice joint venture with IBM Corporation, and Chief Operating Officer ofTelstra Multimedia. Prior to 1994, Mr. Cameron served in various executivepositions with NCR Corporation for 16 years in the US, Canada, Japan, NewZealand and Australia, where his positions included Head of Strategy for NCRCorporation and Managing Director of NCR Japan.

**Dennis R.Jolicoeur**, Chief Financial Officer, Treasurer and Executive VicePresident, has served in these positions since July 1996.   Mr. Jolicoeur served as a member of ourboard of directors from 1996 to 2006. From 1993 to 1996, Mr. Jolicoeur was a principal of Gardiner &Rauen, Inc., an investment banking firm.  Prior to 1993, Mr. Jolicoeur operated severalbusinesses, mostly in the printing and publishing industries.

**Steven S.Spitz**, Vice President and General Counsel, has served in thesepositions since July  2004.  From November 2003 to June 2004, Mr. Spitzserved as Vice President and Senior Counsel. From September 2002 to November 2003, Mr. Spitz was a partner in the lawfirm of Riordan & McKinzie and later at Bingham McCutchen, LLP.  Prior to September 2002, Mr. Spitz was anassociate with Riordan & McKinzie. From June 2001 to November 2003, Mr. Spitz served as outside counsel tothe company.

**MichaelS. Surmeian**, Vice President of Sales, has served in thisposition since December 2005.  From June2002 to December 2005, Mr. Surmeian served as Vice President of RetailSales.  From 2000 to June 2002, he servedas Director of Sales Administration. From 1998 to 2000, Mr. Surmeian served as Director of Finance.  From 1988 to 1998, Mr. Surmeian was a Senior Managerwith Ernst & Young, LLP.

**Section16(a) Beneficial Ownership Reporting Compliance**

Section 16(a) ofthe Exchange Act requires our officers and directors, and persons who own morethan 10% of the outstanding shares of our common stock to file initial reportsof ownership and reports of changes in ownership with the SEC.  These persons and entities also are requiredby SEC rules to furnish us with copies of all Section 16(a) forms they file.

Based solely onour review of the copies of such forms received by us, or writtenrepresentations from these persons and entities that no Section 16(a) reportswere required for such persons, we believe that for fiscal year 2006, thesepersons and entities complied with all Section 16(a) filing requirementsapplicable to them except that: one transaction consisting of the acquisitionof a stock option was reported on a late-filed Form 4 by each of Messrs.DeConcini, Doorley and Cameron; and two transactions consisting of theappointment to our board of directors and the grant of a stock option wasreported on a late-filed Form 3 by Mr. Simon.

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##### **Codeof Ethics**

We have adopted acode of ethics as defined under SEC rules that applies to our CEO, CFO andController.  The code of ethics is partof our Code of Business Conduct and Ethics and is publicly available on ourwebsite at www.natrol.com.  If we makeany substantive amendment to the code of ethics or grant any waiver, includingany implicit waiver, from any provision of the code of ethics that applies toour CEO, CFO or Controller, we will disclose the nature of such amendment orwaiver on our website or in a current report on Form 8-K in accordance with SECrules.

##### **AuditCommittee and Audit Committee Financial Expert**

We currently havean Audit Committee that, among other things, assists our board of directors infulfilling its responsibility for oversight of our accounting and financialreporting processes, as well the audits of our financial statements.  The Audit Committee is comprised of Messrs.Peters (Chairman), DeConcini, Doorley and Simon.  Our board of directors has determined thatMr. Peters is an audit committee financial expert within the meaning of SECrules and that Mr. Peters satisfies the independence standards applicable toaudit committee members under applicable law and the Nasdaq listing standards.

**Item 11.         Executive Compensation.**

**CompensationDiscussion and Analysis**

**Introduction.**

**Compensation Committee Members andRole of Compensation Committee**.

The compensation committee consists of at least three “independent”directors as defined by Nasdaq’s corporate governance listing standards.  Each member of the compensation committeeserves until the earlier to occur of his or her resignation or removal or theelection and qualification of such member’s successor.  The board of directors designates a member ofthe compensation committee to serve as chairperson.  Currently, the compensation committeeconsists of Messrs. Doorley (who is chairperson), DeConcini, Peters and Simon.

The compensationcommittee:

·                  inconjunction with our CEO, develops our executive compensation philosophy,policies and programs;

·                  reviewsand recommends to our board of directors all compensation paid to our executiveofficers and directors;

·                  overseesour (1) annual cash bonus plan and (2) stock option plan; and

·                  annuallyconducts self evaluations and reviews the compensation committee charter.

The compensation committee meets at least four timeseach year and at such other times as is necessary.  The chairperson chairs all meetings of andsets the agendas for the meetings.  Anymember of the compensation committee or our CEO may call a meeting of thecommittee.  The compensation

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committee may request that any of our officers orother employees, or any other persons whose advice and counsel are sought bythe committee, attend any meeting to provide such pertinent information as thecommittee requests.

The compensation committee may delegate authority toact upon specific matters within determined parameters to a subcommitteeconsisting of any committee members or any of our executive officers.  As discussed below, the compensationcommittee has delegated to our CEO the power to grant****stock options to officers and employees who are not executiveofficers in accordance with committee-established guidelines.

In the past, the compensation committee has not used acompensation consultant to assist it in reviewing or establishing executiveofficer compensation. However, as the company grows and changes thecompensation committee has on its agenda to consider utilizing such an advisor.

The compensation committee operates in accordance withthe compensation committee charter, which is available on our website atwww.natrol.com.

**Role of ExecutiveOfficers in Compensation Decisions.**

The compensation committee relies on our seniormanagement, especially our CEO, COO and CFO, to develop a comprehensivecompensation recommendation.  Our CEO andCOO review annually the performance of our executive and other officers, with afocus on the core functional personnel, namely, our CFO, General Counsel andheads of sales, marketing, R&D and operations.  Based on such evaluation, our CEO and COOrecommend to the compensation committee the base salaries and othercompensation payable to these officers. This recommendation is reviewed and discussed by the compensationcommittee.  In addition, the compensationcommittee receives ongoing performance related input during the course of theyear from our CEO, COO and CFO to enable the committee to react to the annualrecommendation effectively.  This isconsistent with our board of directors’ goal of operating as a decision-readyboard.

Additionally, the compensation committee reviews theannual performance of the CEO.  Thisassessment process is led by our Lead Director. The process focuses on our strategic plan and objectives, over atwo-three year time frame, with special focus on the first year.  During 2006, the emphasis was on restoringour base businesses to profitability and stability.  As we made progress in accomplishing thesegoals, the compensation committee is shifting its assessment focus toincorporate continued profitability with renewed revenue growth.

Presently, our CEO, COO and General Counsel ordinarilyattend compensation committee meetings. These individuals are excused from any discussion regarding theircompensation.

The compensation committee has delegated to our CEOthe ability to grant stock options to officers and employees (other thanexecutive officers) under our 2006 stock option and incentive plan pursuant tocommittee-established guidelines.  Themaximum shares available for grant or award under the guidelines is 1,000,000shares. The minimum exercise price for each option is the closing price onNasdaq on the grant date, which for new employees is the first day ofemployment.  The term of each option issix years.  The options vest quarterlyover five years for each initial grant and quarterly over three years for eachsubsequent grant.  The maximum stockoption award for any employee that may be

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granted under theguidelines is either 100,000 or 25,000 depending upon the responsibility of theemployee.

**CompensationCommittee Activities in 2006 and 2007.**

Last year was a significant year of transition for thecompensation committee in terms of its composition and role in compensationdecisions and policies.  In 2006, Messrs.Doorley, Peters and Simon were appointed to the compensation committeereplacing two previous committee members.

With the company on a low growth revenue trajectory,and negative profitability, we recruited key new members (CEO and COO) of ourmanagement team.  The charter developedwith the new team included stabilizing our base business operations and returnto profitability.  We achieved such aturnaround in 2006.  Bonuses, asdescribed below were modest as a percentage of total compensation since profitabilityachieved was also modest. Compensation for our board of directors was reset toemphasize an active, engaged, decision-ready perspective.

In addition, thecommittee took the following key actions during 2006 and through the firstquarter of 2007:

·                  thecompensation of our new CEO (including the award of options to purchase6,029,500 shares of our common stock);

·                  thecompensation of our new COO;

·                  our2006 bonus incentive compensation plan;

·                  our2006 stock option and incentive plan;

·                  anew compensation program for non-employee directors;

·                  arevised compensation committee charter;

·                  stockoption guidelines for CEO grants to new and existing employees; and

·                  executiveofficer base salaries for 2007.

The compensation committee will continue to evaluateour compensation philosophies, program and practices and make recommendationsto our board of directors as appropriate. In 2007, the compensation assessment process for our executive officerswill emphasize maintaining profitable operations with an added element ofrevenue growth, as well as our strategic plans to make strategic acquisitionsand expand our international operations.

**Executive Compensation Program.**

**Objectives ofExecutive Compensation Program.**

Our executive compensation program is designed toachieve the following objectives:

·                  attractand retain talented executive officers through a competitive compensationpackage;

·                  linkcompany and individual performance with compensation earned;

·                  motivateand reward executive officers consistent with our values and strategic plans;and

·                  align the interests of our executiveofficers and stockholders.

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As a publicly held company, we recognize theimportance of creating value for our stakeholders — investors, employees,customers and the community at large. Thus, we intend to continually review and develop our compensationprocess and programs to meet the needs of these stakeholders.

**Impact ofPerformance on Compensation — Base Salaries and Cash Bonuses.**

We adjust executive officer base salaries anddetermine whether any cash bonuses will be made primarily based upon an annualreview of performance led by our CEO and COO. The annual appraisal process incorporates both performance of theexecutive officer within the applicable department and across the company as awhole.  Company performance is defined bymetrics relating to growth and profitability. Our CEO and COO develop a set of recommendations for discussion and reviewwith the compensation committee and the board of directors for approval.

The compensation committee makes decisions regardingcompensation for our CEO, COO, Chairman and other executive officers, whichthen prepares a recommendation for approval by the full board.  The compensation committee stays in activecontact with these executives throughout the year, and thus is able to lead theannual process from a decision-ready perspective.

In the first part of each year, the CEO recommends tothe board and our board of directors develops and approves an annual cash bonusplan, including payout ratios and targets. Overall company performance relative to predetermined plans and targetsdetermines whether bonuses will be paid and their size.

For 2006, bonus compensation decisions were made asfollows:

·                  For new membersof the management team, a competitive cash/current income basis, and optionsbased equity participation to allow these influential team members to share inthe upside of performance results they helped to create. Two new team members,our CEO and COO were included.

·                  For all existingand new members of the management team, a bonus pool was created to alignbehavior with the goal of returning the base businesses to profitability.  A portion of the eligible bonus was paid toeligible employees since the company did return to (modest) profitability forthe year and during each quarter.

**Benchmarking ofCompensation.**

In the future, our board of directors anticipatesbenchmarking executive officer compensation. During 2006, we did not engage in formal benchmarking of executive officercompensation versus any competitors or any peer group.  However, in the course of retaining newmanagement team members we were able to gauge our proposed levels ofcompensation and judged them to be consistent with companies in the consumerproducts space and of comparable scale.

In 2006, in connection with our appointment of severalnew board members, we gathered and analyzed benchmarking data for non-employeedirector compensation from several sources, including the National Associationof Corporate Directors (NACD).  Wereviewed non-employee director compensation of consumer products relatedcompanies with a market capitalization and sales similar to our centralcharacteristics.

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**            Elements of Compensation.**

Our current compensation program consists of thefollowing elements, all of which are evaluated annually:
| Pay Element                                                                                                                                                                                                                                                                                                                                                               | ** ** | **What the Pay Element Rewards**                                                                                                                             | ** ** | **Purpose of the Pay Element**                                                                                                                                                                                                                              |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Base Salary**                                                                                                                                                                                                                                                                                                                                                           |       | Core competence in the executive role relative to  skills, experience and contributions                                                                      |       | Provides fixed compensation based on competitive  market practice                                                                                                                                                                                           |
| **Annual Cash Bonus**                                                                                                                                                                                                                                                                                                                                                     |       | Contributions toward our achievement of specified  pre-tax earnings                                                                                          |       | ·  Provides annual performance-based cash  incentive compensation

·  Provides focus on meeting annual goals that  lead to increased market valuation

·  Motivates achievement of critical annual  performance metrics       |
| **Stock Options**                                                                                                                                                                                                                                                                                                                                                         |       | ·  Sustained stock price appreciation

·  Continued employment with the company over a  5-year/3-year vesting period                     |       | ·  Provides annual performance-based equity  incentive compensation

·  Executive ownership of our stock

·  Aligning of the executives’ interests with  those of stockholders

·  Executive officer retention |
| **Perquisites**

·  **Chairman only:   life insurance**

·  **Chairman and CFO only:  company car or car allowance**                                                                                                                                                                                                                                  |       | These benefits  are part of long term compensation arrangements awarded to such employees;  benefits have not been provided to subsequently hired executives |       | ·  Additional compensation benefits

·  Executive officer retention                                                                                                                                                                     |
| **Welfare Benefits**

·  **Participation in  employee benefit plans generally available to our employees, including  401(k), medical, dental and vision**                                                                                                                                                                                                       |       | These benefits  are part of our broad-based total compensation programs                                                                                      |       | ·  Additional compensation benefits

·  Executive officer retention                                                                                                                                                                     |
| **Change in Control Benefits**

·  **Change of control  arrangements with select executive officers: change of control bonus payment  equal to one year’s base salary**

·  **All employee option  agreements, provide for vesting of 50% of any unvested options and stock  appreciation rights and all other awards upon a change of control** |       | Reward executive  officers when company successfully consummates a change of control  transaction                                                            |       | ·  Provides incentive to consummate company  changes of control

·  Change of control arrangements: make  transactions neutral to executive officers economic interests                                                                 |

 

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Each executive officer’s current and priorcompensation is considered in setting future compensation.  In addition, we review the compensationpractices of other companies.  To someextent, our compensation program is based on the market and the companies inour industry with whom we compete.  Theelements of our plan (e.g., base salary, bonus and stock options) are clearlysimilar to the elements used by many companies. The exact base pay, stock grant, and salary cap amounts are chosen in anattempt to balance the objectives of all stakeholders, rewarding performanceand attracting/retaining executive officers.

**2006 Compensation of Our New CEO**.  In February 2006, our board of directorsappointed Wayne M. Bos as a director and CEO and President designate.  In connection with this appointment, theboard of directors, upon advice of the compensation committee, agreed toprovide Mr. Bos with the following compensation:

·                  $600,000in base salary;

·                  non-qualifiedstock options to purchase 6,029,500 shares of our common stock (representingbeneficial ownership of approximately 29.9% of our common stock at April 15,2007) with an exercise price of $2.282 per share (subject to obtainingstockholder approval of the grant);

·                  eligibilityto participate in our annual bonus compensation plan; and

·                  one year awardof $200,000 in interim housing and other transition expenses.

The options are fully vested but are subject to thefollowing restrictions on sale until February 2009:

·                  1,000,000shares are unrestricted;

·                  1,000,000shares may be sold at any time after the threshold share price is equal to orgreater than $3.00 per share;

·                  1,000,000shares may be sold at any time after the threshold share price is equal to orgreater than $3.50 per share;

·                  1,000,000shares may be sold at any time after the threshold share price is equal to orgreater than $4.00 per share;

·                  1,000,000shares may be sold at any time after the threshold share price is equal to orgreater than $4.50 per share; and

·                  1,029,500 sharesmay be sold at any time after the threshold share price is equal to or greaterthan $5.00 per share.

The “threshold share price” means that the closingprice of our common stock equals or exceeds the relevant threshold for a periodof thirty consecutive trading days.

In March 2006, we entered into an employment agreementwith Mr. Bos.  The employment agreementprovides that employment is “at will” meaning that either we or Mr. Bos mayterminate the employment relationship at any time and for any reason.  The employment agreement does not provide forany specific termination benefits.

During the second quarter of 2007, we anticipateamending our employment agreement with Mr. Bos and entering into an employmentagreement with our Chairman.

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Our stockholders approved the option grant to Mr. Bosat our 2006 annual meeting of stockholders.

**2006 Compensation of Our New COO**.  Our board of directors appointed CraigCameron as our Chief Operating Officer effective in April 2006.  In connection with this appointment, ourboard of directors, upon advice of the compensation committee, agreed toprovide Mr. Cameron with the following compensation:

·                  $300,000in base salary;

·                  non-qualifiedstock options to purchase 200,000 shares of our common stock with an exerciseprice of $2.10 per share, vesting over three years;

·                  non-qualifiedstock options to purchase 100,000 shares of our common stock with an exerciseprice of $2.00 per share to be granted after 120 days of employment, vestingover three years;

·                  eligibilityto participate in our annual bonus compensation plan; and

·                  one year awardof $75,000 in interim housing and other transition expenses.

In addition, in July 2006, our board of directorsapproved a grant to Mr. Cameron of non-qualified stock options to purchase300,000 shares of our common stock with an exercise price of $2.20.

**Base Salary.**

Executive officer compensation generally has beenweighted towards base salary, with the opportunity to receive annual cashbonuses depending upon our operating results. Executive officer base salaries are based on job responsibility andindividual contributions, with reference to base salary levels of executives atsimilar companies in our industry.

In February 2007, our board of directors, upon therecommendation of the compensation committee, approved the following executiveofficers base salaries for 2007:
| Name                                                                                 | ** ** | **2007 Base Salary** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| Elliott Balbert  Executive Chairman                                                  |       | $                              | 624,000    |   |
| Wayne M. Bos  President and Chief Executive Officer                                  |       | $                              | 832,000    |   |
| Craig D. Cameron  Chief Operating Officer                                            |       | $                              | 390,000    |   |
| Dennis R. Jolicoeur  Chief Financial Officer, Treasurer and Executive Vice President |       | $                              | 286,000    |   |
| Steven S. Spitz  Vice President and General Counsel                                  |       | $                              | 260,000    |   |
| Michael S. Surmeian  Vice President of Sales                                         |       | $                              | 208,000    |   |

 

10

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**Annual BonusCompensation Plan.**

Each year, our board of directors approves an annualbonus incentive compensation plan, which is administered by the compensationcommittee.  Participants under the bonusplan are eligible to receive incentive cash bonus payments, depending upon ouroperating results.  The compensationcommittee selects participants based upon an individual’s position and his orher potential impact on our business results and performance.  The following table sets forth the categoriesof participants under the 2006 bonus incentive compensation plan and theireligible bonus, which is a percentage of the participant’s base salary:

| Participants                                                              | ** ** | **Eligible Bonus**  |
|---------------------------------------------------------------------------|------------|---------------------|
| ·  officers and other highly compensated  employees             |       | 25% of base  salary |
| ·  department directors and other similarly  situated employees |       | 15% of base  salary |
| ·  senior and other managers and personnel                      |       | 10% of base  salary |

 

In 2006, the financial measure used to determineannual incentive cash payments was earnings, before bonuses, interest andincome taxes, or EBIT, subject to adjustment for any unusual and/ornon-recurring significant revenues or expenses. Participants under the bonus plan were eligible to receive the followingbonus awards:

| Corporate Earnings Target | ** ** | **Cash Bonus Award  (percent of Eligible Bonus paid)** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| $10,0000,000                        |       | 150                                                                                  | %          |
| 9,000,000 - 9,999,999               |       | 140                                                                                  | %          |
| 8,000,000 - 8,999,999               |       | 130                                                                                  | %          |
| 7,000,000 - 7,999,999               |       | 120                                                                                  | %          |
| 6,000,000 - 6,999,999               |       | 110                                                                                  | %          |
| *5,000,000 - 5,999,999              |       | 100% of eligible bonus                                                               |       |
| 4,000,000 - 4,999,999               |       | 75                                                                                   | %          |
| 3,000,000 - 3,999,999               |       | 50                                                                                   | %          |
| 2,000,000 - 2,999,999               |       | 25                                                                                   | %          |
| 1,000,000 - 1,999,999               |       | 20                                                                                   | %          |
| $0 - 999,999                        |       | 15                                                                                   | %          |

----

*                    CorporateGoal

In February 2007, the compensation committee approvedpayment of a 15% bonus award to the participants, including our executiveofficers, as a result of our achieving EBIT of $482,000 in fiscal 2006.  We paid a total of $134,000 to participantsunder the bonus plan for 2006.

**Stock Options andStock Option Grant Policy.**

Stock options have not been a significant component ofour executive compensation program, other than with respect to the options wegranted in 2006 to Messrs. Bos and Cameron as part of their negotiatedhire.  We believe our option grant policyis consistent with our executive compensation

11

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objectives discussedpreviously.

Subject to certain exceptions set forth below andoption grants for new employees, we plan stock option grant dates well in advanceof any actual grant.  Regarding our usualgrants for existing employees, the timing of each grant is determined months inadvance to coincide with a scheduled meeting of our board of directors and thecompensation committee.  Except inunusual circumstances, we do not grant options at other dates.  The grant date is established when thecompensation committee approves the grant and all key terms have beendetermined. The exercise price of each of our stock options grants is at aminimum equal to the market closing price on the grant date.**** Option grant prices for new employees aredetermined using the market price of our common stock at the close of tradingon the day the individual formally commences work at the company.  To provide incentive to the individual tostay results-oriented, the exercise price of the options is set at a higherprice.

**Change of ControlArrangements.**

*Change of Control Bonus**Plan*.  In 2005, ourboard of directors adopted a change of control bonus plan for executiveofficers, which currently covers our CFO, General Counsel and Vice President ofSales.  No other executive officers arecovered by the plan.  The plan providesthat in the event of a change of control, such individuals would be entitled toreceive a cash bonus equal to one-year’s salary.

In the second quarter of 2007, our board of directorsintends to revaluate and consider adopting changes to this change of controlbonus plan.

*Change of Control Provision inEquity Incentive**Plans*.  We also have a change of control provision inour stock option and incentive plans. This provision applies equally to all participants in the plans,although the compensation committee may remove this provision from anyparticular stock option agreement with a participant at the time of grant.  The provision provides that in the event of achange of control, 50% of the unvested options and any stock appreciationrights that are not exercisable and all other awards become fully exercisableand vested.  All director awards underthe plans become 100% vested upon a change of control.

**CompensationCommittee Report**

We have reviewed and discussed with management thecompensation discussion and analysis required by SEC rules.  We have relied on management’s representationthat the compensation discussion and analysis presented in this 10-K has beenprepared with integrity and objectivity in conformity with SEC rules.  Based upon such review and discussion, werecommended to the board of directors that the compensation discussion andanalysis be included in this 10-K.
|   | The Compensation Committee           |
|--------|--------------------------------------|
|   |                                 |
|   | Thomas L. Doorley, III (Chairperson) |
|   | Dennis W. DeConcini                  |
|   | James R. Peters                      |
|   | Ralph R. Simon                       |

 

12

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##### **CompensationCommittee Interlocks and Insider Participation**

No member of the compensation committee is, or hasbeen, an officer or employee of Natrol. None of our executive officers currently serves on the compensationcommittee of any other company or board of directors of any other company of whichany member of the compensation committee of board is an executive officer.

**2006 Summary Compensation Table**

The following table summarizes the compensationinformation for our named executive officers.
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-equity**   | ** ** | ** **         | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Option** | ** ** | **incentive**    | ** ** | **All Other** | ** ** | ** ** | ** ** |
| **Name and  Principal position**                                            | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards** | ** ** | **Plan**         | ** ** | **compensation**   | ** ** | **Total**  | ** ** |
| ** **                                                                            | ** ** | ** ** | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)**    | ** ** | **compensation** | ** ** | **($)**            | ** ** | **($)**    | ** ** |
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(1)**    | ** ** | **(2)**          | ** ** | **(3)**            | ** ** | ** ** | ** ** |
|                                                                                  |       |       |       |       |       |       |       |       |       |             |       |               |       |       |       |
| Elliott Balbert  Executive Chairman                                                   |       | 2006       |       | 600,000    |       | —     |       | —     |       | 22,500           |       | 40,524             | (4)        | 663,024    |       |
|                                                                                  |       |       |       |       |       |       |       |       |       |             |       |               |       |       |       |
| Wayne M. Bos  President and Chief Executive Officer                                   |       | 2006       |       | 473,077    |       | —     |       | 272,000    | (5)        | 17,740           |       | 161,534            | (6)        | 924,351    |       |
|                                                                                  |       |       |       |       |       |       |       |       |       |             |       |               |       |       |       |
| Craig D. Cameron  Chief Operating Officer                                             |       | 2006       |       | 256,730    |       | —     |       | 515,855    |       | 9,627            |       | 70,111             | (7)        | 852,321    |       |
|                                                                                  |       |       |       |       |       |       |       |       |       |             |       |               |       |       |       |
| Dennis R. Jolicoeur  Chief Financial Officer,  Treasurer and Executive Vice President |       | 2006       |       | 274,159    |       | —     |       | —     |       | 10,294           |       | 12,065             | (8)        | 296,510    |       |
|                                                                                  |       |       |       |       |       |       |       |       |       |             |       |               |       |       |       |
| Steven S. Spitz  Vice President and General Counsel                                   |       | 2006       |       | 249,553    |       | —     |       | —     |       | 9,358            |       | 820                |       | 259,731    |       |
|                                                                                  |       |       |       |       |       |       |       |       |       |             |       |               |       |       |       |
| Michael S. Surmeian  Vice President of Sales                                          |       | 2006       |       | 199,754    |       | —     |       | —     |       | 7,491            |       | 820                |       | 208,065    |       |

----

(1)             The amounts in thiscolumn represent the dollar amount recognized for financial statement reportingpurposes with respect to option grants in fiscal year 2006 in accordance withFAS 123R.  The fair value of all optionsin this column, other than those awarded to Wayne Bos, was calculated using aBlack Sholes methodology.  Theassumptions of the Black-Scholes valuation method are discussed in notes 1 and6 of the consolidated financial statements in Item 8 of our annual report onForm 10-K filed with the SEC on March 31, 2007.

(2)             Amounts in thiscolumn were paid to the named executive officers in February 2007.

(3)             Company matchingcontributions according to the terms of our 401(k) plan are included in thiscolumn, other than with respect to Messrs. Bos and Cameron.

(4)             Represents $32,772 inlife insurance benefits and $6,431 in benefits for the use of a company car.

(5)             Mr.Bos was awarded options to purchase 6,029,500 shares of our common stock inconjunction with his initial employment. Due to a number of factors, including the size of the grant in relationto the total shares

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outstanding, the tradingvolume of our common stock, Mr. Bos’ ability to resell the shares, and thecontrol factor, which the size of the grant implies, consultants used a MonteCarlo method to value Mr. Bos’ options. We used the services of well-credentialed valuation consultants toperform the valuation of Mr. Bos’ options. These consultants developed multiplescenarios, including continuing operation and sale scenarios, to assess thepotential to create stockholder value over the term of the options. Theresulting Monte Carlo analysis gave rise to a range of fair values for whichthe mean amount was utilized in valuing the options.

(6)             Inaddition to his base compensation of $600,000 per annum, Mr. Bos received asupplement amounting to $200,000 to be paid during the course of his first yearof employment.  The purpose of thesupplement was to pay Mr. Bos for certain unspecified transition expenses.  During 2006, $161,534 of the $200,000 awardwas paid.

(7)             Inaddition to his base compensation of $300,000 per annum, Mr. Cameron received asupplement amounting to $75,000 to be paid during the course of his first yearof employment.  The purpose of thesupplement was to pay Mr. Cameron for certain unspecified transitionexpenses.  During 2006, $70,111 of the$75,000 award was paid.

(8)                Represents anamount paid to Mr. Jolicoeur to reimburse him for automobile expenses andcertain taxable benefits.

**2006 Grants of Plan-Based Awards**

The following table sets forth information concerningthe grants of cash-based awards made in 2006 under our 2006 bonus incentivecompensation plan.  No equity incentive planawards here made to the named executive officers during fiscal year 2006.

**EstimatedPossible Payouts Under Non-Equity Incentive Plan Awards  (1)(2)**
| ** **          | ** ** | **Grant** | ** ** | **Threshold** | ** ** | **Target** | ** ** | **Maximum** | ** ** |
|---------------------|------------|-----------|------------|---------------|------------|------------|------------|-------------|------------|
| **Name**            | ** ** | **Date**  | ** ** | **($)**       | ** ** | **($)**    | ** ** | **($)**     | ** ** |
| Elliott Balbert     |       | N/A       |       | 22,500        |       | 150,000    |       | 225,000     |       |
| Wayne M. Bos        |       | N/A       |       | 17,740        |       | 118,269    |       | 177,404     |       |
| Craig D. Cameron    |       | N/A       |       | 9,627         |       | 64,183     |       | 96,274      |       |
| Dennis R. Jolicoeur |       | N/A       |       | 10,294        |       | 68,540     |       | 102,810     |       |
| Steven S. Spitz     |       | N/A       |       | 9,358         |       | 62,388     |       | 93,582      |       |
| Michael S. Surmeian |       | N/A       |       | 7,491         |       | 49,939     |       | 74,908      |       |

----

(1)             Theamounts shown in the threshold, target and maximum columns reflect the minimum,target and maximum amounts payable under the 2006 bonus incentive compensation plan.  The threshold payment is 15% of the targetpayment and the maximum payment is 150% of the target payment.  For more information on the 2006 bonusincentive compensation plan, please see the section “Annual Bonus CompensationPlan.”

(2)             Eachparticipant earned the threshold amount for 2006.  The cash payment was made in February 2007.

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### **Outstanding Equity Awards at 2006 FiscalYear-End**

The following table provides information concerningstock options held by the named executive officers at December 31, 2006.
|                     | ** ** | **Option Awards**                                                                 | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unxercisable** | ** ** | **Exercise  Option  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Outstanding  Vesting  Dates** | ** ** |
| Elliott Balbert     |       | —                                                                                 |       | — |   | — |   | — |   | — |   |
| Wayne M. Bos        |       | 6,029,500                                                                              |       | — |   | 2.28 |   | 02/14/2011 |   | Vested |   |
| Craig D. Cameron    |       | 25,000                                                                                 |       | 275,000 |   | 2.20 |   | 07/07/2012 |   | 25,000 vest quarterly  through July 2009 |   |
|                     |       | 16,667                                                                                 |       | 83,333 |   | 2.00 |   | 06/21/2012 |   | 8,333 vest quarterly  through June 2009 |   |
|                     |       | 50,001                                                                                 |       | 149,999 |   | 2.10 |   | 03/09/2016 |   | 16,666 vest quarterly  through March 2009 |   |
| Dennis R. Jolicoeur |       | 74,100                                                                                 |       | — |   | 1.35 |   | 05/28/2012 |   | Vested |   |
|                |       | 400,000                                                                                |       | — |   | 1.88 |   | 02/01/2011 |   | Vested |   |
|                |       | 95,000                                                                                 |       | — |   | 1.94 |   | 08/21/2010 |   | Vested |   |
| Steven S. Spitz     |       | 14,581                                                                                 |       | 10,419 |   | 2.95 |   | 02/01/2015 |   | 2,083 vest quarterly  through February 2008 |   |
|                     |       | 13,750                                                                                 |       | 11,250 |   | 2.76 |   | 06/08/2014 |   | 1,125 vest quarterly  through June 2009 |   |
| Michael S. Surmeian |       | 5,000                                                                                  |       | 10,000 |   | 1.74 |   | 12/09/2015 |   | 1,250 vest quarterly  through December 2008 |   |
|                |       | 50,000                                                                                 |       | — |   | 1.45 |   | 05/03/2012 |   | Vested |   |
|                |       | 25,000                                                                                 |       | — |   | 1.32 |   | 05/01/2011 |   | Vested |   |
|                |       | 1,000                                                                                  |       | — |   | 1.50 |   | 12/31/2010 |   | Vested |   |
|                |       | 10,000                                                                                 |       | — |   | 4.00 |   | 04/27/2010 |   | Vested |   |
|                |       | 15,000                                                                                 |       | — |   | 6.03 |   | 04/28/2009 |   | Vested |   |
|                |       | 25,000                                                                                 |       | — |   | 10.40 |   | 04/20/2008 |   | Vested |   |

 

**2006 Option Exercises and StockVested Table**

No named executive officer exercised any stock optionsin 2006.

15

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**PotentialPayments upon Termination or Change of Control**

If we were to engage in a change of control, we wouldbe obligated to pay cash bonuses to the named executive officers as follows.

| Name                                                                                 | ** ** | **Change of Control  Cash Bonus** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Elliott Balbert  Executive Chairman                                                  |       | —                                           |       |
| Wayne M. Bos  President and Chief Executive Officer                                  |       | —                                           |       |
| Craig D. Cameron  Chief Operating Officer                                            |       | —                                           |       |
| Dennis R. Jolicoeur  Chief Financial Officer, Treasurer and Executive Vice President |       | $                                                | 286,000    |   |
| Steven S. Spitz  Vice President and General Counsel                                  |       | $                                                | 260,000    |   |
| Michael S. Surmeian  Vice President of Sales                                         |       | $                                                | 208,000    |   |
| Total                                                                                |       | $                                                | 754,000    |   |

 

**DirectorCompensation for 2006**

The following tableprovides information concerning the 2006 compensation of our non-employeedirectors.
| **Name (1)**      | ** ** | **Fees Earned or  Paid in Cash** | ** ** | **Option Awards  ($)** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|-----------|------------|
| ** **             | ** ** | **($)**                                              | ** ** | **(2)**                     | ** ** | **($)**                          | ** ** | **($)**   | ** ** |
| Dennis W. DeConcini    |       | 18,000                                               |       | 51,589                      |       | —                           |       | 69,589    |       |
| Thomas L. Doorley, III |       | 14,750                                               |       | 184,714                     |       | —                           |       | 199,464   |       |
| Joel A. Katz           |       | 5,000                                                |       | 74,656                      |       | —                           |       | 79,656    |       |
| James R. Peters        |       | 10,000                                               |       | 128,812                     |       | —                           |       | 138,812   |       |
| Ralph R. Simon         |       | 10,000                                               |       | 178,781                     |       | —                           |       | 188,781   |       |
| Vernon Brunner(3)      |       | 8,000                                                |       | —                      |       | —                           |       | 8,000     |       |
| Ronald Consiglio(3)    |       | 5,750                                                |       | —                      |       | —                           |       | 5,750     |       |

----

(1)             We do not provideadditional compensation to directors who are also employees.

(2)             The amounts in thiscolumn represent the dollar amount recognized for financial statement reportingpurposes with respect to option grants in fiscal year 2006 in accordance withFAS 123R.  The fair value of all optionsin this column was calculated using a Black Sholes methodology.  The assumptions of the Black-Scholesvaluation method are discussed in notes 1 and 6 of the consolidated financialstatements in Item 8 of our annual report on Form 10-K filed with the SEC onMarch 31, 2007

(3)             Messrs.Brunner and Consiglio served as directors for only a portion of 2006.

16

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**Grant Date Values**
| **Name**               | ** ** | **Grant Date** | ** ** | **Option Shares** | ** ** | **Grant Date  Fair Value** | ** ** |
|------------------------|------------|---------------------|------------|------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | ** **          | ** ** | **(#)**                | ** ** | **($)**                              | ** ** |
| Dennis W. DeConcini    |       | 4/28/06             |       | 45,833                 |       | 1.13                                 |       |
| Thomas L. Doorley, III |       | 2/14/06  4/28/06    |       | 25,000  135,833        |       | 1.27  1.13                           |       |
| Joel A. Katz           |       | 9/6/06              |       | 150,000                |       | 0.50                                 |       |
| James R. Peters        |       | 7/3/06              |       | 150,000                |       | 0.85                                 |       |
| Ralph R. Simon         |       | 4/28/06             |       | 158,833                |       | 1.13                                 |       |

 

**Non-Employee Director CompensationProgram**.  In April2006, our board of directors, acting upon the recommendations of thecompensation committee of the board of directors, approved changes to thenon-employee director compensation program for service on the board, effectiveon July 1, 2006.  The following detailsthe non-employee director compensation program:

| Annual Cash    | ** ** | ** **                                                              |
|----------------|------------|-------------------------------------------------------------------------|
| Retainer Fee:  |       | $20,000 ($5,000 per quarter)                                            |
| Stock Options: |       | 150,000 non-qualified stock options over 3 years  vesting quarterly (1) |

----

(1)             Thenumber of options granted to newly elected non-employee directors and vestingof such options is pro-rated depending upon the remaining term of office(class) for which the director has been elected.

The annual cash retainer fee is payable at thebeginning of each quarter.  Non-employeedirectors do not receive separate meeting fees or fees for service as committeechairs.  The options vest quarterly overthe remaining term of office of each board member.  The term of the options is ten years from thedate of grant for any option granted under the 1996 stock option and grant planand six years for any option granted under the 2006 stock option and incentiveplan.  The option grants also are subjectto the terms of the applicable option plan and individual non-qualified stockoption agreements.  In addition, wereimburse each non-employee director for his or her reasonable expenses forattending board, committee and stockholder meetings, as well as for certainexpenses related to service on the board.

**Item 12.         Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters.**

The following table sets forth information regardingthe beneficial ownership of our common stock at April 15, 2007 by:

·                  each person orentity known to us that beneficially owns more than 5% of our common stock;

·                  each member ofour board of directors;

·                  each of ournamed executive officers; and

·                  allexecutive officers and directors as a group.

The number of shares of our common stock “beneficiallyowned” by each person or entity is

17

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determined in accordancewith SEC rules.  Beneficial ownershipincludes any shares which the person or entity has sole or shared voting poweror investment power and any shares which the person or entity has the right toacquire beneficial ownership within 60 days after April 15, 2007, including anyshares which could be purchased by the exercise of stock options within 60 daysafter this date.

Unless otherwise indicated below, to our knowledge allpersons and entities listed below have sole voting and investment power withrespect to their shares of common stock, except to the extent authority isshared by spouses under applicable law. Unless otherwise indicated below, the address of each beneficial owneris: c/o Natrol, Inc., 21411 Prairie Street, Chatsworth, CA 91311.  We know of no agreements among ourstockholders that relate to the voting or investment power over our commonstock or any arrangement that may at a subsequent date result in our change ofcontrol.

The percentages of common stock beneficially owned arebased on 14,152,227 shares of our common stock outstanding at April 15, 2007.
| ** **                                                                                            | ** ** | **Shares Beneficially Owned** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Name of Beneficial Owner**                                                           | ** ** | **Number**                              | ** ** | **Percentage** | ** ** |
| Financial &  Investment Management Group, LTD (1)  111 Cass Street  Traverse City, MI 49684       |       | 2,021,784                               |       | 14.3 | % |
| Heartland Advisors,  Inc. (2)

William J. Nasgovitz  (2)  789 North Water Street  Milwaukee, WI 53202 |       | 1,410,998                               |       | 10.0 |   |
| Boston Partners Asset  Management, L.L.C. (3)  28 State Street, 20th Floor  Boston, MA 02109          |       | 1,231,210                               |       | 8.7 |   |
| Elliott Balbert (4)                                                                                   |       | 6,029,500                               |       | 42.6 |   |
| Wayne M. Bos (5)                                                                                      |       | 6,029,500                               |       | 29.9 |   |
| Craig D. Cameron (6)                                                                                  |       | 183,334                                 |       | 1.3 |   |
| Dennis R. Jolicoeur (7)                                                                               |       | 569,100                                 |       | 3.9 |   |
| Steven S. Spitz (8)                                                                                   |       | 42,247                                  |       | * |   |
| Michael S. Surmeian (9)                                                                               |       | 154,734                                 |       | 1.1 |   |
| Dennis W. DeConcini  (10)                                                                             |       | 129,212                                 |       | * |   |
| Thomas L. Doorley, III  (11)                                                                          |       | 85,833                                  |       | * |   |
| Joel A. Katz (12)                                                                                     |       | 42,856                                  |       | * |   |
| James R. Peters (13)                                                                                  |       | 25,000                                  |       | * |   |
| Ralph R. Simon (14)                                                                                   |       | 46,333                                  |       | * |   |
| All executive officers and directors as a group (11 persons) (15)                                     |       | 13,337,649                              |       | 62.3 | % |

----

*                    Lessthan 1% of the outstanding shares of our common stock.

(1)             Basedsolely on a Schedule 13G filed with the SEC on February 13, 2007.  Financial & Investment Management Group,Ltd. is a registered investment advisor, managing individual clientaccounts.  All shares are held inaccounts owned by the clients of Financial & Investment Management Group,Ltd.  Accordingly, Financial &Investment Management Group, Ltd. disclaims beneficial ownership.  None of these clients hold more than fivepercent of the class.

(2)             Basedsolely on Amendment No. 2 to a Schedule 13G filed with the SEC on March 7,2007.  These shares may be deemedbeneficially owned within the meaning of Rule 13d-3 of the Securities ExchangeAct of

18

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                           1934 by (1) HeartlandAdvisors, Inc. by virtue of its investment discretion and voting authoritygranted by certain clients, which may be revoked at any time; and (2) WilliamJ. Nasgovitz, as a result of his ownership interest in Heartland Advisors,Inc., Heartland Advisors, Inc. and Mr. Nasgovitz each specifically disclaimbeneficial ownership of these shares.

(3)             Basedsolely on Amendment No. 1 to a Schedule 13G filed with the SEC on February 14,2007.  Boston Partners Asset Management,L.L.C. holds all of the shares under management for its clients, who have theright to direct the receipt of dividends, to receive dividends from such sharesand to receive the proceeds from the sale of such shares. None of these clientshold more than five percent of the common stock of the company.

(4)             Includes5,724,500 shares of our common stock owned by the Balbert Family Trust, arevocable trust of which Mr. Balbert and his wife, Cheryl Balbert, aretrustees and of which Mr. and Mrs. Balbert and other members of theirfamily are the beneficiaries. Also includes 305,000 shares of our common stockowned by Mr. Balbert’s daughter, for which Mr. Balbert disclaimsbeneficial ownership.

(5)             Consistsof 6,029,500 shares of our common stock subject to options exercisable within60 days of April 15, 2007 and issued in the name of BDL InvestmentTrust, for which Praxis Trustees Ltd. serves as trustee.  The beneficiaries of the trust are Mr. Bosand members of his family, including his wife and children.  Mr. Bos currently serves on the board ofdirectors of the trustee.

(6)             Includes 183,334 shares of our common stockwhich may be purchased by Mr. Cameron upon the exercise of stock optionswithin 60 days of April 15, 2007. Excludes the following shares ofcommon stock which may be acquired pursuant to unvested stock options:  225,000 shares which vest in quarterlyinstallments of 25,000 shares through July, 2009; 75,000 shares which vest inquarterly installments of 8,333 shares through June 2009; and, 116,666 shareswhich vest in quarterly installments of 16,666 shares through March 2009.

(7)             Includes 569,100 shares our of common stockwhich may be purchased by Mr. Jolicoeur upon the exercise of stockoptions within 60 days of April 15, 2007.

(8)             Includes7,500 shares of our common stock owned by Mr. Spitz and 34,747 shares of common stock which may bepurchased by Mr. Spitz upon the exercise of stock options within 60 daysof April 15, 2007. Excludes the following shares of common stock which maybe acquired pursuant to unvested stock options: 6,253 shares which vest in quarterly installments of 2,083 sharesthrough February, 2008; and 9,000 shares which vest in quarterly installments of1,125 shares through June 2009.

(9)             Includes21,234 shares of our common stock owned by Mr. Surmeian and 133,500 shares of common stock which may bepurchased by Mr. Surmeian upon the exercise of stock options within60 days of April 15, 2007. Excludes 7,500 shares of common stockwhich may be acquired pursuant to unvested stock options which vest inquarterly installments of 1,250 shares through December 2008.

(10)       Includes8,379 shares of our common stock owned by Mr. DeConcini and 120,833 shares of common stock which may bepurchased by Mr. DeConcini upon the exercise of stock options within60 days of April 15, 2007.

(11)       Includes 85,833 shares of our common stockwhich may be purchased by Mr. Doorley upon the exercise of stock optionswithin 60 days of April 15, 2007. Excludes the following shares ofcommon stock which may be acquired pursuant to unvested stock options:  65,000 shares which vest in quarterlyinstallments of 16,250 shares through April 2008; and, 10,000 shares which vestin quarterly installments of 2,500 shares through June 2008.

(12)       Includes42,856 shares of our common stock whichmay be purchased by Mr. Katz upon the exercise of stock options within60 days of April 15, 2007. Excludes 107,144 shares of common stockwhich may be acquired pursuant to unvested stock options which vest inquarterly installments of 21,428 shares through June 2008.

(13)       Includes25,000 shares of our common stock whichmay be purchased by Mr. Peters upon the exercise of stock options within60 days of April 15, 2007. Excludes 125,000 shares of common stockwhich may be

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                           acquired pursuant tounvested stock options which vest in quarterly installments of 12,500 sharesthrough July 2009.

(14)       Includes46,333 shares of our common stock whichmay be purchased by Mr. Simon upon the exercise of stock options within60 days of April 15, 2007. Excludes 112,500 shares of common stockwhich may be acquired pursuant to unvested stock options which vest inquarterly installments of 12,500 shares through April 2009.

(15)       Includes7,271,036 shares of our common stock whichmay be purchased upon the exercise of stock options within 60 daysof April 15, 2007. Excludes 859,063 shares of common stock which may beacquired pursuant to unvested stock options.

**EquityCompensation Plan Information**

The following table sets forth the shares of ourcommon stock authorized for issuance under our equity compensation plans atDecember 31, 2006.
| **Plan category**                                      | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights   (a)** | ** ** | **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)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders     |       | 8,618,256                                                                                                                                           |       | $                                                                                                           | 2.32       |                                                                                                                                                                                                    | 3,292,547  |   |
| Equity compensation  plans not approved by security holders |       | —                                                                                                                                              |       | —                                                                                                      |       | —                                                                                                                                                                                                  |       |
| Total                                                       |       | 8,618,256                                                                                                                                           |       | $                                                                                                           | 2.32       |                                                                                                                                                                                                    | 3,292,547  |   |

 

**Item 13.         CertainRelationships and Related Transactions, and Director Independence.**

**RelatedParty Transactions**

In February 2006, we entered into an agreement for thelease of a residence with an unrelated third party on behalf of Wayne M. Bos,our President and CEO.  Under the lease,we agreed to make monthly lease payments of $12,000.  Each month after making the monthly lease payment,we deducted an equal amount from Mr. Bos’ salary.  During fiscal 2006, we paid made aggregatepayments under the lease of $127,200 and made a security deposit payment of$12,000.  We deducted these amounts infull against monies owed to Mr. Bos.

**Review,Approval or Ratification of Transactions with Related Persons**

Our board of directors adopted a written policyrequiring that all interested transactions with related parties be approved orratified by the Audit Committee.  Arelated person means any director, director nominee, executive officer or anyimmediate family member of such director or executive officer.  An interested transactions means anytransaction, arrangement or relationship or series of similar transactions,arrangements or relationships (including any indebtedness or guarantee ofindebtedness) in which:

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·                  the aggregate amount involved will ormay be expected to exceed $100,000 in any calendar year,

·                  Natrol is a participant, and

·                  anyrelated party has or will have a direct or indirect material interest (otherthan solely as a result of being a director or a less than 10 percentbeneficial owner of another entity).

The Audit Committee generally in advance reviews allmaterial facts of all interested transactions and either approves ordisapproves of the entry into the transaction. If advance Audit Committee approval of an interested transaction is notfeasible, then the transaction is considered and voted upon by the AuditCommittee at its next regularly scheduled meeting.  In determining whether to approve or ratifyan interested transaction, the Audit Committee takes into account, among otherfactors it deems appropriate, whether the interested transaction is on terms noless favorable than terms generally available to an unaffiliated third-partyunder the same or similar circumstances and the extent of the related person’sinterest in the transaction.

**DirectorIndependence**

Our board of directors has determined that Messrs.DeConcini, Doorley, Peters and Simon are independent directors under the Nasdaqlisting standards.  These directorsconstitute all of the members of our board committees.  In 2006, Vernon Brunner and Ronald Consiglioalso served on our board of directors, and both were determined by our board ofdirectors to be independent under the Nasdaq listing standards.

**Item 14.         PrincipalAccountant Fees and Services.**

**2006 and 2005 Audit and Other Fees**

The following table summarizes the aggregate feesbilled by our principal accountant, Stonefield Josephson, Inc., for 2006 and 2005for the following professional services:
| ** **         | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
|               |       |     |       |     |       |
| Audit Fees (a)     |       | $        | 227,762    |     | $          | 262,647 |   |
| Audit-Related Fees |       | —   |       | —   |       |
| Tax Fees (b)       |       | —   |       | —   |       |
| All Other Fees     |       | —   |       | —   |       |
| Total              |       | $        | 227,762    |     | $          | 262,647 |   |

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(a)             Fees for auditservices billed in 2006 and 2005 consisted of:

·                  audit of ourannual financial statements;

·                  reviews of ourquarterly financial statements; and

·                  statutory andregulatory audits, consents and other services related to SEC matters.

(b)            Aprofessional service firm other than Stonefield Josephson, Inc. provided othertax consulting and preparation services.

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**Pre-Approval of Audit and Non-Audit Services**

In considering the nature of the services provided bythe independent auditor, the Audit Committee determined that such services arecompatible with the provision of independent audit services. The AuditCommittee discussed these services with the independent auditor and ourmanagement to determine that they are permitted under the rules and regulationsconcerning auditor independence promulgated by the SEC to implement theSarbanes Oxley Act of 2002, as well as the American Institute of CertifiedPublic Accountants.

Under its charter, the Audit Committee mustpre-approve all audit and permitted non-audit services to be provided by theindependent auditor unless an exception to such pre-approval exists under theSecurities Exchange Act of 1934 or the rules of the SEC.

Each year the Audit Committee approves the retentionof the independent auditor to audit our financial statements, including theassociated fee. At this time, the Audit Committee evaluates other knownpotential engagements of the independent auditor, including the scope of auditrelated services, tax services and other services proposed to be performed andthe proposed fees, and approves or rejects each service, taking into accountwhether the services are permissible under applicable law and the possibleimpact of each non-audit service on the independent auditor’s independence frommanagement.

Since May 6, 2003, the effective date of the SEC rulesstating that an auditor is not independent of an audit client unless theservices it provides to the client are appropriately approved, each newengagement of our auditors has been approved in advance by the Audit Committee.

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**SIGNATURE**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this Amendment No. 1 to Form 10-K/A to be signed on itsbehalf by the undersigned, thereunto duly authorized, this 30th day of April, 2007.
|        | Natrol, Inc. |
|--------|-------------------|
|   |              |   |
|   | By:               | /s/ Dennis R.  Jolicoeur |
|   |              | Dennis R.  Jolicoeur |
|   | * *          | *Chief  Financial Officer, Treasurer and Executive Vice President* |

 

S-1

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**INDEX TO EXHIBITS**
| Exhibit    | ** ** | ** **                                                                                      |
|------------|------------|-------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description**                                                                                 |
|       |       |                                                                                            |
| 31.1       |       | Certification of Chief Executive Officer Pursuant to  Section 302 of Sarbanes-Oxley Act of 2002 |
|       |       |                                                                                            |
| 31.2       |       | Certification of Chief Financial Officer Pursuant to  Section 302 of Sarbanes-Oxley Act of 2002 |

** **

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