The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited Consolidated Financial Statements and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K.

Overview

We are an integrated manufacturer, marketer, distributor and retailer of branded nutritional supplements and other natural products sold primarily to and through domestic health and natural food stores. Internationally, we market and distribute branded nutritional supplements and other natural products to and through health and natural product distributors and retailers. Our core business strategy is to acquire, integrate and operate, from beginning to end, the manufacturing, marketing and distribution of branded nutritional supplement businesses in the natural products industry. We believe

that the consolidation and integration of these acquired businesses provides ongoing financial synergies through increased scale and market penetration, as well as strengthened customer relationships.

We sell branded nutritional supplements and other natural products under the trademarks Solaray®, VegLife®, KAL®, Nature's Life®, Sunny Green®, Action Labs®, Natural Balance®, NaturalMax®, bioAllers®, Herbs for Kids™, Natra-Bio®, NaturalCare®, Zand®, Health from the Sun®, Life-flo®, Larénim®, Living Flower Essences®, Pioneer®, Thompson®, Natural Sport®, Supplement Training Systems®, Premier One®, Montana Big Sky™, ActiPet®, FunFresh Foods™, Dowd & Rogers™, CompliMed®, AllVia™, Oakmont Labs®, Healthway®, Body Gold®, Sayge Biosciences™, Monarch Nutraceuticals™ and Great Basin Botanicals™. Under the name Woodland Publishing™, we publish, print and market a line of books and booklets to, among others, book distributors, national retail bookstores and health and natural food stores. We also distribute branded products of certain third parties.

We own neighborhood natural food markets, which operate under the trade names The Real Food Company™, Thom's Natural Foods™ and Cornucopia Community Market™. We also own health food stores, which operate under the trade names Fresh Vitamins™, Granola's™ and Pilgrim's Natureway™.

We manufacture and/or distribute one of the broadest branded product lines in the industry with over 4,000 SKUs, including over 700 SKUs sold internationally. We believe that as a result of our emphasis on innovation, quality, loyalty, education and customer service, our brands are widely recognized in health and natural food stores and among their customers.

We were formed in 1993 by senior management and Bain Capital, Inc. to effect a consolidation strategy in the fragmented VMS Industry. Since our formation, we have completed the following acquisitions: Solaray, Premier One, KAL, Monarch, Action Labs, NutraForce Canada, Woodland Publishing, Thompson, Fresh Organics, Nature's Life, Fresh Vitamins, Natural Balance, Montana Naturals, Pioneer, Living Flowers, Life-flo, Larenim, Zand, Terapi, NaturalCare, Dowd & Rogers and Health from the Sun. Management believes that Nutraceutical is well positioned to continue to capitalize on the consolidation we believe is occurring in the VMS Industry.

Critical Accounting Policies

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America required us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. Significant estimates included values and lives assigned to acquired intangible assets, reserves for customer returns and allowances, uncollectible accounts receivable, slow moving, obsolete and/or damaged inventory and valuation and recoverability of long-lived assets. Actual results may differ from these estimates.

Our estimates and judgments related to our critical accounting policies, including factors and assumptions considered in making these estimates and judgments, did not vary significantly for the periods presented and had no material impact on the consolidated financial statements as reported. Our critical accounting policies include the following:

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

Inventories-Provision is made for slow moving, obsolete and/or damaged inventory based on a periodic analysis of individual inventory items, including an evaluation of historical usage and/or movement, age, expiration date and general condition. If market demand and/or consumer preferences

are less favorable than historical trends or future expectations, additional provisions for slow moving, obsolete and/or damaged inventory may be required, which could have a material impact on the consolidated financial statements.

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

We evaluate the recoverability of property, plant and equipment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Property, plant and equipment are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of the asset by comparison of its carrying amount to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the difference between the carrying amount and the fair value of the impaired asset is recorded.

Goodwill and Intangible Assets-Statement of Financial Accounting Standards No. 141, Business Combinations, and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), require estimates and judgments in determining the initial recognition and measurement of goodwill and intangible assets, including factors and assumptions used in determining fair value and useful lives. Intangible assets with finite useful lives are amortized, while intangible assets with indefinite useful lives are not amortized. Amortizable intangible assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and non-amortizable intangible assets are tested annually for impairment and are tested for impairment between annual tests if an event occurs that would cause us to believe that value is impaired. We perform our annual impairment testing as of September 30 each year, which is the last day of our fiscal year.

In accordance with SFAS 142, we performed our annual goodwill impairment testing as of September 30, 2008. Reporting unit fair values were determined using the income and market approaches. Based on the valuation findings, we determined that we had a goodwill impairment related to our health food stores reporting unit in accordance with the first step of the goodwill impairment test described in SFAS 142. This goodwill impairment was the result of a number of factors, including (i) the adverse business climate of the specialty retail market which further declined during the quarter ended September 30, 2008,
(ii) flatness in our health food stores sales and (iii) increased costs associated with new store openings and lease renewals.

We then performed the second step of the impairment test under SFAS 142 to measure the amount of the non-cash impairment charge, which was determined to be $2.9 million ($1.8 million after tax, or $0.16 per diluted share). The charge represented the entire carrying value of goodwill related to our health food stores reporting unit.

During the year ended September 30, 2007, we recorded a non-cash intangible asset impairment charge of $0.5 million ($0.3 million after tax, or $0.02 per diluted share) related to the re-branding of certain of our health food stores. The charge represented the entire carrying amount of trademark and tradename intangible assets related to our health food stores.

The ongoing uncertainty in general economic and market conditions could negatively impact our future operating performance, cash flow and/or stock price and could increase the likelihood of significant additional goodwill or intangible asset impairment charges being recorded in future periods which could materially impact our consolidated financial statements. Triggering events in future periods that could potentially warrant an interim review of goodwill and intangible assets to determine whether or not additional impairments exist include a prolonged decrease in our stock price and market

capitalization, a sustained decrease in our net sales and/or a sustained decrease in our income from operations. The valuation of goodwill and intangible assets is subject to a high degree of judgment and complexity.

Revenue Recognition-Revenue is recognized in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, which states that revenue should be recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the product has been shipped and the customer takes ownership and assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. We believe that these criteria are satisfied upon shipment from our facilities or, in the case of our neighborhood natural food markets and health food stores, at the point of sale within these stores. Revenue is reduced by provisions for estimated returns and allowances, which are based on historical averages that have not varied significantly for the periods presented, as well as specific known claims, if any. No other significant deductions from revenue must be estimated at the point in time that revenue is recognized.

For additional information on our accounting policies, see Note 2 of the accompanying Consolidated Financial Statements.

Results of Operations

The following table sets forth certain Consolidated Statements of Operations data as a percentage of net sales for the periods indicated:

                                                             Year Ended
                                                            September 30,
                                                      2006      2007      2008
       Net sales                                       100.0 %   100.0 %   100.0 %
       Cost of sales                                    47.3      45.8      45.6

       Gross profit                                     52.7      54.2      54.4
       Selling, general and administrative              36.8      39.5      40.1
       Amortization of intangibles                       0.2       0.2       0.4
       Impairment of goodwill and intangible asset         -       0.3       1.8

       Income from operations                           15.7      14.2      12.1
       Interest and other (income)/expense, net         (0.5 )     0.8       0.7

       Income before provision for income taxes         16.2      13.4      11.4
       Provision for income taxes                        6.3       5.1       4.2

       Net income                                        9.9 %     8.3 %     7.2 %

Comparison of Fiscal 2008 to Fiscal 2007

Net Sales. Net sales increased by $10.4 million, or 6.6%, to $166.9 million for fiscal 2008 from $156.5 million for fiscal 2007. Net sales of branded nutritional supplements and other natural products increased by $10.3 million, or 7.4%, to $149.7 million for fiscal 2008 compared to $139.4 million for fiscal 2007. The increase in net sales of branded nutritional supplements and other natural products was primarily related to the net sales contributions of the two businesses acquired during fiscal 2008 and the six businesses acquired during fiscal 2007, partially offset by a slight decrease in sales volume of branded products to certain customers. The impact on net sales related to price changes was not material. Other net sales remained relatively flat at $17.2 million for fiscal 2008 compared to $17.1 million for fiscal 2007. Management believes that the VMS Industry continues to have low growth rates and remains very competitive.

Gross Profit. Gross profit increased by $5.9 million, or 6.9%, to $90.8 million for fiscal 2008 from $84.9 million for fiscal 2007. This increase in gross profit was primarily attributable to the increase in net sales. As a percentage of net sales, gross profit remained relatively flat at 54.4% for fiscal 2008 compared to 54.2% for fiscal 2007.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $5.1 million, or 8.2%, to $67.0 million for fiscal 2008 from $61.9 million for fiscal 2007. As a percentage of net sales, selling, general and administrative expenses increased to 40.1% for fiscal 2008 compared to 39.5% for fiscal 2007. This increase in selling, general and administrative expenses was primarily attributable to operational and transition costs related to the two businesses acquired in fiscal 2008 and the six businesses acquired in fiscal 2007.

Amortization of Intangibles. Amortization of intangibles was $0.7 million for fiscal 2008 compared to $0.4 million for fiscal 2007. For each period, amortization expense was primarily related to intangible assets recorded in connection with acquisitions.

Impairment of Goodwill and Intangible Asset. During fiscal 2008, we recorded a non-cash goodwill impairment charge of $2.9 million ($1.8 million after tax, or $0.16 per diluted share) related to our health food stores. The charge represented the entire goodwill carrying value of our health food stores reporting unit. During fiscal 2007, we recorded a non-cash intangible asset impairment charge of $0.5 million ($0.3 million after tax, or $0.02 per diluted share) related to the re-branding of certain health food stores. The charge represented the entire carrying amount of trademark and trade name intangible assets related to our health food stores.

Interest and Other (Income)/Expense, Net. Net interest and other (income)/expense was $1.3 million for both fiscal 2008 and fiscal 2007 and primarily consisted of interest expense on indebtedness under our revolving credit facility.

Provision for Income Taxes. Our effective tax rate was 37.0% for fiscal 2008 and 38.0% for fiscal 2007. In each period, our effective tax rate was higher than the federal statutory rate primarily due to state taxes.

Comparison of Fiscal 2007 to Fiscal 2006

Net Sales. Net sales increased by $6.1 million, or 4.1%, to $156.5 million for fiscal 2007 from $150.4 million for fiscal 2006. Net sales of branded nutritional supplements and other natural products increased by $6.3 million, or 4.8%, to $139.4 million for fiscal 2007 from $133.1 million for fiscal 2006. The increase in net sales of branded nutritional supplements and other natural products was primarily related to the net sales contributions of the fiscal 2007 acquired businesses, partially offset by a decrease in sales of some SKUs of branded products to certain customers. The impact on net sales related to price changes was not material. Other net sales remained relatively flat at $17.1 million for fiscal 2007 compared to $17.3 million for fiscal 2006. We believe that the VMS Industry continues to have low growth rates and remains very competitive.

Gross Profit. Gross profit increased by $5.7 million, or 7.2%, to $84.9 million for fiscal 2007 from $79.2 million for fiscal 2006. As a percentage of net sales, gross profit increased to 54.2% for fiscal 2007 from 52.7% for fiscal 2006. This increase in gross profit was primarily attributable to the increase in net sales, as well as decreased material costs as a percentage of net sales, including some changes in sales mix related to the fiscal 2007 acquisitions.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $6.5 million, or 11.8%, to $61.9 million for fiscal 2007 from $55.4 million for fiscal 2006. As a percentage of net sales, selling, general and administrative expenses increased to 39.5% for fiscal

2007 from 36.8% for fiscal 2006. This increase in selling, general and administrative expenses was primarily attributable to operational and transition costs related to the fiscal 2007 acquired businesses. Additionally, increased costs associated with labor and labor-related costs, building rents and insurance impacted us during fiscal 2007.

Amortization of Intangible Assets. Amortization of intangibles was $0.4 million for fiscal 2007 compared to $0.3 million for fiscal 2006. For each period, amortization expense was primarily related to intangible assets recorded in connection with acquisitions.

Impairment of Goodwill and Intangible Asset. During fiscal 2007, we recorded a non-cash intangible asset impairment charge of $0.5 million ($0.3 million after tax, or $0.02 per diluted share) related to the re-branding of certain health food stores. The charge represented the entire carrying amount of trademark and trade name intangible assets related to our health food stores.

Interest and Other (Income)/Expense, Net. Net interest and other (income)/expense for fiscal 2006 included other income of $1.1 million ($0.7 million after tax, or $0.06 per diluted share) related to the gain on the sale of our 31,340 square foot building located in Park City, Utah as well as $0.1 million for payments received as settlement of litigation to which we were a plaintiff. Exclusive of these items, net interest and other (income)/expense was $1.3 million for fiscal 2007 compared to $0.4 million for fiscal 2006 and primarily consisted of interest expense on indebtedness under our revolving credit facility, with the increase being primarily related to borrowings for the fiscal 2007 acquired businesses.

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

Selected Quarterly Financial Data; Seasonality

    The following table sets forth certain quarterly financial data for fiscal
2007 and 2008. This quarterly information is unaudited, has been prepared on the
same basis as the annual financial statements and, in our opinion, reflects all
normally recurring adjustments necessary for fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of results for any future period.

                                          Fiscal 2007                                 Fiscal 2008
                            First      Second     Third      Fourth     First      Second     Third      Fourth
                           Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter
                                         (dollars in thousands, except per share data: unaudited)
Net sales                  $ 35,848   $ 42,104   $ 38,694   $ 39,902   $ 41,086   $ 44,446   $ 40,454   $ 40,899
Gross profit                 19,524     23,124     20,805     21,473     22,313     24,516     21,965     21,985
Net income                    3,355      4,159      2,853      2,605      3,211      4,352      2,853      1,527
Net income per common
share:
  Basic                    $   0.30   $   0.38   $   0.26   $   0.23   $   0.29   $   0.39   $   0.26   $   0.14
  Diluted                  $   0.30   $   0.37   $   0.25   $   0.23   $   0.28   $   0.39   $   0.26   $   0.14

We believe that our business is characterized by minor seasonality. However, sales to any particular customer can vary substantially from one quarter to the next based on such factors as industry trends, timing of promotional discounts, international economic conditions and acquisition-related activities. Excluding the effect of acquisitions, we have historically recorded higher branded products sales volume during the second fiscal quarter due to increased interest in health-related products among consumers following the holiday season. The fiscal 2007 acquisitions were completed during the first, second and third quarters and the fiscal 2008 acquisitions were completed during the first and second quarters.

Liquidity and Capital Resources

As of September 30, 2008, we had cash of $5.2 million. Net cash provided by operating activities was $20.3 million, $23.8 million and $16.1 million for the years ended September 30, 2008, 2007, and 2006, respectively. The decrease in net cash provided by operating activities in fiscal 2008 was primarily attributable to a decrease in cash provided by changes in assets and liabilities, net of effects of acquisitions, and a decrease in net income partially offset by an increase in depreciation and amortization and an increase in impairment charges.

Net cash used in investing activities was $23.7 million, $41.2 million, and $10.1 million for the years ended September 30, 2008, 2007, and 2006, respectively. Our investing activities during these periods primarily consisted of acquisitions of businesses, capital expenditures and during the year ended September 30, 2006, proceeds of $4.5 million related to the sale of our building.

During the year ended September 30, 2008, we made two acquisitions. On December 12, 2007, we acquired certain assets of Dowd and Rogers, Inc. Dowd and Rogers, Inc. manufactures and markets a line of gluten-free cake mixes. On March 20, 2008, we acquired the Health from the Sun® brand of dietary supplement products by purchasing selected assets of Arkopharma, LLC. The aggregate purchase price for these acquisitions was $5.9 million in cash.

During the year ended September 30, 2007, we made six acquisitions. On October 31, 2006, we acquired a majority interest in a complementary natural products business. On November 15, 2006, we acquired the Life-flo® brand of health care products, which includes therapeutic creams sold in health and natural food stores, by purchasing substantially all of the operating assets of Life-flo Health Care Products, Inc. and Nutraceutical Labs, Inc. On December 15, 2006, we acquired the Larenim® brand of mineral makeup by purchasing certain assets of Vitamin Outlet, Inc. On January 10, 2007, we acquired the Zand®, Natra-Bio®, bioAllers®, Herbs for Kids™ and Complimed® brands by purchasing certain operating assets of Botanical Laboratories, Inc. On May 4, 2007, we acquired substantially all of the operating assets of TERAPI-consult.as, a leading wholesale distributor of our Solaray® brand as well as other branded nutritional supplements and other natural products in Norway. On June 29, 2007, we acquired the NaturalCare® brand of homeopathic and dietary supplement products by purchasing substantially all of the operating assets of NaturalCare Products, Inc. The aggregate purchase price of these acquisitions was $30.7 million in cash.

The fiscal 2008 and fiscal 2007 acquisitions were financed primarily using borrowings under our revolving credit facility, as well as cash provided by operating activities. These acquisitions are in keeping with our business strategy of consolidating the fragmented industry where we compete and give us nutritional brands with products we currently do not sell. The expected long-term sales and expense synergies of acquired businesses are generally not realized immediately following acquisition as certain transition and integration matters must be completed.

Capital expenditures during the years ended September 30, 2008, 2007, and 2006 related primarily to real estate, distribution and manufacturing equipment, building improvements related to facility consolidation efforts and information systems.

On March 31, 2006, we purchased the Rapid Response Center in Ogden, Utah for $4.2 million in cash. When fully converted, the Rapid Response Center will provide approximately 410,000 square feet of gross building space located on approximately 19.2 acres, which includes available land for expansion. The Rapid Response Center is the central facility where we are, and have been, consolidating operations, including raw material warehousing, manufacturing, packaging, distribution and administrative offices. We were previously leasing most of this facility. We intend to finance anticipated capital expenditures through internally generated cash flow and, if necessary, through funds provided under our revolving credit facility.

Net cash provided by (used in) financing activities was $4.1 million, $19.0 million and $(6.6) million for the years ended September 30, 2008, 2007 and 2006, respectively. Our financing activities during these periods consisted primarily of borrowings and repayments under our revolving credit facility related to operating needs, purchases of common stock for treasury and proceeds from the issuance of common stock.

In October 2007, we registered a direct stock purchase plan with the Securities and Exchange Commission. The purpose of this direct stock purchase plan is to provide a convenient way for existing stockholders, as well as new investors, to purchase shares of our common stock. A total of 1,500,000 shares of our common stock were registered under the plan with 13,043 shares purchased during the year ended September 30, 2008.

On January 28, 2002, we entered into a five-year, sixty million dollar reducing revolving credit facility. On September 7, 2006, we amended this revolving credit facility (the "Amended Credit Agreement"). The Amended Credit Agreement extends the term of the credit facility to September 2011, resets the available credit borrowings to sixty million with no automatic reductions and provides an accordion feature which can increase the available credit borrowings to ninety million, subject to approval by the lenders and compliance with certain covenants and conditions. The lenders on this Amended Credit Agreement are Rabobank International and Wells Fargo. To date, we have not experienced any difficulties in accessing the available funds under our Amended Credit Agreement. Deferred financing fees of $205 thousand related to the Amended Credit Agreement were capitalized.

At September 30, 2008, we had outstanding revolving credit borrowings of $28.0 million under the Amended Credit Agreement. Borrowings under the Amended Credit Agreement are collateralized by substantially all our assets and bear interest at the applicable Eurodollar Rate plus a variable margin or at a base . . .