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

Overview

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

During fiscal 2007, 2008 and 2009, we provided selling and marketing support intended both to defend our overall Move Free business against competition, including private label, and ultimately to increase our market share in the joint care product category. The introduction of Move Free Advanced into substantially all of our significant retail accounts, which began during the second half of fiscal 2006, was substantially completed in the fiscal 2007 second quarter. In December 2007, we announced the fiscal 2008 third quarter introduction of smaller tablets for our existing Move Free items as well as the launch of a Move Free line extension. During fiscal 2008 and 2009, we also increased the distribution of our joint care products in international markets which we will continue in fiscal 2010. During the latter part of fiscal 2008, we introduced MegaRed, an omega-3 krill oil product, into Costco. During fiscal 2009, we continued the introduction of MegaRed into certain other retail accounts. In the latter part of fiscal 2009, we initiated a national marketing campaign to support MegaRed growth. During fiscal 2010, subject to sufficient supply of raw materials, we will introduce MegaRed into new retail accounts and continue significant marketing to support both the new and existing distribution of this product. Subject to competitive joint care category pricing pressures, including private label, the success of incremental private label and new product sales, including MegaRed, and the ability to increase our distribution in international markets, among other factors, we believe fiscal 2010 net sales, as compared to fiscal 2009 net sales, will modestly increase.

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

Our gross profit and operating margins for fiscal 2009 were negatively impacted by incremental private label business awarded in the latter part of fiscal 2008. The incremental business coupled with increased volume from existing business resulted in a significant change in sales mix for fiscal 2009, compared to fiscal 2008 and 2007. The significant increase in lower-margin private label sales coupled with higher raw material costs resulted in overall lower gross profit and operating margins for fiscal 2009, as compared to fiscal 2008 and 2007.

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

Results of Operations

Fiscal 2009 Compared to Fiscal 2008

The following tables show comparative results for selected items as reported and
as a percentage of net sales for fiscal 2009 and 2008, (dollars in thousands):

                                            2009                      2008

Net sales                           $ 190,691       100.0 %   $ 176,914       100.0 %
Cost of goods sold                    123,861        65.0       102,491        57.9

Gross profit                           66,830        35.0        74,423        42.1
Operating expenses:
Selling and marketing                  33,702        17.6        31,366        17.7
General and administrative             13,669         7.2        22,475        12.7
Research and development                4,273         2.2         4,249         2.4
Reimbursement of import costs               -           -           (31 )         -

Total operating expenses               51,644        27.0        58,059        32.8

Income from operations                 15,186         8.0        16,364         9.3
Other income, net                         761         0.4         1,930         1.1
Income tax expense                     (5,617 )      (3.0 )      (6,992 )      (4.0 )

Income from continuing operations   $  10,330         5.4 %   $  11,302         6.4 %

Net Sales. Net sales increased approximately 7.8% to $190.7 million for fiscal 2009, from $176.9 million for fiscal 2008, primarily due to a significant increase in private label sales, partially offset by a decrease in branded net sales.

Aggregate branded net sales decreased approximately 5.3% to $131.8 million for fiscal 2009, from $139.2 million for fiscal 2008, primarily due to an approximate $3.3 million decrease in sales volume, an approximate $1.4 million increase in sales returns and an approximate $2.7 million increase in promotional incentives classified as sales price reductions. Classification of certain promotional costs as a sales reduction is required when the promotion effectively represents a price reduction. We are utilizing more price-discount like promotions in the joint care category to defend our market share against both branded and private label competition. The decrease in sales volume resulted from a reduction in our joint care category volume, significantly offset by incremental MegaRed new product sales. Move Free net sales were $71.3 million and $82.6 million, respectively, for fiscal 2009 and 2008. The decrease in Move Free net sales, as well as decreases in other joint care category sales, primarily resulted from decreases in sales volume due to adjustments to customer inventory levels, private label volume growth due to significant price discounting, and the impact of uncertain economic conditions.

Private label sales increased approximately 56.2% to $58.9 million for fiscal 2009, from $37.7 million for the fiscal 2008, primarily due to incremental business awarded in the latter part of fiscal 2008 together with an increase in customer promotional activity on existing business.

Gross Profit. Gross profit decreased approximately 10.2% to $66.8 million for fiscal 2009, from $74.4 million for fiscal 2008. Gross profit, as a percentage of net sales, decreased to 35.0% for fiscal 2009, from 42.1% for fiscal 2008, primarily due to the reduction in branded joint care category sales, the significant increase in lower margin private label sales, higher raw material costs and incremental promotional incentives. Since certain of our warehousing and distribution costs are included in general and administrative expenses, our gross profit may not be comparable to other entities who may include these expenses as a component of costs of goods sold.

Operating Expenses. Operating expenses decreased approximately 11.1% to $51.6 million for fiscal 2009, from $58.1 million for fiscal 2008. Operating expenses, as a percentage of net sales, were 27.0% and 32.8%, respectively, for fiscal 2009 and 2008. The decrease in operating expenses resulted primarily from a substantial decrease in general and administrative expenses, partially offset by a moderate increase in selling and marketing expenses.

Selling and marketing expenses, including sales, marketing, advertising, freight and other costs, moderately increased to approximately $33.7 million for fiscal 2009, from $31.4 million for fiscal 2008. An increase in promotional and freight costs was partially offset by an approximate $1.0 million reduction in management incentive program costs and the fiscal 2008 recognition of approximately $0.5 million in incremental compensation expenses for the special dividend. The special dividend compensation expense represents a non-cash charge for dividend equivalent rights received by holders of certain equity awards, including stock options and restricted stock units. The increase in promotional costs resulted from additional price discounting in joint care category products due to competitive pressure, including private label, and incremental advertising in support of MegaRed. Freight costs increased due to higher sales volumes and increases in fuel costs.

General and administrative expenses decreased to approximately $13.7 million for fiscal 2009, from approximately $22.5 million for fiscal 2008, primarily due to the fiscal 2008 recognition of approximately $4.4 million in incremental compensation expense for the special dividend and approximately $1.4 million in merger and acquisition related costs, together with an approximate $4.5 million year over year reduction in management incentive program costs.

Research and development costs remained relatively constant at approximately $4.3 million for fiscal 2009 and 2008.

Other Income, net. Other income, net, was $0.8 million for fiscal 2009, compared to $1.9 million for fiscal 2008. The decrease was primarily due to a reduction in interest income resulting from lower yields on investments.

Income Tax Expense. Income tax expense was $5.6 million for fiscal 2009, compared to $7.0 million for fiscal 2008. The effective tax rate was 35.2% and 38.2%, respectively, for fiscal 2009 and 2008. The decrease in the effective tax rate primarily resulted from an increase in certain tax credits.

Results of Operations
Fiscal 2008 Compared to Fiscal 2007

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

                                            2008                      2007

Net sales                           $ 176,914       100.0 %   $ 172,656       100.0 %
Cost of goods sold                    102,491        57.9       103,959        60.2

Gross profit                           74,423        42.1        68,697        39.8
Operating expenses:
Selling and marketing                  31,366        17.7        32,031        18.6
General and administrative             22,475        12.7        15,698         9.1
Research and development                4,249         2.4         3,686         2.1
Reimbursement of import costs             (31 )         -          (394 )      (0.2 )

Total operating expenses               58,059        32.8        51,021        29.6

Income from operations                 16,364         9.3        17,676        10.2
Other income, net                       1,930         1.1         2,935         1.7
Income tax expense                     (6,992 )      (4.0 )      (8,175 )      (4.7 )

Income from continuing operations   $  11,302         6.4 %   $  12,436         7.2 %

Net Sales. Net sales increased approximately 2.5% to $176.9 million for fiscal 2008, from $172.7 million for fiscal 2007, primarily due to an increase in branded and private label sales volume and a decrease in product returns, substantially offset by an increase in sales price reductions related to incremental promotional incentives. Classification of certain promotional costs as a sales reduction is required when the promotion effectively represents a price reduction.

Aggregate branded net sales increased approximately 2.3% to $139.2 million for fiscal 2008, from $136.1 million for fiscal 2007. An approximate $9.2 million, or 5.1% increase in sales volume, primarily in our joint care category business, and an approximate $1.0 million reduction in sales returns, were partially offset by an approximate $7.1 million increase in promotional incentives classified as sales price reductions. We are utilizing more price-discount like promotions in the joint care category to defend our market share against both branded and private label competition. Move Free net sales were $82.6 million and $83.8 million, respectively, for fiscal 2008 and fiscal 2007. The decrease primarily resulted from incremental promotional activity due to competitive joint care product category pricing pressures, which more than off-set an approximate $3.9 million, or 3.4%, increase in sales volume.

Private label sales increased approximately 3.0% to $37.7 million for fiscal 2008, from $36.6 million for the fiscal 2007, primarily due to incremental business awarded in the latter part of fiscal 2008.

Gross Profit. Gross profit increased approximately 8.3% to $74.4 million for fiscal 2008, from $68.7 million for fiscal 2007. Gross profit, as a percentage of net sales, increased to 42.1% for fiscal 2008, from 39.8% for fiscal 2007, primarily due to an approximate $12.0 million decrease in joint care product raw material costs, partially offset by the $7.1 million increase in sales price reductions related to incremental promotional incentives. Since certain of our warehousing and distribution costs are included in general and administrative expenses, our gross profit may not be comparable to other entities who may include these expenses as a component of costs of goods sold.

Operating Expenses. Operating expenses increased approximately 13.8% to $58.1 million for fiscal 2008, from $51.0 million for fiscal 2007. Operating expenses, as a percentage of net sales, were 32.8% and 29.6%, respectively, for fiscal 2008 and 2007. The increase in operating expenses resulted primarily from a substantial increase in general and administrative expenses. In addition, fiscal 2007 includes approximately $0.4 million in reimbursement from certain suppliers of previously recognized import costs as compared to less than $0.1 million in similar reimbursement for fiscal 2008.

Selling and marketing expenses, including sales, marketing, advertising, freight and other costs, moderately decreased to approximately $31.4 million for fiscal 2008, from $32.0 million for fiscal 2007. A decrease in advertising costs, primarily resulting from a decision to shift certain television advertising to promotional incentives reflected as sales price reductions, was partially offset by the fiscal 2008 recognition of approximately $0.5 million in incremental compensation expenses for the special dividend and an increase in freight costs due to the sales volume increase and increasing fuel costs. The special dividend compensation expense represents a non-cash charge for dividend equivalent rights received by holders of certain equity awards, including stock options and restricted stock units.

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

Research and development costs increased to approximately $4.3 million for fiscal 2008, from $3.7 million for fiscal 2007, primarily due to an increase in personnel related costs, expenses associated with product research, and product testing related to the registration of products in international markets.

Other Income, net. Other income, net, was $1.9 million for fiscal 2008, compared to $2.9 million for fiscal 2007. The decrease was primarily due to a reduction in interest income resulting from an overall lower average balance of cash and available-for-sale securities resulting from payment of the special dividend.

Income Tax Expense. Income tax expense was $7.0 million for fiscal 2008, compared to $8.2 million for fiscal 2007. The effective tax rate was 38.2% and 39.7%, respectively, for fiscal 2008 and 2007. The fiscal 2007 tax rate was impacted by certain unusual items, including the recapture of certain previously recognized tax losses, final adjustments to certain tax gains and valuation allowances relating to the fiscal 2006 sale of our Haleko unit, and the reduction of certain contingent tax liabilities.

Liquidity and Capital Resources

Working capital increased approximately $10.7 million to $92.2 million at May 31, 2009, from $81.5 million at May 31, 2008, primarily due to positive financial results. An approximate $7.6 million increase in cash and cash equivalents and available-for-sale securities reflects, among other factors, the impact of year-to-date earnings, partially offset by the payment of approximately $1.2 million in dividends resulting from the vesting of certain restricted stock units, and the payment of approximately $1.7 million in individual income taxes resulting from withholding and effectively reacquiring shares of Class A common stock issued in exchange for fully vested restricted stock units and stock options exercised. Receivables decreased approximately $1.8 million, which includes a $0.3 million decrease in refundable income taxes and a $0.8 million increase in allowances for potential sales returns related to new products. The $0.5 million decrease in prepaid expenses was primarily due to a decrease in prepaid insurance. Accrued expenses decreased approximately $1.7 million primarily due to a decrease in accrued management annual incentive costs, partially offset by an increase in accrued promotional costs.

As a result of current negative liquidity and uncertainty in financial credit markets, we have continued to liquidate our investments in ARS and other variable rate debt securities. Proceeds from the sale of these available-for-sale securities were invested in money market accounts, certificates of deposit, United States Treasury Bills and high-quality commercial paper. At May 31, 2009, we held approximately $4.9 million in available-for-sale securities; consisting of approximately $4.3 million in certificates of deposit and approximately $0.6 million in debt securities, including $0.5 million in illiquid ARS which are fully insured, state agency issued securities. Although we have experienced failed auctions with these ARS, and will therefore not be able to access our funds invested in these ARS until future auctions of these investments are successful, the securities are called by the issuer or the securities mature; we believe that we will ultimately be able to successfully liquidate these investments. However, we believe the unsuccessful liquidation of some, or all, of these securities over the next twelve months will not significantly impact our liquidity needs.

On June 30, 2004, we entered into, through our wholly-owned direct operating subsidiary Schiff Nutrition Group, Inc. ("SNG"), a $25.0 million revolving credit facility (the "Credit Facility") with KeyBank National Association, as Agent. In August 2006, we extended the maturity of the Credit Facility from June 30, 2007 to June 30, 2009. The Credit Facility contained customary terms and conditions, including, among others, financial covenants that limited our ability to pay dividends on our common stock and certain other restrictions. SNG's obligations under the Credit Facility were guaranteed by us and secured by a first priority security interest on all of the capital stock of SNG. The Credit Facility, which expired on June 30, 2009, was available to fund our normal working capital and capital expenditure requirements, with additional availability to fund certain permitted strategic transactions. At May 31, 2009, there were no amounts outstanding and $25.0 million was available for borrowing under the Credit Facility.

On August 18, 2009, we entered into, through SNG, a new $80.0 million revolving credit facility (the "New Credit Facility") with U.S. Bank National Association, as Agent. The New Credit Facility, which replaces our previous $25.0 million credit facility which expired on June 30, 2009, contains customary terms and conditions, including, among others, financial covenants that may limit our ability to pay dividends on our common stock and certain other restrictions. SNG's obligations under the New Credit Facility are guaranteed by us and SNG's domestic subsidiaries and secured by a first priority security interest in all of the capital stock of SNG and its current and future subsidiaries, as well as a first priority security interest in substantially all of our domestic assets. Borrowings under the New Credit Facility bear interest at floating rates based on U.S. Bank's prime rate, the Federal Funds rate, or the LIBOR rate. The New Credit Facility, which matures on August 18, 2012, can be used to fund our normal working capital and capital expenditure requirements, with availability to fund certain permitted strategic transactions. At the inception of the New Credit Facility, no borrowings were outstanding.

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

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

A summary of our outstanding contractual obligations at May 31, 2009 is as
follows (in thousands):

                                  Total Amounts      Less than         1-3           3-5          More than
Contractual Cash Obligations(1)     Committed         1 Year          Years         Years          5 Years

Operating leases                  $       8,959     $     2,385     $   4,648     $   1,926     $           -
Purchase obligations(2)                  20,917          20,917             -             -                 -

Total obligations                 $      29,876     $    23,302     $   4,648     $   1,926     $           -

(1) Unrecognized income tax benefits totaling approximately $0.2 million are excluded since we are unable to estimate the period of settlement, if any.

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

Critical Accounting Policies and Estimates

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

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

· We provide for valuation adjustments for changes in the fair values of our available-for-sale securities. Fair values are based upon quoted market prices and/or other considerations, including fair values determined by financial institutions, current credit rating of the debt securities, insurance provisions and discounted cash flow analysis as deemed appropriate. Changes in valuation adjustments for declines in the fair values of our available-for-sales securities did not significantly impact net income for fiscal 2009, 2008 or 2007. At May 31, 2009, unrealized losses resulting from fair market adjustments to our available-for-sale securities totaled approximately $179. At May 31, 2008 and 2007, there were no unrealized losses resulting from fair market adjustments to our available-for-sale securities.

· We provide for inventory valuation adjustments for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, . . .