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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number: 001-31788

NBTY, Inc.
(Exact name of registrant as specified in its charter)

2100 Smithtown Avenue,
Ronkonkoma, New York 11779
(Address of principal executive offices) (Zip Code)

(631) 567-9500
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý    NO o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o    NO o

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

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o    NO ý

        The number of shares of Common Stock (par value $.008 per share) outstanding as of August 4, 2009 was 61,873,998.

NBTY, INC.
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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NBTY, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(in thousands, except per share amounts)

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

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NBTY, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(in thousands, except per share amounts)

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

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NBTY, Inc.

Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income

Nine Months Ended June 30, 2009 and 2008

(Unaudited)

(in thousands)

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

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NBTY, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

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

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(in thousands, except per share amounts)

1. Basis of Presentation

        NBTY, Inc. (together with its subsidiaries, "we," "our," "us," "NBTY," or the "Company") is a leading global vertically integrated manufacturer, marketer, distributor and retailer of a broad line of high-quality, value-priced nutritional supplements in the United States and throughout the world. We market over 25,000 products under numerous owned and private-label brands, including Nature's Bounty®, Vitamin World®, Pure Protein®, Body Fortress®, Puritan's Pride®, Holland & Barrett®, Rexall®, Osteo-Bi-Flex®, Flex-A-Min®, Knox®, Sundown®, MET-Rx®, WORLDWIDE Sport Nutrition®, American Health®, DeTuinen®, Le Naturiste™, SISU®, Solgar®, Physiologics® and Ester-C®.

        We have prepared these financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") applicable to interim financial information and on a basis that is consistent with the accounting principles applied in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 ("2008 Form 10-K"). In our opinion, these financial statements reflect all adjustments (including normal recurring items) necessary for a fair presentation of our results for the interim periods presented. These financial statements do not include all information or notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the financial statements and notes thereto contained in our 2008 Form 10-K. Results for interim periods are not necessarily indicative of results which may be achieved for a full year.

        We have evaluated subsequent events through August 7, 2009, the date of issuance of these financial statements.

Estimates

        The preparation of financial statements in conformity with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. These judgments can be subjective and complex, and consequently actual results could differ materially from those estimates and assumptions. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our most significant estimates include: sales returns and other allowances; inventory valuation and obsolescence; valuation and recoverability of long-lived assets, including goodwill; income taxes; and accruals for the outcome of current litigation.

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

1. Basis of Presentation (Continued)

Accounts Receivable Reserves

        Accounts receivable were net of the following reserves:

Recent Accounting Developments

        In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162", ("SFAS 168"), which is effective for us on July 1, 2009. SFAS 168 does not alter current GAAP, but rather integrates existing accounting standards with other authoritative guidance. Under SFAS 168 there will be a single source of authoritative GAAP for nongovernmental entities and will supersede all other previously issued non-SEC accounting and reporting guidance. The adoption of SFAS 168 will not have any impact on our financial position or results of operations.

        In June 2009, FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). SFAS 167 amends FIN 46(R), "Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51" to require an enterprise to perform an analysis to determine whether the enterprise's variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impacts the entity's economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. SFAS 167 will become effective for us October 1, 2010. We anticipate that the adoption of SFAS 167 will not have a significant impact on our consolidated financial position or results of operations since we currently do not have any variable interest entities.

        In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted SFAS 165 on June 30, 2009. The adoption of SFAS 165 had no impact on our financial position or results of operations.

        In April 2009, the FASB issued FSP No. 141R-1 "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies" ("FSP 141R-1"). FSP 141R-1 amends the provisions in SFAS 141(R) for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

1. Basis of Presentation (Continued)

business combinations. FSP 141R-1 eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS 141(R) and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP 141R-1 is effective for all business acquisitions occurring on or after October 1, 2009. The impact of the adoptions will be dependent upon the extent and nature of any future acquisitions.

        In April 2009, the FASB issued FASB Staff Position SFAS No. 107-1 and APB No. 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP 107-1 and APB 28-1"). This FSP amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" and APB Opinion No. 28, "Interim Financial Reporting", to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. FSP 107-1 and APB 28-1 applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments. FSP 107-1 and APB 28-1 became effective for us on June 30, 2009. The adoption of this FSP did not have a significant impact on our consolidated financial statements.

        In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (the GAAP hierarchy). This Statement was effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The adoption of this statement did not have a material effect on our consolidated financial statements.

        In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 requires enhanced disclosures regarding an entity's derivative and hedging activities. These enhanced disclosures include information regarding how and why an entity uses derivative instruments; how derivative instruments and related hedge items are accounted for under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", and its related interpretations; and how derivative instruments and related hedge items affect an entity's financial position, financial performance and cash flows. We adopted SFAS 161 as of January 1, 2009. The adoption of SFAS 161 had no impact on our financial position or results of operations. The additional disclosures required by SFAS 161 are included in Note 11.

        In December 2007, the FASB issued SFAS No. 141 (revised 2007), ("SFAS 141R"), "Business Combinations", which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, however, it includes changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS 141R will become effective for us beginning October 1, 2009 and will apply prospectively to business combinations completed on or

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

1. Basis of Presentation (Continued)

after that date. The impact of the adoption of SFAS 141R will be dependent on the extent and nature of any future acquisitions.

        In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits companies to choose to measure certain financial instruments and other eligible items at fair value when the items are not otherwise currently required to be measured at fair value. Under SFAS 159, the decision to measure items at fair value is made at specified election dates on an irrevocable instrument-by-instrument basis. Companies electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option is elected. Companies electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. SFAS 159 became effective for us on October 1, 2008. The adoption of SFAS 159 did not have any impact on our consolidated financial position or results of operations as we did not elect the fair value option.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and enhances disclosures about fair value measurements. SFAS 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. We adopted SFAS 157 on October 1, 2008 for financial assets and liabilities carried at fair value and non financial assets and liabilities that are recognized or disclosed on a recurring basis. The adoption did not have a material effect on our consolidated financial statements. In February 2008, the FASB issued FASB Staff Position 157-2, which provides for a one-year deferral of the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. FASB Staff Position 157-2 will become effective for us beginning October 1, 2009. We anticipate that the adoption of FASB Staff Position SFAS 157-2 will not have a significant impact on our consolidated financial position or results of operations.

2. Acquisitions

Leiner

        On July 14, 2008, we acquired substantially all the nutritional supplement assets of Leiner Health Products Inc. ("Leiner") plus the assumption of certain liabilities for $370,600 (subject to adjustment based upon finalization of working capital balances acquired at the date of closing). During December 2008, the working capital balances were finalized resulting in an additional payment by us of $2,366 which increased goodwill. The working capital payment was made from the $15,000 held in escrow and the remainder of the escrow was returned to NBTY. The purchase price was funded primarily by the use of our existing $325,000 revolving credit facility and cash on hand. The Company also incurred $3,470 of direct transaction costs for a total purchase price of $376,436. Substantially all the goodwill associated with this acquisition is deductible for tax purposes.

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

2. Acquisitions (Continued)

        At the closing of the Leiner acquisition, we anticipated workforce reductions and, as such, included an estimated accrual for such reductions comprised of severance and employee benefits, in the purchase price allocation. The rollforward of the workforce reduction accrual was as follows:

        During the nine months ended June 30, 2009, we incurred $2,204 of severance costs, in the form of stay-bonuses for services incurred in the period. These costs are recorded over the service period and are paid to the Leiner transitional associates upon their termination. This amount was included in selling, general and administrative expense in the consolidated statement of income for the nine months ended June 30, 2009.

        The following unaudited pro forma financial information presents a summary of our consolidated net sales and net income for the three and nine months ended June 30, 2008, assuming that the acquisition of Leiner had taken place on October 1, 2007:

        The above unaudited pro forma financial information has been prepared for comparative purposes only and includes certain adjustments to actual financial results, such as imputed interest costs, and estimated additional depreciation and amortization expense as a result of property, plant and equipment and intangible assets acquired. The pro forma financial information does not purport to be indicative of the results of operations that would have been achieved had the acquisition taken place on the date indicated or that may result in the future.

        The above unaudited pro forma information includes certain non-recurring charges related to Leiner's bankruptcy reorganization and impairments on its Fort Mill, South Carolina facility, which we did not acquire. These non-recurring charges do not relate to the acquisition and were not part of the activities that were acquired by NBTY. The amount of these non-recurring charges included in the

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

2. Acquisitions (Continued)

above unaudited pro forma financial information for the three months and nine months ended June 30, 2008 was $11,838 and $31,658, respectively.

Julian Graves

        On September 16, 2008, our subsidiary, NBTY Europe Limited, acquired Julian Graves, a UK independent retailer of nuts, seeds and confectionaries for approximately $25,000. Julian Graves has a network of 350 stores throughout the UK and Ireland. The preliminary allocation of net assets acquired primarily consisted of inventory, property, plant and equipment and goodwill. Since we acquired the outstanding share capital of Julian Graves, the goodwill associated with this acquisition is not deductible for tax purposes. The purchase agreement stipulates an adjustment to the purchase price between the buyer and seller for the excess or shortfall of the final working capital threshold as stated in the agreement. During June 2009, the final working capital adjustment to the purchase price of approximately $3,044, representing a shortfall in working capital, was received by our subsidiary. This resulted in a reduction of the purchase price and goodwill. The allocation of net assets acquired is based on preliminary estimates. Finalization of the valuation of the net assets acquired and working capital balance at the date of closing are subject to change during the purchase price allocation period (generally one year from the acquisition date).

        In September 2008, the UK Office of Fair Trading commenced an investigation under the merger control provisions of the Enterprise Act 2002 into the completed acquisition by NBTY Europe Limited of Julian Graves. In March 2009, this investigation was referred to the UK Competition Commission for potential anti-trust implications. In July 2009, the UK Competition Commission provisionally approved the acquisition. The final decision by the UK Competition Commission is expected on or before September 3, 2009. Pending the final decision by the UK Competition Commission, NBTY Europe Limited has not integrated the Julian Graves business with its existing UK operations.

        During the three and nine months ended June 30, 2009 we incurred legal costs of $3,722 and $4,822, respectively, related to the review of the Julian Graves acquisition by the Competition Commission in the UK. These costs are included under the caption "selling, general and administrative" expense in the consolidated statements of income.

        Proforma financial information related to Julian Graves is not provided as its impact was not material to our consolidated financial statements.

3. Inventories

        The components of inventories were as follows:

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

4. Goodwill and Intangible Assets

Goodwill

        The changes in the carrying amount of goodwill by segment were as follows:

        The purchase price adjustments included in the Wholesale/US Nutrition segment relate to Leiner acquisition adjustments of $2,366 for the finalization of working capital balances, $730 of additional transaction costs, an adjustment for inventory reserves of $1,189 and a $2,549 increase in the tax accrual. The purchase price adjustments included in the European Retail segment relate to Julian Graves acquisition adjustments of a decrease of $3,044 for the finalization of working capital balances, partially offset by opening balance sheet adjustments of $2,473.

        In March 2009, due principally to a decline in the Company's stock price since the date of our annual goodwill impairment test, we performed an interim test as of February 28, 2009. The fair value of our reporting units exceeded their respective carrying values and therefore no impairment to goodwill was deemed necessary.

Other Intangible Assets

        The carrying amounts of intangible assets as were as follows:

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

4. Goodwill and Intangible Assets (Continued)

        Aggregate amortization expense of other intangible assets included in the consolidated statements of income under the caption "selling, general and administrative" expenses for the three months ended June 30, 2009 and 2008 was approximately $4,018 and $3,094, respectively. Amortization expense for the nine months ended June 30, 2009 and 2008 was approximately $12,042 and $9,329, respectively.

        Assuming no changes in our definite lived intangible assets, estimated amortization expense for each of the five succeeding fiscal years is as follows:

5. IT Project Termination Costs and Impairments

North American and European Retail segments

        During June 2009, management terminated a new point of sale system project for retail operations as it was determined to be ineffective and uneconomical. As a result, previously capitalized software configuration, coding and other related costs and expenses of $11,070 were written-off during the three months ended June 30, 2009. In addition, prepaid maintenance costs of $586 were written off during the same period.

Direct Response segment

        During December 2008, management determined that certain information technology projects relating to the Direct Response segment would be terminated as they were determined to be ineffective and uneconomical. As a result, in December 2008, we recorded a charge to operations of $8,647, consisting of costs and future lease obligations not expected to provide any future economical benefit. During the three months ended June 30, 2009, $1,529 of these termination costs were reversed due to favorable negotiations with previous service providers.

Impairment of Idle Plant

        We own a plant (land and building) located in Augusta, Georgia which is idle. We have marketed the plant for sale, however, due to the continued deterioration of the commercial real estate and credit markets, we have been unable to complete a sale transaction. During June 2009, we determined that the carrying value of the land and building exceeded its estimated fair value, less costs to sell, and recorded an impairment charge of $3,270. This impairment charge is included in the consolidated statements of income under the caption "selling, general and administrative" expenses for the three and nine months ended June 30, 2009.

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

6. Accrued Expenses and Other Current Liabilities

        The components of accrued expenses and other current liabilities were as follows:

7. Long-Term Debt

        The components of long-term debt were as follows:

8. Litigation Summary

Prohormone products

        In March 2004, a putative class-action lawsuit was filed in New Jersey against MET-Rx USA, Inc. ("Met-Rx"), a subsidiary of the Company, claiming that the advertising and marketing of certain prohormone supplements were false and misleading and that plaintiff and the putative class of New Jersey purchasers of these products were entitled to damages and injunctive relief. Because these allegations were virtually identical to allegations made in a putative nationwide class-action previously filed against Met-Rx in California, we moved in 2004 to dismiss or stay the New Jersey action pending the outcome of the California action. The motion was granted, and the New Jersey action is stayed at this time. The California action against Met-Rx had been dismissed in 2008.

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

8. Litigation Summary (Continued)

Nutrition Bars

        Our subsidiary, Rexall Sundown, Inc. ("Rexall"), and certain of its subsidiaries are defendants in a class-action lawsuit brought in 2002 on behalf of all California consumers who bought various nutrition bars. Plaintiffs allege misbranding of nutrition bars and violations of California unfair competition statutes, misleading advertising and other similar causes of action. Plaintiffs seek restitution, legal fees and injunctive relief. We have defended this action vigorously.

        This case was initially stayed for all purposes in early 2005 pending resolution of relevant cases before the California Supreme Court. In December 2007, after these cases were resolved and while Rexall's and the other defendants' renewed motion for judgment on the pleadings was pending, the Court again stayed the case for all purposes, pending rulings on other relevant cases before the California Supreme Court. The California Supreme Court issued a ruling in those other cases on February 11, 2008, and that ruling became final on January 12, 2009. Nevertheless, in light of still more relevant cases pending before the California Supreme Court, all parties to this case have agreed that the stay should remain in place. Based upon the information currently available, no determination can be made at this time as to the final outcome of this case, nor can its materiality be accurately ascertained.

        In addition to the foregoing, other regulatory inquiries, claims, suits and complaints (including product liability and intellectual property claims) arise in the ordinary course of our business. We believe that such other inquiries, claims, suits and complaints would not have a material adverse effect on our consolidated financial condition or results of operations, if adversely determined against us.

9. Income Taxes

        Our provision for income taxes is impacted by a number of factors, including federal taxes, our international tax structure, state tax rates in the jurisdictions where we conduct business, and our ability to utilize state tax credits that expire between 2013 and 2016. Therefore, our overall effective income tax rate could vary as a result of these factors.

        The effective income tax rate for the three months ended June 30, 2009 and 2008 was 35.5% and 34.0%, respectively. The effective income tax rate for the nine months ended June 30, 2009 and 2008 was 35.5% and 33.6%, respectively. The effective income tax rate was higher for the three and nine months ended June 30, 2009 as compared to the prior comparable periods due to a higher effective state rate as a result of increased operations in California from the Leiner acquisition, a lower domestic production deduction in the current year due to lower domestic income and lower tax-free interest income in the current year.

        We accrue interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At June 30, 2009, we had $1,756 and $889 accrued for the potential payment of interest and penalties, respectively. As of June 30, 2009, we were subject to U.S. Federal Income Tax examinations for the tax years 2005 - 2008, and to non-US examinations for the tax years of 2003 - 2008. In addition, we are generally subject to state and local examinations for fiscal years 2005 - 2008.

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

10. Stock-based Compensation

        During the three months ended June 30, 2009, the Company granted 925 stock options to directors and certain employees under the 2008 and 2000 Stock Option Plans. These stock options were granted with a weighted average exercise price of $22.90. All stock options were granted at a price equal to the fair market value of the Company's common stock on the date of grant. The vesting period for 261 of these options is over four years, with ¹/2 vesting in 2010, and ¹/6 vesting on the anniversary of the date of grant in 2011, 2012 and 2013. The vesting period for the remaining 664 options is over four years, with no vesting in 2010, and ¹/3 vesting on the anniversary of the date of grant in 2011, 2012 and 2013. All stock options granted expire ten years from the date of grant.

        The weighted average fair value per share of the options granted was $11.48. The fair value of each option award is estimated on the date of grant using a Black-Scholes-Merton option pricing model. The following weighted average assumptions were used for the options granted during the three months ended June 30, 2009:

(1)

The risk-free rate is based upon the rate on a zero coupon U.S. Treasury bill, for the expected term of the option, in effect at the time of grant.

(2)

The expected term of the option is based on historical employee exercise behavior, the vesting terms of the respective option and a contractual life of ten years.

(3)

Expected volatility is primarily based on the daily historical volatility of our stock price, over a period similar to the expected term of the option.

11. Net Income Per Share

        Basic net income per share is based on the weighted average number of common shares outstanding during the three and nine month period ended June 30, 2009 and 2008. Diluted net income per share includes the dilutive effect of outstanding stock options, which resulted in a dilutive effect of approximately 1,468 and 1,550 shares for the three months ended June 30, 2009 and 2008, respectively, and 1,459 and 1,721 shares for the nine months ended June 30, 2009 and 2008, respectively. There were 910 and 871 outstanding stock options for the three and nine months ended June 30, 2009, respectively, that were not included in the calculation of diluted net income per share since they would have been anti-dilutive.

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

12. Comprehensive Income

        The components of comprehensive income were as follows:

13. Fair Value of Financial Instruments

        GAAP establishes a framework for measuring fair value and requires certain disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.



•

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.



•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Interest Rate Swaps

        To manage the potential risk arising from changing interest rates and their impact on long-term debt, our policy is to maintain a combination of available fixed and variable rate financial instruments. In Fiscal 2008, we entered into two interest rate swap contracts to hedge the variability of future interest relating to a portion of the interest payments on our Term Loan. Each swap contract has a notional amount of $100 million. One swap contract has a fixed interest rate, before bank margin of 3.88% for a two year term and the other swap contract has a fixed interest rate, before bank margin of 4.195% for a three year term. Under the terms of the swap contracts, variable interest payments for a portion of our Term Loan are swapped for fixed interest payments.

        In accordance with GAAP, we have formally documented the relationship between the interest rate swap contracts and the Term Loan, as well as our risk management objective and strategy for undertaking the hedge transactions. This process includes linking the derivative which was designated as a cash flow hedge to the specific liability on the balance sheet. We record the change in the fair value

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NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

13. Fair Value of Financial Instruments (Continued)

of the swap contracts through Other Comprehensive Income ("OCI"), net of income tax. Since we expect these hedging relationships to be highly effective, both at inception of the hedges and on an ongoing basis, they are expected to be highly effective in achieving offsetting changes in fair value attributable to the hedged risk during the period that the hedges are designated. We have determined that there will be no ineffectiveness in the hedging relationships since the hedged forecasted interest payments are based on the same notional amount, have the same reset dates, and are based on the same benchmark interest rate designated under the variable rate Term Loan. We assess, at the inception of the hedges and on an ongoing basis, whether the derivatives used in the hedging transaction are highly effective in offsetting changes in the cash flows of the hedged item. The change in the fair value of the swap contracts for the nine months ended June 30, 2009 recorded through OCI, net of income tax was $4,797. At June 30, 2009, the swap contracts liability, included in other liabilities, was $10,032. The fair value of the swap contracts were valued using observable current market information such as the prevailing LIBOR interest rate and LIBOR yield curve rates (Level 2).

7¹/8% Senior Subordinated Notes

        The face value and the fair value of the 7¹/8% Senior Subordinated Notes at June 30, 2009, was $190,000 and $177,175, respectively. The fair value of the 7¹/8% Senior Subordinated Notes was determined based on then quoted market prices (Level 1).

14. Business and Credit Concentration

Financial Instruments

        Financial instruments which potentially subject us to credit risk consist primarily of cash and cash equivalents (the amounts of which may, at times, exceed Federal Deposit Insurance Corporation limits on insurable amounts), investments and trade accounts receivable. We mitigate our risk by investing in or through major financial institutions. At June 30, 2009, we had $3,075 of municipal auction rate securities, which were classified in non-current assets as available-for-sale investments.

Customers

        We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customers' current credit worthiness, as determined by review of their current credit information. Customers account activity is continuously monitored. As a result of this review process, we record bad debt expense, which is based upon historical experience as well as specific customer collection issues that have been identified, to adjust the carrying amount of the related receivable to its estimated realizable value. While such bad debt expenses have historically been within expectations and allowances established, if the financial condition of one or more of our customers were to deteriorate, additional bad debt provisions may be required.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

14. Business and Credit Concentration (Continued)

        The following individual customers accounted for the following percentages of net sales for the three and nine months ended June 30, 2009 and 2008, respectively:

        The loss of this customer, or any other major customer, would have a material adverse effect on our consolidated results of operations if we were unable to replace such customer(s).

        The following individual customers accounted for 10% or more of the Wholesale/US Nutrition segment's gross accounts receivable as of June 30, 2009 and September 30, 2008, respectively:

15. Supplemental Disclosure of Cash Flow Information

16. Segment Information

        We are organized by sales segments on a worldwide basis. We evaluate performance based on a number of factors; however, the primary measures of performance are the net sales, gross profit and

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

16. Segment Information (Continued)

income or loss from operations (prior to corporate allocations) of each segment, as these are the key performance indicators that we review. Operating income or loss for each segment does not include the impact of any intercompany transfer pricing mark-up, corporate general and administrative expenses, interest expense and other miscellaneous income/expense items. Corporate general and administrative expenses include, but are not limited to: human resources, legal, finance, and various other corporate level activity related expenses. Such unallocated expenses remain within corporate. During the three months ended June 30, 2009, we changed the way certain expenses are allocated to the segments. Specifically, certain shipping and warehouse costs, information technology and advertising costs previously included in the Corporate segment are now allocated to the other segments. All prior period segment information has been adjusted to conform with the current period presentation.

        All our products fall into one or more of these four segments:

•

Wholesale/US Nutrition—This segment is comprised of several divisions, each targeting specific market groups which include wholesalers, distributors, food, drug and mass merchandisers, pharmacies, health food stores, bulk and international customers.



•

North American Retail—This segment generates revenue through its 442 owned and operated Vitamin World and Nutrition Warehouse stores selling proprietary brand and third-party products, and through its Canadian operation of 86 owned and operated Le Naturiste stores.



•

European Retail—This segment generates revenue through its 534 Holland & Barrett stores, 346 Julian Graves stores and 31 GNC stores in the UK, 73 DeTuinen stores in the Netherlands and 24 Nature's Way and 4 Julian Graves stores in Ireland. Such revenue consists of sales of proprietary brand and third-party products, as well as franchise fees from 9 Holland & Barrett locations in South Africa.



•

Direct Response/E-Commerce—This segment generates revenue through the sale of proprietary brand and third-party products primarily through mail order catalog and the internet. Catalogs are strategically mailed to customers who order by mail, internet, or by phone.

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Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

16. Segment Information (Continued)

        The following table represents key financial information of our business segments: