UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

x	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934~~	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
OR
o	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934~~	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO: 0-24567

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO: 0-24567

NATROL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		95-3560780
Delaware		95-3560780
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

21411 ~~PRAIRIE~~Prairie ~~STREET CHATSWORTH, CALIFORNIA 91311 (Address of principal executive offices)~~Street

~~(818) 739-6000 (Registrant’s telephone number~~Chatsworth, ~~including~~California ~~area code)~~91311

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

(818) 739-6000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by a 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12-B2 of the Exchange Act. (check one)

Large accelerated filer o

Accelerated filer o

or Non-accelerated filer x

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

As of August 95, ~~2006~~2007, 1314,~~589~~157,~~148~~044 shares of the registrant’s common stock were outstanding.

~~Natrol,~~TABLE OF ~~Inc.~~CONTENTS

INDEX

PART I		FINANCIAL INFORMATION

Item 1.		Financial Statements

		Consolidated Balance Sheets

		Consolidated Statements of Income

		Consolidated Statements of Cash Flows

		Notes to Consolidated Unaudited Financial Statements

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Item 4.		Controls and Procedures

PART II.		OTHER INFORMATION

Item 1A.		Risk Factors

Item 5.		Other Information

Item 6.		Exhibits

Signature

Exhibit Index

PART I	FINANCIAL INFORMATION	3
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Unaudited Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	15
PART II.	OTHER INFORMATION	15
Item 1A.	Risk Factors	15
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 6.	Exhibits	17
Signature
Exhibit Index

PART 1 — FINANCIAL INFORMATION

ITEMItem 1. FINANCIALFinancial STATEMENTSStatements

Natrol, Inc. and Subsidiaries

Consolidated Condensed Balance Sheets

(In thousands, except share and per share data)

	June 30			December 31
	2006			2005
	2007			2006
	(unaudited)
Assets
Current assets:
Cash	$	2,262		$	3,097
Cash and cash equivalents	$	8,640		$	1,003
Accounts receivable, net of allowances of $210 and $247 at June 30, 2006 and December 31, 2005, respectively	7,541			6,723
Accounts receivable, net of allowances of $241 and $181 at June 30, 2007 and December 31, 2006, respectively	11,274			6,485
Inventory	1220,~~236~~057			11,~~797~~788
Income taxes receivable	~~234~~—			~~439~~375
Deferred income taxes	21,~~021~~635			21,~~021~~630
Prepaid expenses and other current assets	~~491~~1,164			~~726~~1,743
Total current assets	2442,~~785~~770			2423,~~803~~024
Property and equipment:
Building and improvements	~~14,936~~—			14,~~930~~953
Machinery and equipment	56,~~777~~122			5,~~754~~757
Furniture and office equipment	3,~~138~~038			23,~~900~~013
	23,851			23,584
	9,160			23,723
Accumulated depreciation and amortization	(97,~~376~~343		)	(89,~~684~~912		)
Property and equipment, net	141,~~475~~817			1413,~~900~~811
Property held for sale, net	—			761
Restricted cash	5,250			5,000
Restricted cash	5,000			5,000
Deferred income taxes	4,265			4,265
Deferred income taxes	4,033			3,905
Goodwill, net of accumulated amortization and impairment charge	2,026			2,026
Goodwill, net of accumulated amortization and impairment charge of $37,381	2,026			2,026
Trademarks	5,730			5,730
Other assets	531,047			67744
Total assets	$	5062,~~372~~905		$	5154,~~462~~600
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,750		$	4,647
Line of credit	$	—		$	3,694
Accrued expenses	4,122			2,888
Accounts payable	8,039			3,058
Accrued payroll and related liabilities	1,063			826
Accrued expenses	3,081			2,558
Current portion of long-term debt	548			532
Accrued payroll and related liabilities	1,364			1,185
Total current liabilities	7,483			8,893
Income taxes payable	2,850			—
Long-term debt, less current portion	6,887			7,165
Current portion of long-term debt	12			414
Commitments and contingencies
Total current liabilities	15,346			10,909
Long-term debt, less current portion	31			6,301
Deferred benefit from sale leaseback	5,280			—
Commitments and contingencies	—			—
Stockholders’ equity:
Preferred stock, par value of $0.01 per share:
Preferred stock, par value of $0.01 per share: Authorized shares—2,000,000; Issued and outstanding shares—none	—			—
Authorized shares—2,000,000; Issued and outstanding shares—none	—			—
Common stock, par value of $0.01 per share: Authorized shares—50,000,000, Issued and outstanding shares—14,155,544 and 14,116,148 at June 30, 2007 and December 31, 2006, respectively	142			141
Common stock, par value of $0.01 per share:
Additional paid-in capital	61,965			61,638
Authorized shares—50,000,000 Issued and outstanding shares—13,575,648 and 13,535,837 at June 30, 2006 and December 31, 2005, respectively	136			135
Accumulated deficit	(19,896		)	(24,409		)
Additional paid-in capital	60,537			60,113
Accumulated other comprehensive income	37			20
Accumulated deficit	(24,671		)	(24,844		)
Total stockholders’ equity	42,248			37,390
Total stockholders’ equity	36,002			35,404
Total liabilities and stockholders’ equity	$	62,905		$	54,600
Total liabilities and stockholders’ equity	$	50,372		$	51,462

See accompanying notes

Natrol, Inc. and Subsidiaries

Consolidated Condensed Statements of ~~Operations~~Income

(In thousands, except share and per share data)

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	Three months ended						Six months ended
	2006			2005			2006			2005
	June 30,						June 30,
Net sales	$	16,587		$	19,604		$	33,511		$	37,273
	2007			2006			2007			2006
Cost of goods sold	9,394			12,076			19,423			23,480
Net sales	$	19,547		$	16,587		$	38,254		$	33,511
Gross profit	7,193			7,528			14,088			13,793
Cost of goods sold	10,263			9,394			20,184			19,423
Selling and marketing expenses	4,091			4,860			8,183			9,045
Gross profit	9,284			7,193			18,070			14,088
General and administrative expenses	2,765			2,086			5,290			5,003
Selling and marketing expenses	5,549			4,092			10,575			8,183
Option expenses	67			—			359			—
General and administrative expenses	2,998			2,831			6,015			5,649
Total operating expenses	68,~~923~~547			6,~~946~~923			1316,~~832~~590			1413,~~048~~832
Operating income (loss)	270			582			256			(255		)
Operating income	737			270			1,480			256
Interest income	60151			4860			~~116~~184			90116
Interest expense	(~~153~~70		)	(~~160~~153		)	(~~307~~291		)	(~~320~~307		)
Gain on sale of property	—			—			230			—
Other (Loss)	(35		)	—			(35		)	—
Income (loss) before taxes	177			470			295			(485		)
Gain on sale of property	6,062			—			6,062			230
Income tax provision (benefit)	77			179			122			(184		)
Income before taxes	6,845			177			7,400			295
Net Income (loss)	$	100		$	291		$	173		$	(301	)
Income tax provision	2,672			77			2,887			122
Income (loss) per share:
Net income	$	4,173		$	100		$	4,513		$	173
Basic	$	.01		$	.02		$	.01		$	(.02	)
Income per share:
Diluted	$	.01		$	.02		$	.01		$	(.02	)
Basic	$	0.29		$	0.01		$	0.32		$	0.01
Diluted	$	0.25		$	0.01		$	0.28		$	0.01
Weighted-average shares outstanding—basic and diluted
Basic	1314,~~563~~153,~~747~~601			13,~~453~~563,~~164~~747			1314,~~557~~149,~~115~~355			13,~~418~~557,~~981~~115
Diluted	1316,~~914,~~763,440			1413,~~178~~914,~~075~~763			1316,~~865~~093,~~531~~514			13,~~418~~865,~~981~~531

See accompanying notes

Natrol, Inc. and Subsidiaries

Consolidated Condensed Statements of Cash Flows

(In thousands)

(unaudited)

	Six months ended June 30,
	Six months ended
	2006			2005
	June 30,
	2007			2006
Operating activities
Net income (loss)	$	173		$	(301	)
Net income	$	4,513		$	173
Adjustments to reconcile income (loss) to net cash used in operating activities:
Adjustments to reconcile income to net cash provided by (used) in operating activities:
Depreciation and amortization	697			643
Gain on sale of property	(6,062		)	—
Provision for bad debts	(37		)	179
Depreciation and amortization	605			697
Deferred income taxes	(128		)	—
Foreign currency translation	17			—
Shares issued for services	32			—
Provision for bad debts	60			(37		)
Option expense	359			—
Deferred income taxes	(5		)	(128		)
Shares issued for services	—			32
Option expense	264			359
Changes in operating assets and liabilities:
Accounts receivable	(781		)	(1,906		)
Deferred benefit from sale leaseback	5,280			—
Inventory	(439		)	(824		)
Accounts receivable	(4,849		)	(781		)
Income taxes receivable/payable	205			228
Inventory	(8,270		)	(439		)
Prepaid expenses and other current assets	234			115
Income taxes receivable/payable	3,225			205
Accounts payable	(3,102		)	235
Prepaid expenses and other current assets	579			234
Accrued expenses	1,439			608
Accounts payable	4,979			(3,102		)
Accrued payroll and related liabilities	238			(754		)
Accrued expenses	522			1439
Net cash used in operating activities	(1,110		)	(1,777		)
Accrued payroll and related liabilities	179			238
Net cash provided by (used in) operating activities	1,037			(1,110		)
Investing activities
Purchases of property and equipment	(~~267~~234		)	(~~380~~267		)
Sale of property	759			—
Proceeds from sale of property	26,000			—
Other assets	12			25
Cash outlay for acquisition	(8,235		)	759
Net cash provided by (used in) investing activities	504			(355		)
Other assets	(629		)	12
Net cash provided by investing activities	16,902			504
Financing activities
Repayments on long-term debt	(263		)	(236		)
Repayment of line of credit	(3,694		)	—
Proceeds from issuance of common stock	34			200
Repayments on long-term debt	(6,672		)	(263		)
Net cash used in financing activities	(229		)	(36		)
Proceeds from issuance of common stock	64			34
Net decrease in cash and cash equivalents	(835		)	(2,168		)
Net cash used in financing activities	(10,302		)	(229		)
Cash and cash equivalents, beginning of period	3,097			6,022
Net increase (decrease) in cash and cash equivalents	7,637			(835		)
Cash and cash equivalents, end of period	$	2,262		$	3,854
Cash and cash equivalents, beginning of period	1,003			3,097
Cash and cash equivalents, end of period	$	8,640		$	2,262

See accompanying notes

~~NATROL~~Natrol, ~~INC~~Inc. and Subsidiaries

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~UNAUDITED FINANCIAL~~Unaudited ~~STATEMENTS~~Financial Statements

(In thousands, ~~except~~ except share and per share data)

1. BASIS OF PRESENTATION

The ~~accompanying~~ accompanying consolidated condensed financial statements have been prepared by Natrol, Inc. (the “Company”), pursuant to the rules and regulations of the Securities ~~and~~ and Exchange Commission (SEC). This quarterly report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, ~~2005~~2006. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations. ~~The~~ The information reflects all normal and recurring adjustments which, in the opinion of the Company’s management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the three ~~months~~ and six months ended June 30, ~~2006~~2007 are not necessarily indicative of the results to be expected for the full year or any other period.

2. STOCK BASED COMPENSATION

~~Through~~During the ~~end~~three ofand ~~2005,~~six ~~the~~month ~~Company~~periods ~~measured~~ended ~~compensation~~June ~~for~~30, ~~stock-based~~2007, ~~incentive programs utilizing~~ the ~~intrinsic~~Company ~~value method prescribed by Accounting~~granted ~~Principles~~options ~~Board~~to ~~(APB)~~purchase ~~Opinion No. 25~~50,000 ~~Accounting for~~shares ~~Stock~~and ~~Issued to Employees~~77,500 ~~and~~shares ~~related~~of ~~interpretations.~~common ~~Under~~stock, ~~this~~respectively. ~~method,~~During the ~~Company~~three ~~did~~and ~~not~~six ~~record~~month ~~compensation~~periods ~~expense~~ended ~~when~~June ~~stock~~30, ~~options~~2006 the ~~were~~Company granted options to ~~eligible~~purchase ~~participants~~497,499 asand ~~long~~6,786,999 asshares ~~the exercise price was not less than the fair market value~~ of ~~the~~ common stock, ~~when the option was granted~~respectively. ~~In accordance~~Of ~~with~~these ~~Statement of Financial Accounting Standards (SFAS) No. 123~~shares, ~~Accounting for Stock-Based Compensation~~6, ~~(SFAS~~029,500 ~~123)~~options ~~and~~were ~~SFAS~~granted ~~No.~~to ~~148, Accounting for~~Wayne ~~Stock-Based~~M. ~~Compensation~~Bos —upon ~~Transition~~his ~~and~~appointment ~~Disclosure,~~as the Company ~~disclosed~~’s ~~the~~CEO ~~pro~~and ~~forma~~President. ~~net~~This ~~income~~option award ~~per~~was ~~share~~approved asby if the ~~fair~~stockholders ~~value-based~~of ~~method had~~the ~~been~~Company ~~applied~~at inits ~~measuring~~2006 ~~compensation~~annual meeting ~~expense~~of ~~for stock-based incentive awards~~stockholders. NoThe ~~stock-based~~remaining ~~compensation~~options ~~cost~~were ~~was~~granted ~~recognized~~to inother ~~the Consolidated~~employees ~~Statement~~and ofdirectors. ~~Operations~~The ~~for~~options ~~the~~granted ~~three~~to ~~months~~Mr. ~~and~~Bos ~~six~~have ~~months~~certain ~~ended~~service ~~June~~and performance ~~30,~~conditions ~~2005 for~~which ~~options~~have ~~granted~~been ~~under~~discussed in the Company’s ~~stock~~prior ~~option~~SEC filings. ~~plan,~~These ~~as all unvested~~ options ~~granted~~were ~~had~~fully anvested ~~exercise~~upon ~~price~~grant, ~~equal~~and towe orrecognized ~~greater than the fair market~~a ~~value~~related expense of ~~the~~$0.3 million ~~underlying~~during ~~common stock on~~ the ~~date~~first quarter of ~~grant~~2006.

InThe ~~December~~Company ~~2004,~~used ~~the~~a ~~Financial~~Monte ~~Accounting~~Carlo ~~Standards~~method ~~Board~~to ~~(FASB)~~simulate ~~issued~~stock ~~SFAS~~price paths over the term ~~123R~~of the 6,029,500 ~~Share~~options ~~Based~~awarded ~~Payment:~~to AnMr. ~~Amendment~~Bos. ofAll other options were valued ~~FASB~~using ~~Statements~~a NoBlack-Scholes model. ~~123~~The ~~and~~Monte 95Carlo ~~(SFAS~~method, ~~123R).~~which ~~This~~is ~~statement~~one ~~requires~~acceptable ~~that~~valuation ~~the~~method ~~cost~~per ~~resulting~~Statement ~~from~~of ~~all~~Financial ~~share-based~~Accounting ~~payment~~Standard ~~transactions~~123R, bewas ~~recognized~~used indue ~~the~~to ~~Company’s~~many ~~consolidated~~factors ~~financial~~which ~~statements.~~make Inutilizing ~~addition,~~a inBlack-Scholes ~~March~~model ~~2005~~inappropriate ~~the~~for ~~SEC~~a ~~released~~block ~~SEC~~of ~~Staff~~options ~~Accounting~~of ~~Bulletin~~this Nomagnitude. ~~107,~~These ~~Share-Based~~factors ~~Payment~~include ~~(SAB~~but ~~107).~~are ~~SAB 107~~not ~~provides~~limited to the ~~SEC’s~~size ~~staff’s~~of ~~position~~the ~~regarding~~grant ~~the~~in ~~application~~relation ofto ~~SFAS~~the ~~123R~~total ~~and~~shares outstanding, ~~certain~~the ~~SEC~~trading ~~rules~~volume ~~and~~of ~~regulations,~~the ~~and~~Company’s ~~also~~stock ~~provides~~and the ~~staff~~holder’s ~~views~~ability to resell ~~regarding~~the shares, and the ~~valuation~~control offactor, ~~share-based~~which ~~payment~~the ~~arrangements~~size ~~for~~of ~~public companies~~the grant implies. ~~Generally,~~The Company used the ~~approach~~services inof ~~SFAS~~a ~~123R~~well-credentialed isgroup ~~similar~~of tovaluation ~~the~~experts ~~approach~~to ~~described~~perform inthe ~~SFAS~~valuation ~~123~~of Mr. ~~However,~~Bos’ ~~SFAS~~options. ~~123R~~This ~~requires~~group ~~all~~developed ~~share-based payments to~~multiple ~~employees~~scenarios, including ~~grants~~continuing ofoperation ~~employee~~and ~~stock~~sale ~~options~~scenarios, to beassess ~~recognized~~the potential into create shareholder value over the ~~statement~~ term of ~~operations~~the ~~based~~options. onThe resulting ~~their~~Monte ~~fair~~Carlo ~~values.~~analysis ~~Pro~~gave ~~forma~~rise ~~disclosure~~to a range of fair ~~value~~values ~~recognition,~~for aswhich the ~~prescribed~~mean ~~under~~amount ~~SFAS~~was ~~123,~~utilized isin novaluing ~~longer~~the ~~an alternative~~options for Mr. Bos.

InAll other ~~2006,~~stock ~~the~~options ~~Company~~were ~~adopted~~valued ~~the~~using ~~fair~~a ~~value~~Black-Scholes ~~recognition~~model. ~~provisions~~Under of SFAS 123R, the ~~utilizing~~Company ~~the~~will ~~modified-prospective-transition~~continue ~~method,~~to asutilize ~~prescribed by~~the ~~SFAS~~Black-Scholes ~~123R.~~model ~~Under~~to estimate the fair ~~transition~~market ~~method,~~value ~~compensation~~related ~~cost~~to ~~recognized~~employee ~~during the~~stock ~~three~~options ~~and~~granted, ~~six~~modified, cancelled ~~months~~or ~~ended~~repurchased ~~June~~after 30January 1, 2006, ~~includes:~~unless ~~(a)~~such ~~compensation~~method ~~cost~~is clearly inappropriate for ~~all~~a ~~share-based~~significant ~~payments~~block ~~granted~~of ~~prior~~stock tooptions, ~~but~~such ~~not~~as ~~yet~~were ~~vested~~granted asto Mr. Bos. The Company’s assessment of ~~January~~the estimated compensation charges for 1,these ~~2006,~~other ~~based~~stock onoptions ~~the~~is ~~grant~~affected ~~date~~by ~~fair~~its ~~value~~stock ~~estimated~~price inas ~~accordance~~well ~~with~~as ~~SFAS~~assumptions ~~123,~~regarding ~~and~~a ~~(b)~~number ~~compensation~~of ~~expense~~complex ~~for~~and ~~all~~subjective ~~share-based~~variables ~~payments~~and ~~granted~~the related tax ~~subsequent~~impact. toThese ~~January~~variables 1include, ~~2006,~~but ~~based~~are onnot limited to, the ~~grant-date~~Company’s ~~fair~~stock price ~~value~~volatility ~~estimated~~and ~~in accordance~~expected ~~with~~employee ~~the~~stock ~~provisions~~option behavior. The Company recorded option expenses of $133,000 ~~SFAS~~and ~~123R.~~$265,000 ~~Under~~for the three and ~~modified-prospective-transition~~six ~~method~~month periods ended June 30, ~~results~~2007 and $67,000 and $359,000 for the ~~prior~~three and six month periods ~~have~~ended ~~not been~~June ~~restated~~30, 2006, respectively.

~~During the three months and six months ended June 30, 2006, the Company granted options to purchase 497,499 and~~ 6,786,999 shares of common stock. Of the 6,786,999 shares, 6,029,500 options were granted to Wayne M. Bos upon his appointment as the Company’s CEO and President. This option award was approved by the stockholders of the Company at its 2006 annual meeting of stockholders. The remaining 757,499 options were granted to other employees and directors. The options granted to Mr. Bos have certain service and performance conditions which have been discussed in the Company’s proxy statement for the 2006 annual meeting of stockholders. These options were fully vested upon grant, and we recognized a related expense of $0.3 million during the first quarter of 2006. During the three and six months ended June 30, 2006, we recognized expenses of $0.1 million and $0.4 million as a result of the adoption of SFAS 123R.

The ~~effect~~following ofsummarizes the ~~change in~~Company’s ~~applying~~stock ~~the~~option ~~original~~activity ~~provisions~~for ofthe six ~~SFAS~~months ~~123~~ended ~~resulted~~June ~~in lowering operating income~~30, ~~income before taxes, net income and basic and diluted earnings per share as follows~~2007:

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value
Number of option shares:
Outstanding at January 1, 2007	8,618,256	$	2.32
Granted	77,500	3.44
Exercised	21,817	1.39
Canceled or expired	63,500	2.23
Outstanding at June 30, 2007	8,610,439	$	2.33	4.21	$	0.0
Exercisable at June 30, 2007	7,645,429	$	2.33	3.92	$	0.0

	Three months ended					Six months ended
	June 30, 2006					June 30,2006
	As per SFAS 123R		Change to three months			As per SFAS 123R		Change to six months
Operating income	$	270	$	(67	)	$	256	$	(359	)
Income before provision for income taxes	177		$	(67	)	295		$	(359	)
Net income	100		$	(42	)	173		$	(231	)
Net income per share:
Basic	$	0.01	—			$	0.01	$	(0.02	)
Diluted	$	0.01	—			$	0.01	$	(0.02	)

The total fair value of unvested options as of June 30, 2007 was $882,508. The aggregate intrinsic value of unvested options as of June 30, 2007 was $0.0.

The ~~Company used a Monte Carlo~~ ~~method~~following tosummarizes ~~simulate stock price paths over~~ the ~~term~~fair ofvalue the 6,029,500 options awarded to Mr. Bos. All other options were valued using a Black-Scholes model. The Monte Carlo method, which is one acceptable valuation method per SFAS 123R, was used due to many factors which make utilizing a Black-Scholes model inappropriate for a block of ~~options of this magnitude. These factors include but are not limited to~~ the ~~size of the grant in relation to the total shares outstanding, the trading volume of the~~ Company’s unvested stock ~~and the holder’s ability~~options tothat ~~resell~~vested ~~the~~during ~~shares, and~~ the ~~control~~six ~~factor~~months ~~which~~ended ~~the~~June size of the grant implies. The Company used the services of a well-credentialed group of valuation experts to perform the valuation of Mr. Bos’ options. This group developed multiple scenarios including continuing operation and sale scenarios30, ~~to assess the potential to create shareholder value over the term of the options~~2007. ~~The resulting Monte Carlo analysis gave rise to a range of fair values for which the mean amount was utilized in valuing the options for Mr. Bos.~~

All other stock options were valued using a Black-Scholes model. Under SFAS 123R, the Company will continue to utilize the Black-Scholes model to estimate the fair market value related to employee stock options after January 1, 2006, unless such method is clearly inappropriate for a significant block of stock options, such as were granted to Mr. Bos. The Company’s assessment of the estimated compensation charges for these other stock options is affected by its stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. These variables include, but are not limited to the Company’s stock price volatility and expected employee stock option behavior.

	Shares	Weighted Average Fair Value
Unvested at January 1, 2007	1,231,574	$	0.91
Granted	77,500	1.11
Canceled or expired	53,500	1.21
Vested	290,564	0.91
Unvested at June 30, 2007	965,010	$	0.91

The ~~following~~ ~~summarizes~~Black-Scholes option-pricing model is used by the Company’s ~~stock~~to ~~option~~determine ~~activity~~the weighted average fair value of options, ~~not~~except ~~including~~for the ~~Wayne~~options ~~Bos~~granted to Wayne ~~stock~~Bos. The fair value of options, ~~for~~at date of grant and the ~~six~~assumptions ~~months~~utilized ~~ended~~to determine ~~June~~such ~~30,~~values ~~2006~~are indicated in the following table:

	Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	Six months ended
Number of shares under option:
	June 30,
Outstanding at January 1, 2006	2,310,820		$	3.13
	2007			2006
Granted	757,499		2.28
Weighted average fair value at date of grant for options granted during the period using Black-Sholes	$	1.11		$	1.39
Exercised	15,563		1.43
Risk-free interest rates	4.45		%	4.51		%
Canceled or expired	42,500		5.04
Expected stock price volatility	59.72			60.82
Outstanding at June 30, 2006	3,010,256		$	2.90		5.6	$	0.0
Expected dividend yield	0.0		%	0.0		%
Exercisable at June 30, 2006	2,222,921		$	3.10		4.3	$	0.0

~~The~~These assumptions ~~following~~resulted ~~summarizes~~in a weighted-average fair value of $1.11 and $1.39 ~~the~~respectively, ~~Company’s~~for each stock option ~~activity, including~~valued using the ~~Wayne~~Black-Scholes ~~Bos~~method ~~stock~~and granted ~~options,~~in ~~for~~each of the six-month ~~months~~periods ended June 30, 2007 and 2006:.

	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Number of option shares:
Outstanding at January 1, 2006	2,310,820	$	3.13
Granted	6,786,999	2.28
Exercised	15,563	1.43
Canceled or expired	42,500	5.04
Outstanding at June 30, 2006	9,039,756	$	2.49	5.0	$	0.0
Exercisable at June 30, 2006	8,252,421	$	2.50	4.6	$	0.0

3. INVENTORY

7Inventories consist of the following:

The following summarizes the fair value of the Company’s stock options for the six months ended June 30, 2006, not including the Wayne Bos stock options.

	June 30, 2007		December 31, 2006
	(In thousands)
Raw material and packaging supplies	$	9,920	$	6,778
Finished goods	10,137		5,010
Total inventory	$	20,057	$	11,788

	Shares	Weighted Average Fair Value
Nonvested at January 1, 2006	99,501	$	1.48
Granted	757,499	$	1.39
Vested	69,165	$	1.24
Nonvested at June 30, 2006	787,335	$	1.14

~~The~~4. ~~following~~SHIPPING ~~summarizes the~~AND ~~fair value of the Company’s stock options for the six months ended June 30,~~HANDLING ~~2006, including the Wayne Bos stock options.~~COSTS

	Shares	Weighted Average Fair Value
Nonvested at January 1, 2006	99,501	$	1.48
Granted	6,786,999	$	.16
Vested	6,098,665	$	.06
Nonvested at June 30, 2006	787,335	$	1.14

The Company records all amounts charged to customers for shipping and handling as revenue. All outbound shipping and fulfillment costs are classified as selling and marketing expenses and totaled approximately $0.9 and $1.7 million for the three and six month periods ending June 30, 2007 and approximately $0.8 and $1.6 million in the three and six month periods ended June 30, 2006.

~~As of June 30, 2006, there was $0~~5.9 ~~million~~EARNINGS ofPER total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under existing stock option plans. This cost is expected to be recognized over a weighted-average period of 2.72 years. The total measurement fair value of shares vested during the six-months ended June 30, 2006 was $0.4 million.SHARE

The ~~Black-Scholes~~Company ~~option~~calculates ~~pricing~~income ~~model~~per isshare ~~used~~in byaccordance ~~the~~with ~~Company~~Statement toof ~~determine~~Financial Accounting ~~the~~Standard No. 128, Earnings per Share. Basic earnings per share have been computed by dividing net income by the weighted average ~~fair~~number ~~value~~ of ~~options~~common ~~except~~shares ~~for~~outstanding during the ~~Wayne~~period. ~~Bos~~Diluted ~~options. The~~earnings ~~fair~~per ~~value~~share ofhave ~~options~~been atcomputed ~~date~~by ofdividing ~~grant~~net ~~and~~income by the ~~assumptions~~weighted ~~utilized~~average tonumber ~~determine~~of ~~such~~common ~~values~~shares ~~are~~and ~~indicated~~dilutive ~~in the~~common ~~following~~stock ~~table:~~equivalents (stock options), when dilutive.

	Six months ended June 30
	2006			2005
Weighted average fair value at date of grant for options granted during the period using Black-Sholes	$	1.39		$	1.71
Risk-free interest rates	4.51		%	3.72		%
Expected stock price volatility	60.82			63.62
Expected dividend yield	0.0		%	0.0		%

As of the three and six month periods ending June 30, 2007 and 2006, the following options were outstanding and considered anti-dilutive.

These assumptions resulted in a weighted-average fair value of $1.71 for each stock option valued under the Black- Scholes method and granted in the six months ended June 30, 2005.

	Three months ended June 30,		Six months ended June 30,
	2007	2006	2007	2006

Options outstanding	8,610,439	9,039,756	8,610,439	9,039,756

Anti-dilutive options	5,005,849	8,688,740	6,170,033	8,733,840

~~The following table illustrates the effect on net~~6. ~~income~~SENIOR ~~and~~CREDIT ~~earnings per share if the Company had applied the fair value recognition provisions of SFAS 123R for the three and six month periods ended June 30, 2005.~~FACILITY

	Three months		Six months
	ended June 30, 2005
Net income (loss)	$	291	$	(301	)
Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax benefits (“Stock Compensation”)	25		35
Net Income (loss) — pro forma	$	266	$	(336	)
Net income (loss) per share:
Basic—as reported	$	.02	$	(.02	)
Diluted—as reported	$	.02	$	(.02	)
Basic—pro forma	$	.02	$	(.03	)
Diluted—pro forma	$	.02	$	(.03	)

The Company is party to a loan and security agreement with Wachovia Capital Finance (Western), as agent, the lenders party thereto, Prolab Nutrition, the Company’s wholly owned subsidiary, and certain of its other subsidiaries, as guarantors. The loan agreement provides for a three-year secured revolving credit facility of up to $10.0 million. Borrowings under the credit facility may be used for ongoing working capital purposes and certain future acquisitions. At June 30, 2007, the Company had no borrowings outstanding under the credit facility.

Under the credit facility, the Company may borrow up to the lesser of $10.0 million or the borrowing base (calculated based upon eligible inventory and eligible accounts). The interest rate on borrowings under the credit facility is equal to: (1) agent’s publicly announced prime rate for prime rate loans or (2) 2.25% plus the applicable Eurodollar rate for any Eurodollar rate loans. Interest is payable monthly in arrears not later than the first day of each calendar month. The agent’s prime rate as of June 30, 2007 was 8.25%. The credit facility requires that all principal be repaid in August 2009. Additionally, borrowings under the credit facility must be repaid when the borrowings exceed the borrowing base.

3The credit facility is secured by a first priority lien on all of the Company’s assets and properties (which includes the assets and properties of Prolab Nutrition, the guarantors and the Company’s future subsidiaries), subject to certain exceptions. ~~INVENTORY~~The obligations under the credit facility are guaranteed by Natrol Products, Inc., Natrol Acquisition Corp. and Natrol Direct, Inc. and by each of the Company’s future subsidiaries.

~~Inventories~~The ~~consist~~credit offacility contains covenants restricting the ~~following~~Company’s ability to, among other things: (1) incur or guarantee additional debt; (2) engage in any mergers or acquisitions (subject to certain exceptions); (3) engage in any asset sales or dispose of any assets (other than in the ordinary course); (4) engage in transactions with affiliates; (5) incur liens; (6) make any loans or investments; and (7) declare or pay dividends or redeem or repurchase capital stock.

	June 30, 2006		December 31, 2005
Raw material and packaging supplies	$	5,890	$	7,547
Finished goods	6,346		4,250
Total inventory	$	12,236	$	11,797

The credit facility also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults to the Company’s other material indebtedness.

~~4. SHIPPING AND HANDLING COSTS~~8

~~The~~As of June 30, 2007, the Company ~~records~~was ~~all~~in ~~amounts~~default ~~charged~~under tocertain covenants ~~customers~~in ~~for~~the ~~shipping~~credit ~~and~~facility related to ~~handling~~investments asin ~~revenue~~new businesses. The Company ~~All~~cannot ~~outbound~~borrow ~~shipping~~under ~~and~~the ~~fulfillment~~line ~~costs~~of ~~are~~credit ~~classified~~until Wachovia agrees to waive asthe ~~selling~~event of default and ~~marketing~~forbear ~~expenses~~from ~~and~~exercising ~~totaled~~its ~~approximately~~default $1rights.6 Wachovia ~~million~~is ~~in both~~now ofreviewing the ~~six~~acquisition ~~month~~of Medical ~~periods~~Research ~~ended~~Institute (MRI) on June 301, 2007, which triggered the event of ~~2006~~default. We ~~and~~expect ~~2005~~the Company’s ability to borrow against the line of credit to be reinstated in the normal course of review.

57. ~~EARNINGS~~ ~~PER~~RECENTLY ~~SHARE~~ISSUED ACCOUNTING PRONOUNCEMENTS.

The ~~Company~~Financial ~~calculates~~Accounting ~~income~~Standards Board (~~loss~~“FASB”) ~~per~~issued ~~share~~Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) in June 2006. The interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with ~~SFAS~~Statement of Financial Accounting NoStandard 109. FIN 48 is effective for fiscal ~~128~~years beginning after December 15, ~~Earnings~~2006. ~~per~~We ~~Share~~adopted the provisions of FASB Interpretation No. ~~Basic~~48, ~~earnings~~“Accounting ~~per~~for ~~share~~Uncertainty ~~have~~in ~~been~~Income ~~computed~~Taxes-an byinterpretation ~~dividing~~of ~~net~~FASB Statement ~~income~~No. 109 (~~loss~~“FIN 48”), by on January 1, 2007. FIN 48 clarifies the ~~weighted~~accounting for ~~average~~uncertainty ~~number~~in ofincome ~~common~~taxes ~~shares~~recognized ~~outstanding~~in ~~during~~an ~~the~~enterprise’s ~~period.~~financial ~~Diluted~~statements ~~earnings~~in ~~per~~accordance ~~share~~with ~~have~~FASB ~~been~~Statement ~~computed~~109, by“Accounting ~~dividing~~for ~~net~~Income ~~income~~Taxes”, and ~~(loss)~~prescribes bya recognition threshold and measurement process for financial ~~the~~statement ~~weighted~~recognition ~~average~~and ~~number~~measurement of ~~common~~a ~~shares~~tax ~~and~~position ~~dilutive~~taken ~~common~~or ~~stock~~expected to be ~~equivalents~~taken ~~(stock~~in ~~options)~~a tax return. FIN 48 also provides guidance on derecognition, classification, ~~when~~interest ~~dilutive~~and penalties, accounting in interim periods, disclosure and transition.

~~As of~~Based ~~June~~on ~~30,~~our ~~2006 and June 30~~evaluation, ~~2005,~~we ~~options~~have toconcluded ~~purchase~~that ~~9,039,756 and~~there ~~2,355,679~~are ~~shares~~no ofsignificant ~~common stock,~~uncertain ~~respectively,~~tax ~~were,~~positions ~~outstanding.~~requiring ~~For~~recognition ~~the~~in ~~three~~our ~~months~~financial ~~ended~~statements. ~~June~~Our ~~30, 2006,~~evaluation ~~8,688,740 options~~was ~~were~~performed ~~considered~~for ~~to be anti-dilutive. For~~ the ~~six~~tax ~~month~~years ~~period~~ ended ~~June~~December 3031, ~~2006~~2003, 82004,~~733,840~~ ~~options were~~2005 ~~considered~~and ~~anti-dilutive. For the three months ended June 30~~2006, ~~2005,~~ ~~1,630,768~~the ~~options~~tax ~~were~~years ~~considered~~which ~~anti-dilutive. All~~remain ~~options outstanding~~subject atto ~~June~~examination ~~30,~~by ~~2005,~~major ~~were~~tax ~~considered~~jurisdictions ~~anti-dilutive during the~~as ~~six~~of ~~months ended~~ June 30, ~~2005 due to the Company’s loss during the period~~2007.

~~ITEM~~We may 2from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. ~~MANAGEMENT’S~~In ~~DISCUSSION~~the ~~AND~~event ~~ANALYSIS~~we OFreceived ~~FINANCIAL~~an ~~CONDITION~~assessment ~~AND~~for interest ~~RESULTS~~and/or OFpenalties, ~~OPERATIONS~~it was classified in the financial statements as “selling, general and administrative expense”.

~~Forward~~In September 2006, ~~Looking~~the ~~Statements~~FASB issued Statement of Financial Standard No. 157 (“FAS 157”), “Fair Value Measurements “, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair ~~Certain~~value ~~Risks~~measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of FAS 157, but does not expect the adoption of FAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows.

~~The~~In ~~statements~~February ~~contained~~2007, ~~in this report that are not purely historical are “forward-looking statements” within~~ the ~~meaning~~FASB ofissued ~~Section 21E~~Statement of ~~the~~Financial ~~Securities~~Standard ~~Exchange Act~~No. ~~These~~159, ~~statements~~“The ~~are~~Fair ~~based~~Value onOption ~~our~~for ~~expectations,~~Financial ~~hopes,~~Assets ~~beliefs, commitments, intentions,~~ and ~~strategies~~Financial ~~regarding~~Liabilities ~~the~~Including ~~future.~~an ~~They~~Amendment ~~may be identified by the use~~ of ~~words~~FASB orStatement ~~phrases,~~No. ~~such as “believe,~~115” ~~“expect,” “anticipate,”~~ (“~~should,”~~SFAS ~~“plan,~~159” ~~“estimate,” and “potential,” among others~~). SFAS ~~Forward-looking statements~~159 ~~include,~~permits ~~but~~entities ~~are~~to ~~not~~choose ~~limited~~ to, ~~statements~~measure ~~contained in this Item 2~~many ~~regarding our~~ financial ~~performance,~~instruments ~~revenue~~ and ~~expense~~certain ~~levels in the future, and the sufficiency of our existing assets to fund future operations and capital spending needs. Actual results could differ materially from the anticipated results or~~ other ~~expectations~~items ~~expressed~~at infair ~~these forward-looking statements as a result of the risks~~value, ~~uncertainties~~with ~~and contingencies discussed~~unrealized ~~below~~gains and inlosses ~~our~~related ~~annual report on Form 10-K for the year ended December 31, 2005. The fact that some of the risks, uncertainties and contingencies may be the same or similar~~ to ~~past~~these ~~reports~~financial weinstruments ~~have~~reported ~~filed~~in ~~with~~earnings ~~the SEC means only that~~at ~~the~~each ~~risks~~subsequent ~~are~~reporting ~~present in multiple periods~~date. SFAS We159 ~~believe~~is ~~that~~effective ~~many~~for offiscal ~~the risks,~~years ~~uncertainties~~beginning ~~and~~after ~~contingencies~~November ~~detailed here are part of doing business in the industry in which we operate and will likely be present in all periods reported. The fact that certain risks~~15, ~~uncertainties and contingencies are endemic to the industry does not lessen their significance~~2007. We ~~The forward-looking statements contained in this report~~ are ~~made~~currently asevaluating of the ~~date of~~ impact this ~~report,~~Statement ~~and we~~will ~~assume~~have noon ~~obligation~~our toconsolidated ~~update~~financial ~~them or to update the reasons why actual results could differ from those projected in these forward-looking~~ statements.

Our ability to predict results or the affect of certain events on our future operating results is inherently uncertain. Forward-looking statements should not be unduly relied on since they involve known and unknown risks, uncertainties and other9

98. FINAL RULE FOR CURRENT GOOD MANUFACTURING PRACTICES FOR DIETARY SUPPLEMENTS

~~factors~~On June 22, 2007, the Food and ~~some~~Drug ofAdministration ~~which~~(“FDA”) ~~are~~issued ~~beyond~~its ~~our~~final ~~control~~regulations establishing the minimum Current Good Manufacturing Practices (“CGMPs”) necessary for activities related to manufacturing, packaging, labeling, or holding operations for dietary supplements. The ~~Therefore~~final rule applies to all dietary supplements sold or offered for sale in the United States and requires manufacturers to evaluate the identity, wepurity, ~~wish~~strength, and composition of their dietary supplements. An Interim Final Rule has also been issued to ~~caution~~allow ~~you~~manufacturers to petition ~~carefully~~the ~~consider~~FDA for an exemption to the ~~following~~100 ~~factors~~percent ~~discussed~~identity testing requirement for dietary ingredients to be used in ~~our~~dietary ~~other~~supplements; ~~SEC~~provided ~~reports.~~that they ~~The~~demonstrate ~~factors~~that ~~discussed~~less ~~herein~~than ~~may~~100 percent identity testing does not bematerially diminish ~~exhaustive.~~the ~~Therefore,~~assurance that the ~~factors~~dietary ingredient is correctly ~~contained~~identified. The ~~herein~~final ~~should~~CGMP beand ~~read~~the interim ~~together~~final ~~with~~rule ~~our~~are ~~other~~effective ~~reports~~August 24, 2007 and ~~documents~~the compliance date is ~~which~~June ~~are~~2008, ~~filed~~except bythat usbusinesses ~~with~~like the ~~SEC~~Company ~~from~~that employ fewer than 500 but at least 20 or more full-time equivalent employees have until June 2009 to comply ~~time,~~with ~~which~~the ~~may~~regulation. We ~~supplement,~~are ~~modify,~~currently ~~supersede~~evaluating orthe ~~update~~potential impact that the ~~factors~~new ~~listed~~regulations inand ~~this~~any applicable ~~report~~exemptions may have on the Company’s financial position, results of operations, or cash flows.

~~Factors~~9. ~~that~~ACQUISITION ~~could cause~~OF orMEDICAL ~~contribute~~RESEARCH ~~to our actual results differing materially from those discussed herein include~~INSTITUTE, ~~but~~INC. ~~are not limited to:~~(MRI)

~~· industry~~On ~~trends~~June 1, ~~including~~2007, awe ~~general~~acquired all ~~downturn~~of orthe ~~slowing~~outstanding stock of MRI for $8.6 million of cash and up to an additional $80.0 million in cash based upon the ~~dietary~~Earnings ~~supplement~~Before ~~industry;~~Interest and Taxes (EBIT), as defined, of MRI during the three years after the acquisition date. The Company allocated the purchase price per SFAS 141 to the fair value of the assets acquired, net of liabilities assumed. Because the net assets acquired were greater than the cash paid, the value of certain fixed assets were adjusted per SFAS 141. These assets will be adjusted should any additional payments be made to the former owners of MRI.

~~· increased~~The ~~competition~~only ~~from~~consideration ~~current competitors~~used ~~and new market entrants, including from private label house brands~~to ~~supported~~acquire byMRI ~~retailers;~~was cash.

~~· our~~The ~~ability~~following table summarizes the allocations of the consideration to ~~develop~~the ~~and~~assets ~~execute our~~acquired ~~business~~net ~~plans;~~of liabilities assumed.

· adverse publicity regarding the dietary supplement industry or our brands or products;

	(000)
Cash and cash equivalents	$	5,105
Accounts Receivable	2,514
Inventory	4,068
Other Current assets	98
Property, Plant & Equipment	114
Patents	258
Total Assets acquired	12,157
Less Liabilities assumed	3,531
Total Consideration	8,626

~~· exposure to product liability claims, as well as a limited amount of insurance coverage including a lack of earthquake insurance;~~10

· If the ~~effectiveness~~operating results of ~~our~~MRI ~~product~~had been included ~~development~~since ~~program~~the ~~and~~beginning ~~our~~the ~~need~~three toand ~~develop~~six ~~new~~month ~~products~~periods ~~that~~ended ~~receive~~June a30, ~~high~~2007 and ~~degree~~2006, ofthe ~~consumer~~pro ~~acceptance;~~forma revenues, net income and net income per share would be as follows:

· the effectiveness of our manufacturing, quality control and inventory control measures;

	Three Months Ended June 30,					Six Months ended June 30,
	2007		2006			2007		2006
Revenues	$	26,404	$	20,869		$	49,545	$	47,384
Net income	5,174		(856		)	5,232		2,497
Net income per share
Basic	$	0.37	$	(0.06	)	$	0.37	$	0.18
Diluted	$	0.31	$	(0.06	)	$	0.33	$	0.18
Weighted-average shares outstanding—basic and diluted
Basic	14,153,601		13,563,747			14,149,355		13,557,115
Diluted	16,763,440		13,914,763			16,093,514		13,865,531

~~· our~~Our ~~ability~~prime toreason ~~gain~~for oracquiring ~~expand or~~MRI ~~maintain~~was ~~distribution~~MRI’s ~~and~~premiere ~~new~~position orin ~~existing~~the ~~channels~~sports nutrition marketplace, allowing us to strengthen our position within this area of ~~trade;~~the nutraceutical business.

~~· an~~As ~~increase~~of inJune 30, 2007, the ~~cost~~balance sheet of ~~obtaining~~MRI is consolidated with our balance sheet. The statement of income of MRI for the 30 day period from June 1, 2007 to June 30, 2007 is consolidated with our statement of income for the three and ~~maintaining~~six ~~shelf~~month ~~space~~periods ended June 30, 2006. The statement of cash flows for MRI for the period from June 1, 2007 to June 30, 2007 is included with ~~major~~our ~~national~~statement ~~retailers;~~of cash flows for the six months ended June 30, 2007.

~~· adverse changes in government~~10. ACQUISITION ~~regulation or changes in local, state or national laws;~~COMMITMENTS

~~· our~~Nu ~~dependence~~Hair onand ~~certain~~Shen ~~large customers;~~Min Brands

~~· our~~Consideration for ~~ability~~the toacquisition ~~retain~~of the NuHair and ~~attract~~Shen Min brands includes potential ~~talented~~incentive ~~management~~payments based upon the net amount of invoiced sales of the NuHair and ~~key~~Shen ~~employees;~~Min products during fiscal 2007, 2008 and 2009. For 2007, the Company is obligated to pay the seller of the brands $1.00 (one dollar) for every dollar of net invoiced sales in excess of $7.6 million, calculated on a quarterly basis. The potential incentive payment for 2007 may not exceed $2.0 million. For 2008, the Company is obligated to pay the seller 15% of the amount by which net invoiced sales exceed $11.4 million. For 2009, the Company is obligated to pay the Seller 15% of the amount by which net invoiced sales exceed $13.68 million. As of June 30, 2007, we do not believe that any potential incentive payments to the former owners of the NuHair and Shen Min brands will be material.

~~· our~~Promensil ~~ability to manage our growth, execute our business plan~~ and ~~manage changing market conditions;~~Trinoven

~~· our~~Consideration for ~~ability~~the license of the exclusive U.S. rights to ~~consummate~~the Promensil and Trinoven ~~integrate~~brands ~~future~~includes ~~acquisitions;~~a royalty on net sales revenue that exceeds $2.0 million. Until 2014, the Company is obligated to pay Novogen a royalty equal to 5.0% of annual net sales between $2.0 to $3.0 million and a royalty equal to 7.5% of annual net sales in excess of $3.0 million. After 2014, the Company is obligated to pay Seller a royalty equal to 2% of annual net sales between $2.0 to $3.0 million and a royalty equal to 3.0% of annual net sales in excess of $3.0 million. During the six months ended June 30, 2007, net sales revenue of the Promensil and Trinoven brands amounted to $1.2 million and, as a result we do not believe that any potential incentive payments to the licensor will be material.

~~· the~~Medical ~~absence~~Research ~~of conclusive clinical studies for many of our products;~~Institute

~~· our~~Consideration for ~~sales~~the ~~and~~acquisition ~~earnings~~of ~~volatility;~~MRI, includes incentive payments that would allow the former owners of MRI to earn an additional $80.0 million if the earnout conditions are met.

~~· our~~Year ~~reliance~~one ~~on independent brokers to sell our products;~~incentives.

~~· our~~If ~~ability~~earnings before interest and taxes prior to ~~protect~~general ~~our~~corporate allocations for the twelve (12) month period following the ~~intellectual~~Closing ~~property;~~Date (“Year One EBIT”) is between $2.5 million and $4.0 million, the former owners of MRI will be paid an incentive payment of between $4.7 million and $7.5 million. As of June 30, 2007 we believe that it is highly likely that

· continued market acceptance of our supplements, Laci Le BeauÒ herbal teas, ProlabÒ sports nutrition products and Essentially Pure Ingredient®’s raw material products; and11

~~· legal actions~~an ~~brought~~incentive bypayment ~~federal,~~will ~~state~~be made and ~~local~~that the ~~governmental~~amount ~~authorities~~will ~~and private~~be ~~parties~~at the mid to higher end of the range.

~~OVERVIEW~~Also, if Year One EBIT reaches $5.0 million, additional incentives may be earned by the former owners of MRI. These incentives begin at $5.0 million and could exceed $21.5 million depending upon EBIT performance. As of June 30, 2007, it is uncertain as to whether the $5.0 EBIT level will be reached and, as such it is uncertain as to whether an additional incentive payment will be made.

WeYear ~~manufacture~~two and ~~market branded, high-quality dietary supplements, herbal teas, and sports nutrition products under~~ three ~~labels:~~ ~~the Natrol® brand, the Laci Le Beau® brand of herbal teas, and the Prolab® sports nutrition brand~~incentives. To a limited degree, we also market a few nutraceutical ingredients to other manufacturers of supplements or fortified foods through our Essentially Pure Ingredients® (EPI) raw material supply division, which also sells contract-manufacturing services to companies within the nutraceutical industry.

~~Our~~Year ~~core~~two ~~Natrol~~and ~~brand~~year ~~focuses~~three onincentive ~~supplements~~payments ~~that~~ are described more fully in ~~high~~our ~~demand~~other asfilings ~~well~~with asthe ~~specialty~~SEC. In ~~niche~~order ~~and~~to ~~proprietary~~earn ~~formulations~~incentives ~~that~~in year two, EBIT for year two, as defined, ~~have~~must ~~potentially~~reach ~~strong~~$6.5 ~~margins~~million. WeIn ~~position~~order ~~Natrol~~to earn incentives in year three, EBIT for year three as adefined ~~premium~~must ~~brand~~reach of$14.0 million. Total incentive payments for ~~supplements~~the ~~rather~~three ~~than~~years in which incentives can be earned could total as amuch ~~value~~as ~~brand~~$80.0 million if all incentive payment conditions are met.

~~The majority of the dietary supplements we sell are sold under the Natrol brand~~11. ~~These~~SALE ~~supplements~~AND ~~include vitamins, minerals,~~LEASEBACK hormonal supplements, herbal products and specialty combination formulas that contribute to an individual’s physical and mental well being. We sell our products through multiple distribution channels throughout the United States. These channels include domestic health food stores and mass-market drug, clubs, retail and grocery store chains. We also sell our products through independent catalogs, Internet shopping sites, and within approximately 40 foreign countries through international distributors. Our Natrol brand strategy emphasizes building strong recognition of the Natrol brand across multiple distribution channels through a marketing strategy that includes print, television, radio and coop advertising and public relations campaigns that are designed to build consumer awareness and increase the purchase of our products by consumers.TRANSACTION

~~Herbal~~In April ~~teas~~2007, ~~are~~the company sold ~~under~~its ~~the~~manufacturing ~~Laci~~and Ledistribution ~~Beau~~facilities ~~brand.~~in ~~Laci~~Chatsworth, LeCalifornia ~~Beau~~for ~~teas~~$26 ~~are~~million, ~~flavored~~giving ~~herbal~~rise ~~teas~~to a gain of approximately $12 million. ~~The~~Since ~~primary~~the ~~tea~~facilities ~~category~~are isleased ~~our Super~~back ~~Dieter’s~~from ~~Tea®.~~the Webuyer, ~~use~~$5.5 million of the ~~same~~gain ~~sales~~is ~~people~~deferred and ~~brokers~~recognized toover ~~sell~~the ~~herbal~~lease term, in ~~teas~~accordance aswith ~~supplements~~SFAS No. 13 ~~And,~~and as98. ~~with~~The ~~our~~$6.1 ~~supplement~~million ~~business,~~balance ~~our~~of ~~Laci~~the ~~Le Beau~~gain ~~strategy~~in ~~emphasizes~~excess ~~building~~of ~~strong~~the ~~recognition~~net present value of the ~~Laci~~lease Lepayments, ~~Beau~~was ~~brand~~recognized upon ~~across~~the sale.

10Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~multiple~~Forward Looking ~~distribution~~Statements ~~channels.~~and Certain Risks

The statements ~~Prolab~~contained ~~sports~~in ~~nutrition~~this ~~line~~report that are not purely historical are “forward-looking statements” within the meaning of ~~products~~Section 21E isof the Securities Exchange ~~targeted~~Act. toThese ~~body~~statements ~~builders~~are based on our expectations, hopes, beliefs, commitments, intentions, and ~~health~~strategies ~~minded~~regarding ~~individuals~~the ~~seeking~~future. aThey ~~high~~may ~~degree~~be identified by the use of ~~physical~~words ~~fitness~~or phrases, such as “believe”, “expect”, “anticipate”, “should”, “could”, “would”, “will”, “might”, “may”, “plan,” “estimate,” and “potential,” among others. ~~Prolab’s~~Forward-looking ~~products~~statements include, ~~supplements~~but ~~designed~~are not limited to, statements ~~help~~contained in this Item 2 regarding our financial performance, ~~these~~revenue ~~individuals~~and ~~gain~~expense levels in the future, and ~~lose~~the ~~weight~~sufficiency asof ~~well~~our asexisting assets ~~improve~~to ~~muscle~~fund ~~mass~~future operations and ~~muscle~~ ~~definition~~capital spending needs. ~~Prolab~~Actual ~~products~~results could ~~are~~differ ~~sold~~materially ~~primarily~~from ~~through~~the ~~sports~~anticipated ~~nutrition~~results or other expectations ~~retail~~expressed ~~stores,~~in ~~fitness~~these ~~centers,~~forward-looking ~~websites~~statements as a result of the risks, uncertainties ~~health-food~~and ~~stores~~contingencies discussed below and in our annual report on Form 10-K for the year ended December 31, 2006. The fact that some of the ~~internationally~~risks, ~~through~~uncertainties ~~designated~~and ~~distributors~~contingencies may be the same or similar to past reports we have filed with the SEC means only that the risks are present in multiple periods.

WeOur ability ~~also~~to ~~sell~~predict ~~nutraceutical~~results ~~grade~~or ~~ingredients~~the ~~such~~effect asof certain events on our future ~~garlic~~operating results is inherently uncertain. Forward-looking statements should not be unduly relied on, since they involve known and ~~arabinogalactan~~unknown torisks, uncertainties and other ~~manufacturers~~factors, ~~through~~which in many cases are beyond our ~~EPI~~control ~~division~~and cannot be predicted or quantified. ~~The~~Therefore, we wish to caution you to ~~EPI~~carefully ~~division~~consider ~~also~~the ~~markets~~following ~~Natrol’s~~factors, ~~manufacturing~~which ~~capabilities~~are not toexhaustive, together with disclosures in other reports ~~nutraceutical~~and ~~businesses~~documents filed with ~~that~~the ~~need~~SEC ~~contract~~by ~~manufacturing~~the ~~support.~~Company ~~EPI~~from ~~shares~~time to time and which may supplement, modify, supersede or update the factors listed in this report. The Company is subject to all of ~~Natrol’s~~the ~~resources~~business risks facing public companies, including ~~Natrol’s~~business ~~headquarters~~cycles ~~facility~~and trends in the general economy, ~~its~~market ~~manufacturing~~conditions, ~~and~~potential ~~research~~loss ~~and~~of ~~development~~key personnel, government legislation and regulation ~~expertise,~~and ~~its~~natural causes. ~~financial~~Additional ~~resources,~~factors asthat ~~well~~could ascause ~~accounting~~or ~~and~~contribute ~~management~~to ~~resources.~~our actual results differing materially from those discussed herein include, but are not limited to:

~~Natrol’s consumer products fall into the general~~· our ~~definition~~ability ~~of vitamin, minerals, herbs and dietary supplements. Each year, we strive~~ to ~~broaden~~develop ~~our product offerings so as to increase revenue~~ and ~~gross profits~~execute ~~while lessening dependence upon any one product. We divide~~ our ~~business,~~ ~~other than the EPI~~ business, ~~into approximately 50 product categories. The products in these categories are packaged into approximately 500 stock keeping units (SKUs).~~plans;

~~Key~~· our ~~issues~~ability ~~for~~to ~~management~~replace ~~include:~~our Ester-C® business once we have used the remaining inventory of Ester-C®;

· ~~product development~~adverse publicity regarding our products and any ~~acquisitions~~similar products distributed by others;

· ~~expanding~~our ability to manage the risks and costs ~~distribution~~associated ofwith our ~~products~~acquisition tostrategy, ~~new~~including ~~markets~~managing ~~including~~the ~~international~~integration ~~markets~~of MRI;

· ~~product~~our ability to retain and attract talented ~~introductions~~management and key employees;

· ~~the~~our ~~marketing~~insurance ofcoverage or third party ~~current~~indemnification ~~and~~rights ~~new~~may ~~products~~be insufficient to cover losses that we incur;

~~· inventory management; and~~12

· ~~controlling the~~we ~~cost~~may ofexperience ~~doing~~greater ~~business~~than inexpected product ~~our various channels of trade.~~returns;

~~The~~· our ~~nutritional~~failure ~~supplement business is dependent upon access~~ to ~~new~~adequately ~~products~~anticipate ~~and new distribution channels. New products are important~~sales for growth and to replace volume lost by products reaching the end of their product life cycles. For these reasons, we continually research potential new products. Developing a single new product can be a multi-year effort depending upon the complexity of the product and the amount of testing that must be completed to validate the product concept. We also are continuously looking for new channels in which to distribute our products both in the United States and in foreign markets.needs;

~~Product introductions~~· any doshortage not come without risk. Product launches can require substantial marketing support. Oftentimes retailers demand slotting fees or other up-front expenditures. If a product launch is not as successful as anticipated, additional promotional expenditures may be needed to sustain sales and reduce possible returns. Most vendors retain certain rights as they relate to product returns. A broad product launch, one in ~~which~~the asupply ~~new product is introduced into thousands~~ of ~~retail~~key ~~outlets, can cause a strain on corporate~~raw ~~resources since inventories must be produced and delivered. The resulting sales increase also leads to an increase in accounts receivable with customers.~~materials;

~~Another~~· our ~~avenue~~ability ~~for new products is~~ to ~~acquire~~protect ~~existing brands or products. We purchased the Laci LeBeau brand of herbal teas and the Prolab brand of sports nutrition products, which now account for approximately 25% of~~ our ~~business. We may acquire other products or brands in the future.~~intellectual property;

~~Nutritional~~· our ~~supplements~~exposure ~~must~~to ~~maintain~~product ~~potency~~liability ~~levels during their selling life. As a result~~claims, ~~products are stamped with an expiration~~as ~~date~~well ~~and~~as ~~retailers~~the ~~will~~limits ~~not accept product with limited shelf life into their warehouses. Shelf life issues require a high degree~~ of ~~supply~~our ~~chain~~self ~~management of~~insurance ~~raw~~program ~~materials~~for ~~and~~products ~~finished~~liability ~~goods to ensure that shelf life is maximized and that the out-of-date inventory is minimized.~~claims;

~~The competition for shelf space at retailers is intense. Our sales people have ongoing discussions with~~ · our retail customers with regards to the allocation of shelf space and the level of promotional support for products. Retailers look to their vendors for promotional support for the products on their shelves in order to maximize sales. ~~Vendors such as us look to retailers for advantageous placement of their products~~ and ~~promotion~~earnings of their products within stores and within a retailer’s promotional media such as newspaper advertisements placed by retailers. The cost of promotions and support to the retailer on the part of vendors such as Natrol can be substantial and management must continually review promotional efforts with retailers to ensure that sales are profitable.volatility;

11· our ability to engage in many transactions prohibited by our senior credit facility;

~~RESULTS~~· legal OFactions ~~OPERATIONS~~brought by federal, state and local governmental authorities and private parties;

~~Three~~· increased ~~months~~competition ~~ended~~from ~~June~~existing competitors 30and new market entrants, ~~2006 compared~~including tofrom ~~June~~private ~~30,~~label ~~2005~~house brands; and

NET SALES. We recognize revenue from sales only after product is shipped. We have no consignment sales. Net sales represent product shipped less actual and estimated future returns, spoilage allowances, allowances for product deemed to be unsaleable by customers, goods shipped to customers for promotional or other purposes, rebates, slotting fees and other promotional expenditures. Estimates and allowances are based upon known claims and an estimate of additional returns when · the ~~amount~~impact of ~~future~~natural ~~returns~~disasters ~~from~~on our ~~customers~~manufacturing ~~can be reasonably estimated~~facility.

~~Net~~The ~~sales~~forward-looking ~~decreased~~statements ~~15.4%,~~contained orin ~~$3.0~~this ~~million~~report are made as of the date of this report, and we assume no obligation to ~~$16.6~~update ~~million~~or ~~for~~revise them to reflect changed assumptions, the ~~three~~occurrence ~~months~~of unanticipated events or changes to ~~ended~~future ~~June~~operating ~~30,~~results ~~2006~~over ~~from~~time ~~$19.6~~or ~~million~~to ~~for~~update the ~~three~~reasons ~~months~~why ~~ended~~actual ~~June 30,~~results ~~2005~~could differ from those projected in these forward-looking statements.

In the second quarter of 2005, we shipped approximately $2.0 million of new Natrol brand products. Shipments of Natrol products in the second quarter of 2006 did not include significant product introductions. As a result, net revenue for the Natrol brand (which includes Laci Le Beau herbal tea sales) were $1.3 million less in the second quarter of 2006 than the second quarter of 2005.OVERVIEW

Net sales of our Prolab products were approximately $1.3 million less in the second quarter of 2006 compared to the second quarter of 2005. Approximately $950,000 of this amount was due to decreased sales to international distributors. We are currently establishing a subsidiary in the United Kingdom in order to enhance our sales position in Europe. In late 2005, we decided to limit business with our Canadian distributor. Decreased sales in Canada represented approximately half of the decrease in Prolab’s international business.General

~~Approximately~~We ~~$0.5~~manufacture ~~million~~and ofmarket ~~the~~branded, ~~decline~~high-quality indietary ~~net~~supplements, ~~sales~~herbal ~~was~~teas, and ~~due~~sports tonutrition aproducts ~~reduction~~under inseven ~~our~~primary ~~EPI division’s~~brands: ~~contract~~Natrol®, ~~manufacturing~~Laci ~~business.~~ Le ~~During~~Beau®, ~~the~~Prolab®, ~~third~~Nu ~~quarter~~Hair® of, ~~2005~~Shen Min®, wePromensil® ~~decided~~and toMRI. ~~discontinue~~Through ~~certain~~our ~~unprofitable~~Essentially ~~contract~~Pure ~~manufacturing~~Ingredients® ~~accounts.~~ (EPI’s) ~~contract~~division ~~manufacturing~~we ~~revenue~~also ~~has~~sell ~~fallen~~nutraceutical asgrade ingredients ato ~~result~~other manufacturers of ~~this~~nutrition products and provide contract ~~decision~~manufacturing services to companies within the nutraceutical industry.

~~Gross~~The ~~shipments,~~majority ~~which~~of ~~reflect~~our ~~sales~~dietary ~~prior~~supplements toare ~~deductions~~sold ~~for~~under ~~promotional~~the ~~activities~~Natrol brand, but we are ~~returns,~~continuing ~~and~~to ~~payment~~acquire ~~discounts,~~new ~~fell~~brands ~~less~~that ~~than~~we ~~net~~expect ~~revenue. Gross~~will ~~shipments~~eventually ~~were~~contribute significantly $2to our product mix sales.3 ~~million~~Our ~~less~~Natrol inbrand ~~the~~focuses on supplements ~~second~~that ~~quarter~~are ofin ~~2006~~high ~~than~~demand ~~the~~as ~~second~~well ~~quarter~~as ofspecialty ~~2005. The~~niche ~~reason~~and ~~for~~proprietary ~~the~~formulations that ~~difference~~have ~~between~~potentially ~~the~~strong margins. These supplements include vitamins, ~~decline~~minerals, inhormonal ~~gross~~supplements, herbal products and ~~net~~specialty ~~sales~~combination formulas ~~was~~that contribute to an ~~increase~~individual’s inphysical ~~estimated~~and ~~returns~~mental ofwell-being. On ~~approximately~~June ~~$0.5~~1, ~~million~~2007, inwe ~~the~~acquired ~~quarter~~MRI aswhich ~~well~~develops asand anmarkets ~~increase~~products inunder ~~promotional~~the MRI ~~spending~~brand. ~~that~~Our isMRI ~~recorded~~brand assupplies ahigh-quality ~~reduction~~sports ofnutrition ~~revenue~~products ofincluding CE2®, ~~approximately~~NO2®, $0Pro-Nos™ and Anabolic Switch™.2 These products are primarily ~~million~~designed to enhance the workout performance of athletes.

~~GROSS PROFIT. Gross profit decreased 4.4%, or $0.3 million, to $7.2 million for the three months ended June 30, 2006 from $7.5 million for the three months ended June 30, 2005.~~ The ~~decrease~~key ~~resulted~~elements ~~from~~of ~~lower~~our ~~sales volume during the~~business ~~quarter. Gross~~strategy ~~margin~~are ~~increased~~ to 43.4% for the three months ended June 30, 2006 from 38.4% for the three months ended June 30, 2005. We increased gross margin during 2006 by reducing materials cost and improving efficiency within our manufacturing, planning and procurement areas.

~~SELLING~~· Control ~~AND~~our ~~MARKETING EXPENSES. Selling and marketing expenses consist primarily of advertising and promotional expenses,~~ cost ~~of distribution,~~ and ~~related~~improve payroll expenses and commissions. Selling and marketing expenses decreased 15.8%, or $0.8 million, to $4.1 million for the three months ended June 30, 2006 from $4.9 million for the three months ended June 30, 2005. The higher expenditures in 2005 were directly related to the introduction of new products during the second quarter of 2005.margins;

~~GENERAL~~· Develop AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of personnel costs related to general management functions, finance, accounting and information systems, as well as professional fees related to legal, audit and tax matters and depreciation. General and administrative expenses increased 32.6%, or ~~$0.7~~acquire ~~million~~new toproducts $2.8 million for the three months ended June 30, 2006 from $2.1million for the three months ended June 30, 2005. Payroll during the second quarter of 2006 was approximately $0.4 million more than in the second quarter of 2005 due to increased staffing at the executive level. During the second quarter of 2005, the Company also benefited from a $0.2 million legal settlement. This receipt was recorded as an offset to legal expenses and ~~lowered~~product ~~general~~lines ~~& administrative~~that ~~expenses~~can inhelp ~~2005~~us ~~relative~~capitalize toupon ~~2006. The remainder of the increase~~our was primarily due to additional consulting expenses related to the establishment of a European subsidiary in the United Kingdom as well as a $0.1 million stock option expense due to the adoption of FASB 123R.infrastructure;

~~INTEREST~~· Expand the ~~EXPENSE.~~distribution ~~We recorded interest expense~~ of ~~$153,000~~our ~~for~~products ~~the three months ended June 30, 2006 as compared~~ to ~~interest~~new ~~expense of $160~~markets,~~000 for~~ ~~the~~including ~~three months ended June 30~~internationally; and, ~~2005.~~

~~INCOME TAX EXPENSE. Our effective tax rate was 43.7% for~~ · Improve the ~~three months~~marketing ~~ended~~of ~~June~~our ~~30, 2006 and 38~~products.~~0% for the~~

12Management Overview

~~three~~We concluded ~~months~~the ~~ended~~second ~~June~~quarter ~~30,~~of ~~2005.~~2007 Wewith doapproximately ~~not~~$4.2 ~~consider~~of ~~this~~net ~~difference to~~income bewhich ~~material~~included ~~due~~proceeds tofrom the ~~small~~sale ~~amount~~ of ~~income~~our ~~earned. In~~property ~~periods~~and ~~when income is low,~~ the ~~differences~~ ~~between~~acquisition ~~taxable income and reported income can, in percentage~~of ~~terms,~~MRI. ~~become~~This ~~greater~~was ~~causing~~our ~~the~~sixth ~~period’s~~successive ~~reported~~profitable ~~tax rate to increase~~quarter.

~~Six months ended June 30, 2006 compared to June 30, 2005~~13

~~NET~~We ~~SALES.~~sold ~~Net~~our properties as part of our growth strategy. The sales allowed ~~decreased~~us 10to eliminate our debt and fund the acquisition of MRI.~~1%,~~ MRI orconcluded calendar 2006 with more than $321.80 million, toin net revenue and more than $333.50 million ~~for~~of ~~the~~net ~~six~~income ~~months~~and we ~~ended~~anticipate ~~June 30,~~that ~~2006~~MRI ~~from~~will ~~$37.3~~contribute ~~million~~positively ~~for~~to ~~the~~our ~~six~~revenue ~~months~~and ~~ended~~net income in ~~June 30,~~the ~~2005~~future.

~~Net~~We ~~sales~~acquired ofMRI ~~the~~for ~~Natrol~~$8.6 ~~brand~~million ~~(which~~including ~~includes~~adjustments ~~Laci~~for Leworking ~~Beau~~capital ~~tea~~and ~~sales)~~a potentially ~~were~~substantial $1earnout based on MRI’s ability to meet certain revenue benchmarks.2 MRI supplies high-quality sports nutrition products, such as CE2®, ~~million~~NO2®, ~~less~~Pro-Nos™ and Anabolic Switch™, which are primarily designed to enhance work-out performance. The MRI brand carries a premier position in the ~~first~~sports nutrition ~~half~~market. ofThe ~~2006~~brand ~~than~~identity is underpinned by a reputation for innovative science. Notably, MRI was the first ~~half~~company to launch nitric oxide based products in the sports nutrition market. MRI’s products are primarily distributed through the retail chain of ~~2005~~GNC. We feel that MRI will assist us in our goal of growing the business and creating a new platform to make additional acquisitions. This acquisition will help accelerate our corporate development plan by creating scale, synergies, and new avenues for growth.

~~In the~~An ~~first~~important ~~half~~part of ~~2005,~~our webusiness ~~shipped~~strategy ~~approximately~~is ~~$2.4~~to ofdevelop ~~new~~or ~~Natrol~~acquire ~~brand products. Shipments~~new ~~of Natrol~~ products ~~during~~with ~~the~~strong ~~first~~margins ~~half~~that ofcan ~~2006~~capitalize ~~did~~upon ~~not~~our ~~include significant product introductions~~infrastructure. ~~Even so, gross shipments~~Senior ofmanagement ~~the~~is ~~Natrol~~focused ~~brand~~on ~~during~~this ~~the first half of 2006 were approximately equal to gross shipments in 2005~~effort. ~~However, estimated~~Our ~~returns~~policy ~~during~~is ~~the~~not ~~first~~to ~~half~~announce ~~of 2006 were approximately $1.3 million~~any ~~higher~~potential ~~than~~acquisition ~~estimated~~until ~~returns~~an inacquisition ~~the~~agreement ~~first~~has ~~half~~been ~~of 2005~~signed. ~~Estimated returns reduce gross revenue when calculating net sales.~~

~~Net~~Our net sales offor ~~our~~the ~~Prolab~~three ~~products~~months ~~were~~ended ~~approximately~~June $130, 2007 grew 17.68% or $3.0 million ~~less~~more inthan our net sales for the ~~first half~~same ofperiod in 2006. ~~than~~The prime inreason for the ~~first~~increase ~~half~~in ofnet ~~2005.~~revenue ~~Approximately~~was ~~$1.0~~the ~~million~~acquisition of ~~this~~the NuHair, ~~amount~~Shen ~~was~~Min ~~due~~and toPromensil ~~decreased~~brands ~~sales~~in toOctober ~~international~~2006 ~~distributors~~and the acquisition of MRI in June 2007. WeThe ~~are~~core ~~currently~~Natrol ~~establishing~~business ahas ~~subsidiary in~~been impacted from the ~~United~~loss ~~Kingdom~~of Ester-C sales. As we have discussed in ~~order~~prior tofilings, ~~enhance~~Ester-C ~~our~~is ~~sales~~the ~~position~~only product line which accounted for more than 10% of our revenue in ~~Europe~~2006. ~~Decreased~~We ~~sales~~will inno ~~Canada~~longer ~~was~~be ~~responsible~~able ~~for approximately~~to ~~one~~sell Ester-~~quarter~~C ofafter March 2008 due to the ~~decline~~sale inof ~~Prolab’s~~our ~~international~~supplier ~~business.~~to a competitor who will not ~~The~~continue ~~remainder~~to ofsupply Ester-C to the ~~decline~~Company ~~was~~once ~~due~~our tosupply ~~decreased~~contract ~~domestic~~expires. As a result, Ester-C sales ofare ~~Prolab~~declining rapidly. We shipped $0.9 million less of Ester-C products during the ~~first~~three ~~six~~ months ended June 30, 2007 than in the same period of 2006.

~~Approximately~~The $1newly acquired brands have high gross margins.0 ~~million~~Due ofto the ~~decline~~favorable ineffects ~~net~~of the ~~sales~~new ~~was~~product ~~due~~mix, toas awell ~~reduction~~as inincreased manufacturing efficiency, our ~~EPI~~gross ~~division’s~~margin ~~contract~~in ~~manufacturing~~the ~~business~~quarter ended June 30, 2007 increased to 47. ~~During~~4% ~~the~~from ~~third~~43.3% in the quarter ofended ~~2005~~June 30, we2006, ~~made~~and the ~~decision~~gross tomargin ~~discontinue~~for the second quarter of ~~certain~~2007 ~~unprofitable~~is ~~contract~~also ~~manufacturing~~more ~~accounts. EPI’s~~than ~~contract~~the ~~manufacturing~~43.4% ~~revenue~~recorded ~~has decreased~~for asthe ayear ~~result~~ended ofDecember ~~this~~31, ~~decision~~2006.

~~GROSS~~During the ~~PROFIT. Gross~~quarter ~~profit~~we ~~increased~~controlled ~~2.1%~~our orcosts $0of administration.3 General ~~million,~~and toadministrative expenses increased $14166.10 ~~million~~thousand ~~for~~in ~~the~~absolute ~~six~~dollar ~~months~~terms ~~ended June 30, 2006 from $13.8 million~~but ~~for~~declined ~~the~~in ~~six~~percentage ~~months ended June 30~~terms, ~~2005~~from in17.1% ~~spite~~ of ~~the~~net ~~decrease~~revenue in ~~sales due to~~ the ~~improvement~~quarter inended June ~~gross~~30, ~~margin.~~2006 ~~Gross margin increased~~ to 4215.03% for the ~~six~~ ~~months~~quarter ended June 30, ~~2006~~2007. These ~~from~~percentage ~~37.0%~~savings ~~for~~were achieved despite the ~~six~~increased ~~months~~administrative ~~ended June 30,~~costs ~~2005. During~~of ~~2006,~~our weacquisitions ~~have~~and increased ~~been~~administrative ~~focused~~costs onresulting ~~reducing~~from ~~material~~the ~~cost~~establishment ~~and~~of ~~improving~~a ~~efficiency~~subsidiary ~~within~~in ~~our~~the ~~manufacturing,~~United ~~planning~~Kingdom ~~and~~during ~~procurement~~the ~~areas~~third-quarter of 2006.

~~SELLING~~Total ~~AND~~selling ~~MARKETING~~and ~~EXPENSES~~marketing costs increased as a percentage of revenue. ~~Selling~~ The increase was driven by additional cooperative advertising and media ~~marketing~~expenditures ~~expenses~~as ~~decreased~~well ~~9.5%,~~as orthe ~~$0.8~~addition ~~million,~~of some personnel to ~~approximately~~support ~~$8.2~~our new ~~million~~brands ~~for~~as ~~the~~well ~~six~~as ~~months~~our ~~ended~~operations ~~June 30,~~in ~~2006~~the ~~from~~United Kingdom. We spent approximately $91.05 million ~~for~~more in the ~~six~~ ~~months~~second ~~ended~~quarter ~~June 30,~~of ~~2006.~~2007 ~~The~~than ~~higher~~the ~~expenditures~~second inquarter ~~2005~~of ~~were~~2006 ~~directly~~on ~~related~~sales toand marketing expenses, which increased the ~~introduction~~percent of ~~new~~net ~~products~~revenue spent ~~during~~on ~~the~~sales ~~second~~and ~~quarter~~marketing from 24.7% ofto ~~2005~~28.4%.

~~GENERAL AND~~The ~~ADMINISTRATIVE~~largest ~~EXPENSES. General~~immediate ~~and administrative~~challenges ~~expenses~~are ~~increased 12.9%, or $0.6 million~~ to ~~$5.6~~manage ~~million~~through ~~for~~ the ~~six~~decline ~~months~~of ~~ended~~our ~~June 30,~~Ester-C business ~~2006~~and ~~from~~to ~~$5.0~~fully ~~million~~integrate ~~for the six months ended June 30, 2005~~MRI. ~~Approximately~~We ~~$0.4~~will ~~million~~continue ofto ~~the~~work ~~increase was due~~ to ~~the~~improve ~~recording~~internal ofefficiencies ~~option~~and ~~expenses~~to asstrengthen weour ~~adopted~~core ~~FASB~~business ~~123R~~though incomplementary ~~January~~acquisitions ~~2006. The remainder~~that ofimprove ~~the~~our ~~increase was primarily due to additional payroll expenditures~~business ~~for executives~~platform.

~~INTEREST EXPENSE. We recorded interest expense of $307,000 for the six months ended June 30, 2006 as compared to interest expense of $320,000 for the three months ended June 30, 2005.~~14

~~INCOME~~Results TAX EXPENSE. Our effective tax rate was 41.4% for the six months ended June 30, 2006 and 38.0% for the six months ended June 30, 2005. We do not consider this difference to be material due to the small amount of ~~income earned. In periods when income is low, the differences between taxable income and reported income can, in percentage terms, become greater causing the period’s reported tax rate to vary.~~Operations

~~SALE~~THREE OFMONTHS ~~BUILDING.~~ENDED ~~During~~JUNE ~~the first six months of 2006~~30, ~~we sold~~2007 aAND ~~building~~JUNE ~~we owned in Bloomfield~~30, ~~Connecticut~~ that was formerly used as a shipping facility for our Prolab brand. The approximate net book value of the property, plant and plant improvements that were sold was $759,000 and the gain, net of brokerage, legal and other related expenses was approximately $230,000.2006

~~LIQUIDITY~~NET ~~AND~~SALES. ~~CAPITAL~~We ~~RESOURCES~~recognize revenue from sales only after product is shipped. We have no consignment sales. Net sales represent product shipped less actual and estimated future returns, spoilage allowances, allowances for product deemed to be unsaleable by customers, free goods shipped to customers for promotional or other purposes, rebates, slotting fees and other promotional expenditures. Estimates and allowances are based upon known claims and an estimate of additional returns when the amount of future returns from customers can be reasonably estimated.

AsNet ofsales increased 17.8%, or $2.9 million, to $19.5 million for the three months ended June 30, 2007 from $16.6 million for the three months ended June 30, 2006. Increased sales of $4.2 million from the acquired NuHair, weShen ~~had~~Min, ~~working~~Promensil ~~capital~~and MRI brands and an increase in Prolab product sales of approximately $170.32 million were aspartially ~~compared~~offset by a decline of $0.4 million in EPI revenue and a decline of approximately $1.1 million in the remaining Natrol segment business. The decline in Natrol revenue was primarily due to a fall off in Ester-C sales, which were $150.9 million less in ~~working~~the ~~capital~~three months atended June 30, 2007 than in the three months ended June 30, 2006. Ester-C is being discontinued because the supplier of Ester-C will no longer sell raw material to us after March 2008.

13GROSS PROFIT. Gross profit increased 29.1%, or $2.1 million, to $9.3 million for the three months ended June 30, 2007, from $7.2 million for the three months ended June 30, 2006. Gross margin increased to 47.4% for the three months ended June 30, 2007, from 43.4% for the three months ended June 30, 2006. The increase in gross margin was primarily due to product mix as well as improved manufacturing efficiency. The change in product mix was due to the acquisition of the NuHair, Shen Min, Promensil and MRI brands.

~~December 31~~SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of advertising and promotional expenses, costs of distribution, and related payroll expenses and commissions. ~~2005~~Selling and marketing expenses increased 35. ~~Our~~6%, ~~cash~~or ~~balance~~$1.5 atmillion, to $5.6 million for the three months ended June 30, 2007, from $4.1 million for the three months ended June 30, 2006. Selling expenses increased ~~was~~approximately $0.8 million due to increased staffing and promotion required by our acquisitions and the establishment of a subsidiary in the United Kingdom. Marketing expenses increased approximately $20.26 million due to increased expenditures on traditional media and trade shows.

~~Operating~~GENERAL ~~Activities~~AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of personnel costs related to general management functions, finance, accounting and information systems, as well as professional fees related to legal, audit and tax matters and depreciation. General and administrative expenses increased 5.9%, or $0.2 million to $3.0 million for the three months ended June 30, 2007 from $2.8 million for the three months ended June 30, 2006. The reason for the increase was the infrastructure and payroll necessary to support our acquisitions and our subsidiary in the United Kingdom.

~~Net cash~~INTEREST ~~used~~EXPENSE. byWe ~~operating~~recorded ~~activities~~interest expense ~~was~~of $~~1.1~~70,000 ~~million~~ for the ~~six~~three months ended June 30, ~~2006~~2007 ~~versus~~as ~~net~~compared ~~cash~~to interest ~~used~~expense of ~~approximately~~ $~~1.8~~153,000 ~~million~~ for the ~~six~~ three months ended June 30, ~~2005~~2006. The ~~Cash~~decrease ~~used~~was bydue ~~operating~~to ~~activities during~~ the ~~six months~~pay ~~ended~~off ~~June 30, 2006 consisted primarily~~ of ~~cash~~all ~~provided by non-cash charges~~ of ~~$0.9~~the ~~million~~existing ~~and~~debt ~~cash used because of changes~~ in ~~operating~~April ~~assets~~2007. ~~and~~Proceeds ~~liabilities~~from ofthe ~~$2.2~~sale/leaseback ~~million~~transaction ~~offset~~were byused ~~the~~to ~~Company’s~~pay ~~profit~~off ofthe $0debt.~~2 million.~~

~~During the~~INCOME ~~six~~TAX ~~months~~EXPENSE. ~~ended~~Our ~~June~~effective ~~30, 2006 we implemented SFAS 123R and expensed stock~~tax ~~options~~rate ~~awarded~~was ~~to employees~~39.0 ~~This~~% ~~expense~~in ~~amounted~~the tothree ~~$0.4~~months ~~million,~~ended ~~but~~June ~~was~~30, ~~a non-cash~~2007 ~~charge. Depreciation~~ and ~~amortization~~ ~~provided $0~~43.7% ~~million~~in ofthe ~~cash. These non-cash sources of cash were~~three ~~offset~~months byended anJune ~~increase~~30, ~~in deferred tax assets of $0~~2006.~~1 million and a decrease in allowances for bad debts.~~ ~~Cash~~The ~~used~~differences ~~by operating~~are ~~assets and liabilities consisted~~ primarily ofdue anto ~~increase in accounts~~the ~~receivable~~different oflevels ~~$0.8 million, an increase in inventory~~ of $0income.4 When ~~million, and a~~income ~~decrease~~is inlow ~~accounts~~the ~~payable~~effect of ~~$3.1~~non-deductible ~~million offset by an increase in accrued~~ expenses ofon ~~$1.4~~the ~~million,~~final antax ~~increase~~rate inare ~~accrued payroll of $0.2 million and an~~greater ~~increase~~than inwhen ~~prepaid expenses and~~ income ~~taxes~~is ~~receivable of $0~~high.~~4 million. The increase in accounts receivable was due to the level and timing of sales. Accounts payables were reduced consistent with normal terms from our vendors.~~

~~Investing Activities~~15

Net cashSIX providedMONTHS byENDED investingJUNE activities was $0.5 million for the six months ended June 30, 20062007 comparedCOMPARED toTO netJUNE cash used of $0.3 million during the six months ended June 30, 2005. During the half of 2006, we sold our warehouse in Bloomfield, Connecticut. The net book value of the property sold was approximately $0.8 million. Other investment activity consisted primarily of the acquisition of $0.3 million of equipment.

~~Financing~~Net ~~Activities~~sales increased 14.2%, or $4.7 million, to $38.3 million for the six months ended June 30, 2007, from $33.5 million for the six months ended June 30, 2006. Sales of $6.7 million from the acquired NuHair, Shen Min, Promensil and MRI brands were partially offset by a decline of $0.8 million in EPI revenue, a decline of approximately $0.3 million of Prolab revenue and a decline of approximately $0.9 million of remaining Natrol segment net revenue.

~~Net cash~~GROSS ~~used~~PROFIT. byGross ~~financing~~profit ~~activities~~increased 28.3%, ~~was~~or $4.0 million, to $18.21 million for the six months ended June 30, ~~2006~~2007, from as$14.1 ~~opposed~~million tofor ~~cash~~the ~~used~~six ofmonths ~~$36~~ended June 30,~~000~~ ~~during~~2006. Gross margin increased to 47.2% for the six months ended June 30, ~~2005~~2007 from 42. ~~During~~0% ~~the~~for the six months ended June 30, 2006,. weThe ~~repaid~~increase $0in gross margin was primarily due to product mix as well as improved manufacturing efficiency.3 The ~~million~~change in product mix was due to the acquisition of ~~long-term~~the ~~debt~~NuHair, Shen Min, Promensil and MRI brands, each of which maintain higher gross margin percentages than the average of all of our products.

AsSELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of advertising and promotional expenses, costs of distribution, and related payroll expenses and commissions. Selling and marketing expenses increased 29.2%, or $2.4 million, to $10.6 million for the six months ended June 30, ~~2006~~2007, wefrom ~~had~~ $78.42 million for the six months ended June 30, 2006. Selling expenses increased approximately $1.1 million due to increased cooperative adverting promotion and additional staffing required by our acquisitions and the establishment of ~~outstanding~~a ~~debt~~subsidiary in the United Kingdom. Marketing expenses increased approximately $1.3 million due to increased expenditures on traditional media and trade shows.

~~We currently~~GENERAL doAND ~~not~~ADMINISTRATIVE ~~have~~EXPENSES. General aand ~~line~~administrative ofexpenses ~~credit~~consist ~~established. We~~primarily ~~are,~~of ~~however,~~personnel ~~attempting~~costs related to ~~secure~~general amanagement ~~line of~~functions, ~~credit. Although~~finance, weaccounting ~~believe~~and ~~that a~~information ~~line~~systems, ofas ~~credit~~well isas ~~obtainable,~~professional ~~there~~fees isrelated noto ~~guarantee~~legal, ~~that~~audit ~~financial~~and ~~institutions~~tax matters ~~will~~and bedepreciation. ~~willing~~General toand ~~provide~~administrative ~~capital~~expenses toincreased us6. ~~Also~~5%, inor ~~providing~~$0.4 million usto ~~with~~$6.0 ~~additional~~million ~~funds,~~for ~~potential~~the ~~lenders~~six ~~may~~months ~~seek to~~ended ~~impose~~June ~~covenants~~30, ~~restricting~~2007 us from ~~certain~~$5.6 million ~~activities~~for ~~and~~the ifsix wemonths ~~believe~~ended ~~it is~~June ~~necessary~~30, to2006. ~~borrow~~The ~~funds~~reason ~~with~~for ~~these~~the ~~restrictions~~increase inwas the ~~place,~~infrastructure weand ~~may~~payroll ~~find~~necessary ~~that our ability~~ to ~~compete~~support ~~effectively~~our inacquisitions and our subsidiary ~~market~~in ~~sector~~the isUnited ~~hindered~~Kingdom.

~~In order~~INTEREST toEXPENSE. ~~meet~~We ~~our~~recorded ~~long-term~~interest expense ~~liquidity~~of ~~needs~~$291,000 wefor ~~may~~the besix ~~required~~months toended ~~incur additional~~June ~~indebtedness or issue additional equity and debt securities~~30, ~~subject to~~2007 ~~market~~as ~~and~~compared ~~other conditions. There can be no assurance that such additional~~to ~~financing~~interest ~~will~~expense beof ~~available~~$307,000 onfor ~~terms~~the ~~acceptable~~six tomonths usended orJune at30, ~~all~~2006. The decrease ~~failure~~was due to ~~raise~~ the ~~funds~~pay ~~necessary~~off toof ~~finance~~all ~~its~~of ~~future~~the ~~cash~~existing ~~requirements~~debt orin ~~consummate~~April 2007. ~~future~~Proceeds ~~acquisitions~~from ~~could~~the ~~adversely~~sale/leaseback ~~affect~~transaction ~~our~~were ~~ability~~used to ~~pursue~~pay ~~new acquisitions~~off ~~and~~the ~~could negatively affect our operations in future periods~~debt.

~~We believe~~INCOME ~~that~~TAX ~~our~~EXPENSE. ~~cash~~Our ~~balance~~effective ~~together~~tax rate ~~with~~was ~~cash~~39.0% ~~generated~~in ~~from~~the ~~operations~~three ~~and the~~months ~~potential~~ended toJune ~~borrow~~30, ~~duns~~2007 and ~~raise~~41.4% ~~capital~~in ~~should~~the bethree months ~~sufficient~~ended toJune ~~fund~~30, ~~our anticipated~~2006. ~~working~~The ~~capital~~difference ~~needs~~is ~~and~~primarily ~~planned~~due ~~capital~~to ~~expenditures for~~ the ~~next~~different 12levels ~~months~~of income. ~~However,~~When ifincome weis dolow ~~not meet~~the ~~our~~effect ~~operating~~of ~~plan,~~non-deductible weexpenses ~~may~~on bethe ~~required~~final totax ~~obtain~~rate ~~additional~~are ~~borrowings~~greater tothan ~~fund~~when ~~working~~income ~~capital~~is ~~needs~~high.

~~CRITICAL~~SALE ~~ACCOUNTING~~OF ~~POLICIES~~BUILDINGS. During the first six months of 2006, we sold a building we owned in Bloomfield, Connecticut that was formerly used as a shipping facility for our Prolab brand. The approximate net book value of the property, plant and plant improvements that were sold was $759,000 and the gain, net of brokerage, legal and other related expenses was approximately $230,000.

~~Management’s~~In ~~beliefs~~April ~~regarding~~2007, ~~significant~~we ~~accounting~~sold ~~policies~~our ~~have~~94,000 square ~~not~~foot manufacturing, distribution and office facility and our 132,000 ~~changed~~square ~~significantly~~foot ~~from~~shipping ~~those~~facility ~~discussed~~both located in ~~Item~~Chatsworth, 7California. The sales ofprice ~~our~~for ~~annual~~the ~~report~~properties onwas $26.0 million. After paying expenses ~~Form~~associated ~~10-K~~with ~~for~~the transaction, taxes, and extinguishing the ~~year~~mortgage ~~ended~~debt ~~December~~on the 31buildings, ~~2005~~we netted approximately $12.0 million in cash. We recorded a gain of approximately $6.1 million and a future lease benefit of $5.5 million, which will be amortized over 5 years.

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~16

~~Our~~LIQUIDITY ~~exposure~~AND ~~to market~~CAPITAL ~~risks is limited to interest rate risks. The risks related to foreign currency exchange rates are immaterial and we do not use derivative financial instruments.~~RESOURCES

WeAs ~~are~~of ~~subject to~~June ~~interest~~30, ~~rate market risk associated with our bank debt. Even so~~2007, we ~~do not~~had ~~believe~~working ~~the~~capital ~~risk~~of ~~associated~~$27.4 ~~with~~million ~~such~~as ~~borrowing~~compared isto ~~significant~~$12.1 ~~Additionally, we~~million doin ~~not~~working capital ~~believe~~at ~~that~~December 31, ~~the~~2006. Our ~~risk~~cash isbalance ~~significant~~at ~~for~~June ~~our~~30, ~~long-term~~2007 ~~debt due to~~was ~~the~~approximately ~~low~~$8.6 million.

14Operating Activities

~~fixed~~Net ~~rates~~cash ~~and relative~~provided ~~insignificance~~by ofoperating activities ~~the~~was ~~fixed long-term debt to our balance sheet~~$1.8 million ~~Our long-term~~for ~~debt~~the issix ~~comprised~~months ofended ~~two~~June ~~fixed~~30, ~~rate~~2007 compared ~~notes~~to ~~with~~net acash ~~total~~used ~~principal balance~~ of approximately $61.9 1 million ~~collateralized~~for bythe ~~our~~six ~~headquarters~~months ~~building~~ended ~~and~~June ~~our~~30, ~~shipping~~2006. ~~facility~~Cash ~~and~~provided ~~one~~by ~~variable~~operating ~~rate~~activities ~~note~~during ~~with~~the ~~a principal~~six ~~balance~~months ofended ~~approximately~~June ~~$0.5~~30, ~~million~~2007 ~~collateralized~~consisted byprimarily ~~our~~of ~~general~~cash ~~assets.~~provided ~~The~~by non-cash ~~interest~~charges ~~rate~~of on$0.9 million ~~the~~and ~~fixed~~cash ~~rate~~used ~~notes~~because ~~associated~~of ~~with~~changes ~~our real estate average 8.0%. The interest rate~~ in ~~the variable~~operating ~~rate~~assets ~~note~~and isliabilities ~~equal~~of to$3.6 million ~~the~~and ~~Prime~~by ~~Lending~~our ~~Rate~~profit ~~plus 0~~of $4.~~75%~~5 million.

~~ITEM~~During 4the six months ended June 30, 2007, non-cash charges for depreciation and amortization had the effect of providing $0.6 million ~~CONTROLS~~of ~~AND~~cash, ~~PROCEDURES~~the expensing of stock options provided $0.3 million of cash, and, increasing the provision for bad debts had the effect of providing $0.1 million. These non-cash sources of cash were offset by a small decrease in foreign currency translation and a small increase in deferred income taxes.

~~Evaluation of~~Cash ~~Disclosure~~provided ~~Controls~~by ~~and Procedures. We~~operating ~~maintain~~assets ~~disclosure~~and ~~controls~~liabilities ~~and~~consisted ~~procedures~~primarily ~~that~~of ~~are~~an ~~designed~~increase toin ~~ensure~~accounts ~~that~~payable ~~information~~of ~~required~~$5.0 million, toan beincrease ~~disclosed~~ in ~~our~~accrued ~~Exchange~~expenses ~~Act~~of ~~reports~~$0.5 ~~is recorded~~million, an ~~processed,~~increase ~~summarized~~in ~~and~~accrued ~~reported~~payroll ~~within~~of ~~the~~$0.2 ~~time~~million, ~~periods~~an ~~specified~~increase inof ~~the~~$3.2 ~~SEC’s~~million in ~~rules and~~income ~~forms~~taxes payable, and, ~~that~~a ~~such~~decrease ~~information~~in isprepaid ~~accumulated~~expenses ~~and~~of ~~communicated~~$0.6 million, tooffset ~~our~~by ~~management,~~an ~~including~~increase ~~our~~in ~~principal~~accounts ~~executive~~receivable of $4.8 million and ~~principal~~an ~~financial~~increase in ~~officers~~inventory of $8.3 million,. The aslarge ~~appropriate~~changes in accounts receivable, accounts topayable ~~allow~~and ~~for~~inventory ~~timely~~were ~~decisions~~primarily ~~regarding~~due ~~required~~to ~~disclosure~~the acquisition of MRI.

InInvesting designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.Activities

AsNet ~~required~~cash provided by ~~SEC~~investing ~~Rule 13a-15(b),~~activities wewas ~~carried~~$16.1 million ~~out~~for anthe ~~evaluation,~~six ~~under~~months ~~the~~ended ~~supervision~~June ~~and~~30, 2007 ~~with~~compared ~~the~~to ~~participation~~net ofcash ~~our~~provided ~~management,~~of ~~including~~$0.5 million ~~our~~during ~~principal~~the ~~executive~~six ~~and~~months ended ~~principal~~June ~~financial officers~~30, of2006. During the ~~effectiveness~~six ofmonths ~~the~~ended ~~design~~June ~~and~~30, ~~operation~~2007, we invested $0.2 ofmillion ~~our~~in ~~disclosure~~new ~~controls~~equipment and ~~procedures~~realized as$11.7 offrom the ~~end~~sale of ~~the~~property ~~period~~and ~~covered~~$5.3 bymillion ~~this~~net ~~report.~~from ~~Based~~the oncreation ~~the~~of ~~foregoing,~~a ~~our~~deferred ~~principal~~lease ~~executive~~benefit ~~and~~which ~~principal~~is related to ~~financial~~the ~~officers~~real ~~have~~estate ~~concluded~~transaction. The acquisition ~~that~~of ~~our~~other ~~disclosure~~assets ~~controls~~used ~~and~~$0.6 ~~procedures were~~million ~~effective~~of cash.

~~Changes in~~Financing Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Activities

~~PART~~Net IIcash used by financing activities was $10.3 million for the six months ended June 30, 2007 compared to cash used of $0.2 during the six months ended June 30, 2006. During the six months ended June 30, 2007, we repaid $3.7 million of our line of credit and $6.7 million of our long-~~OTHER~~term ~~INFORMATION~~debt. During the six months ended June 30, 2007, we received $0.1 million from the exercise of stock options. All of our long and short-term debt was extinguished during the six months ended June 30, 2007 other than a small automobile loan acquired as part of the MRI transaction.

~~ITEM~~Senior ~~1A.~~Credit ~~RISK FACTORS~~Facility

~~Information concerning~~In ~~certain~~August ~~risks~~2006, ~~and~~we ~~uncertainties~~entered ~~appears~~into a inloan ~~Part~~and I,security ~~Item~~agreement 1Awith ~~“Risk Factors”~~Wachovia ofCapital ~~our~~Finance ~~annual~~(Western), ~~report~~as agent, onthe ~~Form~~lenders ~~10-K~~party ~~for~~thereto, ~~the~~Prolab ~~year~~Nutrition, ~~ended~~our ~~December~~wholly 31owned subsidiary, ~~2005 (as~~and ~~updated~~certain ~~below~~of inour ~~this~~other ~~Item~~subsidiaries, ~~1A)~~as guarantors. ~~You~~ The loan ~~should~~agreement ~~carefully~~provides ~~consider~~for ~~these~~a ~~risks~~three-year, ~~and~~secured, ~~uncertainties~~revolving ~~before~~credit ~~making~~facility anof up ~~investment~~to ~~decision~~$10.0 million. ~~with~~Borrowings ~~respect~~under tothe ~~shares~~facility ofwill ~~our~~be ~~common~~used ~~stock. Such~~for ~~risks~~ongoing outstanding working capital purposes and ~~uncertainties~~certain ~~could~~future ~~materially adversely~~acquisitions. ~~affect~~At ~~our~~June 30, ~~business~~2007, ~~financial~~we ~~condition~~had orno ~~operating~~borrowings ~~results~~under the facility.

~~During~~ Under the ~~period~~credit ~~covered~~facility, bywe may ~~this~~borrow ~~quarterly~~up ~~report,~~to ~~there~~the ~~has~~lesser ~~been~~of no$10.0 million ~~material~~or ~~change~~the borrowing base ~~from~~(calculated ~~the~~based ~~risk~~upon ~~factors~~eligible ~~previously~~inventory ~~disclosed~~and ineligible ~~our~~accounts). ~~annual~~The ~~report~~interest rate on ~~Form~~borrowings ~~10-K~~under the credit facility is equal to: (1) agent’s publicly announced prime rate for ~~the~~prime ~~year~~rate ~~ended~~loans ~~December~~or ~~31,~~(2) ~~2005,~~2.25% ~~except~~plus the applicable Eurodollar rate for any Eurodollar rate loans. Interest is payable monthly in arrears not later than the ~~addition~~first day of ~~the~~each ~~following risk~~calendar ~~factors:~~month.

~~We have new senior members of our management team whose experience is outside of the nutraceutical industry.~~17

InThe ~~March~~credit ~~2006,~~facility ~~our board~~requires ofthat ~~directors~~all ~~appointed~~principal ~~Wayne~~be M.repaid ~~Bos,~~in asfull ~~our~~on ~~new~~the ~~president~~third ~~and~~anniversary ~~chief executive officer. In April 2006, our board~~ of ~~directors~~ ~~appointed~~the ~~Craig Cameron as our chief operating officer~~closing date. ~~While~~ ~~Messrs. Bos and Cameron have extensive experience~~Additionally, ~~neither~~borrowings ~~has~~under ~~experience~~the incredit ~~our~~facility ~~industry. If~~must ~~Messrs.~~be ~~Bos~~repaid ~~and Cameron are unable to~~when ~~adapt successfully to~~ the ~~unique~~borrowings ~~challenges~~exceed of the ~~nutritional~~borrowing ~~supplement industry or to define or execute our business strategies, our results of operation and financial condition may be adversely affected~~base.

IfThe credit facility is secured weby ~~fail~~a tofirst ~~successfully~~priority ~~implement~~lien on all our ~~business~~assets ~~strategies~~and properties (which includes the assets and properties of Prolab Nutrition, the guarantors and our ~~ability~~future subsidiaries), subject to certain exceptions. The obligations under the credit ~~increase~~facility ~~our~~are ~~revenues~~guaranteed ~~and~~by ~~operating~~Natrol ~~profits~~Products, ~~could~~Inc., beNatrol ~~adversely~~Acquisition ~~affected~~Corp. and ~~our~~ ~~overall~~Natrol ~~business~~Direct, ~~could~~Inc. beand ~~harmed~~by each of our future subsidiaries.

~~Our~~The ~~current~~credit ~~business~~facility contains ~~strategies~~covenants ~~involve~~restricting ~~(1)~~our ~~developing~~ability ~~Natrol~~to, asamong aother ~~solid,~~things: ~~profitable~~(1) ~~growth~~incur ~~company,~~or guarantee additional debt; (2) ~~expanding~~engage ~~our~~in ~~international~~any ~~operations~~mergers ~~and~~or ~~(3)~~acquisitions ~~making opportunistic~~(subject ~~acquisitions. Our~~to ~~business~~certain ~~strategies include~~exceptions); ~~realizing~~(3) ~~cost~~engage ~~savings~~in ~~from~~any ~~operational~~asset ~~efficiency~~sales ~~improvements~~or ~~by implementing~~dispose ~~processes~~of ~~designed~~any toassets (other ~~improve~~than in the ~~efficiency~~ordinary ~~level~~course); of(4) ~~our manufacturing~~engage ~~facilities. We~~in ~~may~~transactions ~~have to~~with affiliates; (5) incur ~~costs~~liens; to(6) ~~achieve~~make ~~our~~any ~~potential~~loans ~~cost~~or ~~savings. These~~investments; ~~costs~~and ~~not~~(7) ~~fully~~declare or ~~achieve~~pay ~~our~~dividends ~~expected cost~~or ~~savings~~redeem ~~and~~or ~~efficiency~~repurchase ~~improvements~~capital stock.

15The credit facility also provides for customary events of default, including non-payment defaults, covenant defaults and cross-defaults to our other material indebtedness.

WeAs of ~~are~~June ~~planning~~30, to2007, ~~expand our~~the ~~international~~Company ~~operations. Operations~~ was in ~~foreign~~default ~~markets~~under ~~may~~certain becovenants ~~affected~~in byits credit ~~currency~~facility ~~fluctuations,~~related ~~different~~to ~~consumer preferences,~~investments ~~government~~in ~~regulation~~new businesses and ~~local~~cannot ~~market~~borrow under ~~conditions. To~~ the ~~extent~~line ~~that~~of wecredit ~~open~~until ~~new~~Wachovia ~~international~~agrees to waive the event of default ~~operations~~and inforbear ~~foreign~~from ~~markets,~~exercising weits ~~may~~default ~~not~~rights. ~~experience~~Wachovia ~~the~~is ~~operating~~now ~~margins~~reviewing wethe ~~expect~~acquisition of MRI on June 1, ~~and~~2007, ~~our~~which ~~expected~~triggered ~~growth~~the inevent ~~our~~of ~~results~~default. The Company expects its ability to borrow against the line of ~~operations~~credit ~~may~~to be ~~negatively impacted~~reinstated in the normal course of review.

~~Additionally~~In order to meet our long-term liquidity needs, ~~there~~which ~~can~~include the potential payment of certain incentives related to our acquisitions, we may be required to incur additional indebtedness or issue additional equity and debt securities, subject to market and other conditions. There can be no assurance that wesuch additional financing will be ~~able~~available toon ~~find~~terms ~~new~~acceptable ~~international~~to ~~markets~~us ~~which~~or ~~meet~~at all. The failure to raise the funds necessary to finance our ~~criteria,~~future cash requirements or ifconsummate wefuture ~~find~~acquisitions ~~such~~could ~~markets,~~adversely ~~that~~affect weour ability ~~will~~to ~~successfully implement~~pursue new acquisitions and could negatively affect our ~~expansion~~operations in ~~goals~~future periods.

~~Our~~We believe that our cash balance ~~failure~~together with cash generated from operations and the potential to ~~appropriately~~borrow ~~respond~~funds and raise capital should be sufficient to ~~changing~~fund ~~consumer~~our ~~preferences~~anticipated ~~and~~working ~~demand~~capital needs and planned capital expenditures for ~~new~~the ~~products~~next ~~could~~12 ~~significantly~~months. ~~harm~~However, if we do not meet our ~~customer~~operating ~~relationships~~plan, ~~and~~we may be required to obtain additional ~~product~~borrowings ~~sales~~to fund working capital needs.

~~The nutritional~~New ~~supplement~~Accounting industry is characterized by rapid and frequent changes in demand for products and new product introductions. Our failure to accurately predict these trends could negatively impact consumer opinion of us as a source for the latest products, which in turn could harm our customer relationships and cause decreases in our net sales. The success of our new product offerings depends upon a number of factors, including our ability to:Standards

~~· accurately~~The Financial ~~anticipate~~Accounting ~~customer~~Standards ~~needs;~~Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) in June 2006. The interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement of Financial Accounting Standard 109. FIN 48 is effective for fiscal years beginning after December 15, 2006. We have not determined the effect, if any, the adoption of FIN 48 will have on our consolidated financial statements. We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

~~· innovate~~Based on ~~and~~our ~~develop~~evaluation, ~~new~~we ~~products;~~have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2003,

~~· successfully commercialize new products in a timely manner;~~18

~~· price~~2004, ~~our~~2005 ~~products~~and ~~competitively;~~2006, the tax years which remain subject to examination by major tax jurisdictions as of June 30, 2007.

~~· manufacture~~We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial ~~deliver~~to our ~~products in~~financial ~~sufficient~~results. ~~volumes~~In the event we received an assessment for interest and/or penalties, it was classified in athe ~~timely~~financial ~~manner;~~statements as “selling, general and administrative expense”.

~~· differentiate~~In ~~our~~September 2006, ~~product~~the ~~offerings~~FASB ~~from~~issued ~~those~~Statement of ~~our~~Financial ~~competitors~~Accounting Standarad No. 157 (“FAS 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. FAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. Statement of Financial Accouting Standard 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of FAS 157, but does not expect the adoption of FAS 157 to have a material impact on its consolidated financial position, results of operations or cash flows.

IfIn February we2007, the FASB issued statement of Financial Accounting Standard No. ~~are~~159, ~~unable~~“The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS 159”). Statement of Accounting Standard 159 permits entities to ~~retain~~choose to ~~key~~measure ~~personnel~~many financial instruments and certain other items at fair value, with ~~our~~unrealized ~~ability~~gains and losses related to ~~manage~~these ~~our~~financial ~~business~~instruments ~~effectively~~reported ~~and~~in ~~continue~~earnings ~~our~~at ~~growth~~each ~~could~~subsequent bereporting ~~negatively~~date. ~~impacted~~SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact this Statement will have on our consolidated financial statements.

~~Key~~Critical ~~management employees~~Accounting include Wayne M. Bos, Craig Cameron, Dennis Jolicoeur and certain other employees. These key management employees are primarily responsible for our day-to-day operations, and we believe our success depends in large part on our ability to retain them and to continue to attract additional qualified individuals to our management team. We do not have an employment agreement with any of our key management employees other than Wayne M. Bos. The loss or limitation of the services of any of our key management employees or the inability to attract additional qualified management personnel could have a material adverse effect on our business, financial condition, and result of operations.Policies

~~ITEM~~Management’s beliefs 4.regarding ~~SUBMISSION~~significant OFaccounting ~~MATTERS~~policies TOhave Anot ~~VOTE~~changed significantly OFfrom ~~SECURITY~~those ~~HOLDERS~~discussed in Item 7 of our annual report on Form 10-K for the year ended December 31, 2006.

~~Our 2006~~Item ~~annual~~3. ~~meeting~~Quantitative ofand ~~stockholders~~Qualitative ~~was~~Disclosures ~~held~~About onMarket ~~June 8, 2006.~~Risk

~~a) At~~Our exposure ~~the~~to ~~annual~~market ~~meeting,~~risks ~~the~~is ~~following~~limited ~~director was~~to ~~re-elected~~interest rate risks. The risks related to ~~our~~foreign ~~board~~currency ofexchange ~~directors:~~rates are immaterial and we do not use derivative financial instruments.

		Votes For		Votes Withheld
Ralph Simon		11,268,307		2,215,105

We are subject to interest rate market risk associated with our bank debt. Even so, we do not believe the risk associated with such borrowing is significant. We currently have no long-term debt other than for a small automobile loan and, as of June 30, 2007, we had no borrowings under our line of credit. The line of credit is collateralized by our general assets.

~~The~~Item ~~following~~4. ~~individuals~~Controls ~~are~~and ~~members of our board of directors whose terms of office as directors continued after the annual meeting.~~Procedures

~~Elliott~~Evaluation ~~Balbert~~of ~~Wayne~~Disclosure MControls and Procedures. We ~~Bos~~maintain ~~Dennis~~disclosure ~~DeConcini~~controls ~~Thomas~~and ~~Doorley~~procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, ~~III~~processed, ~~Dennis~~summarized Rand reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow for timely decisions regarding required disclosure. ~~Jolicoeur~~In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures.

~~b) At~~As ~~the~~required ~~annual~~by ~~meeting~~Rules 13a-15(e) and 15d-15(e) of the ~~stockholders~~Securities ~~considered~~Exchange ~~and~~Act of ~~voted~~1934, ~~upon~~we acarried ~~proposal~~out ~~to adopt~~an evaluation, under the ~~Natrol,~~supervision ~~Inc.~~and ~~2006~~with ~~Stock~~the participation ~~Option~~of ~~and~~our ~~Incentive~~management, ~~Plan. The~~including ~~following~~our ~~vote~~principal ~~was~~executive ~~recorded:~~and principal financial officer,

For		7,690,785
Against		3,546,473
Abstain		4,347
Broker non-votes		2,241,807

16of the effectiveness of the design and operation of our disclosure controls and procedures and internal controls over financial reporting as of the end of the period covered by this report. Based on the foregoing, our principal executive and principal financial officer have concluded that, as of the period covered by this report, our disclosure controls and procedures were effective.

~~c) At~~Changes in Internal Control Over ~~the~~Financial ~~annual~~Reporting. There ~~meeting~~were ~~the~~no ~~stockholders~~changes ~~considered~~in ~~and~~our ~~voted~~internal ~~upon~~control aover ~~proposal~~financial toreporting ~~approve~~that occurred during the ~~award~~last offiscal ~~options~~quarter tothat ~~purchase~~have 6materially affected,~~029,500~~ ~~shares~~or are ofreasonably ~~common~~likely ~~stock~~ to ~~Wayne~~ ~~Bos~~materially affect, our ~~president~~internal ~~and~~control ~~chief~~over ~~executive officer~~financial reporting. ~~The following vote was recorded:~~

For		7,675,684
Against		3,563,871
Abstain		2,350
Broker non-votes		2,241,807

Attached as exhibits to this Form 10-Q are certifications of the Company’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934. This “Controls and Procedures” section includes information concerning the controls and evaluation thereof referred to in the attached certifications, and it should be read in conjunction with the attached certifications for a more complete understanding of the topics presented.

~~ITEM~~PART 6.II—OTHER ~~EXHIBITS~~INFORMATION

Exhibit 10.1		2006 Bonus Incentive Compensation Plan(1)
Exhibit 10.2		Natrol, Inc. 2006 Stock Option and Incentive Plan(2)
Exhibit 10.3		Form of Non-Qualified Stock Option Agreement under the Natrol, Inc. 2006 Stock Option and Incentive Plan(2)
Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Item 1A. Risk Factors

~~(1) Incorporated~~Information byconcerning ~~reference~~certain torisks and uncertainties appears in Part I, Item 1A “Risk Factors” of our ~~current~~annual report on Form 810-K ~~filed~~for ~~with~~ the ~~SEC~~year onended ~~May~~December 131, 2006. You should carefully consider these risks and uncertainties before making an investment decision with respect to shares of our common stock. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

~~(2) Incorporated~~During bythe ~~reference~~three tomonths ~~our~~ended ~~current~~June 30, 2007, there has been no material change from the risk factors previously disclosed in our annual report on Form 810-K ~~filed~~for ~~with~~ the ~~SEC~~year onended ~~July~~December 731, 2006.

17Item 5. Other Information

~~SIGNATURE~~Our 2007 annual meeting of stockholders has been delayed by more than 30 days from June 8, the anniversary date of the 2006 annual meeting of stockholders. Our board of directors has not yet determined the date of the 2007 annual meeting of stockholders. We will provide all required information about the 2007 annual meeting of stockholders when it becomes available.

~~Pursuant to~~Item ~~the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized~~6. Exhibits

	NATROL, INC.
Date: August 14, 2006	By:	/s/ Dennis R. Jolicoeur
		Chief Financial Officer, Treasurer and Executive
		Vice President
		(Duly Authorized Officer and Principal Financial and Accounting Officer)

(a) Index to Exhibits

Exhibit No.	Notes	Description
Exhibit 10.1	(1)	Stock Purchase Agreement dated as of June 1, 2007 among Natrol, Inc., the shareholders of Medical Research Institute, a California corporation, and Medical Research Institute, a California corporation.
Exhibit 10.2	(2)	Natrol Inc. 2007 Bonus Incentive Compensation Plan
Exhibit 10.3	(2)	Summary of Amendment to Change of Control Bonus Plan
Exhibit 31.1	*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1	*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2	*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

~~Exhibit Index~~Notes:

~~Exhibit~~* Filed ~~No.~~with ~~Exhibit~~this ~~Description~~report on Form 10Q.

Exhibit 10.1		2006 Bonus Incentive Compensation Plan(1)
Exhibit 10.2		Natrol, Inc. 2006 Stock Option and Incentive Plan(2)
Exhibit 10.3		Form of Non-Qualified Stock Option Agreement under the Natrol, Inc. 2006 Stock Option and Incentive Plan(2)
Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Previously filed with the Company’s Form 8-K, filed June 1, 2007 and incorporated herein by this reference.

(12) ~~Incorporated~~ Previously byfiled ~~reference~~with tothe ~~our~~Company’s ~~current report on~~ Form 8-K, filed ~~with~~May ~~the~~9, ~~SEC~~2007 onand ~~May~~incorporated 1,herein ~~2006~~by this reference.

~~(2) Incorporated by reference to our current report on Form 8-K filed with the SEC on July 7, 2006~~20

19SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 14, 2007	NATROL, INC.

	By:	/s/ Dennis R. Jolicoeur
		Dennis R. Jolicoeur
		Chief Financial Officer, Treasurer and Executive Vice President (Duly Authorized Officer and Principal Financial and Accounting Officer)

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