NBTY (NTY)

9. Income Taxes

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

        The effective income tax rate for the three months ended March 31, 2009 and 2008 was 35.2% and 32.9%, respectively. The effective income tax rate for the six months ended March 31, 2009 and 2008 was 35.5% and 33.4%, respectively. The effective income tax rate was higher for the six months ended March 31, 2009 as compared to the prior comparable period due to a higher effective state rate as a result of increased operations in California from the Leiner acquisition and a lower domestic production deduction in the current year due to lower domestic income.

        We accrue interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At March 31, 2009, we had $1,640 and $889 accrued for the potential payment of interest and penalties, respectively. As of March 31, 2009, we were subject to U.S. Federal Income Tax examinations for the tax years 2005 - 2008, and to non-US examinations for the tax years of 2003 - 2008. In addition, we are generally subject to state and local examinations for fiscal years 2005 - 2008.

9. Income Taxes

        Our provision for income taxes is impacted by a number of factors, including federal taxes, our international tax structure, state tax rates in the jurisdictions where we conduct business, and our ability

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Table of Contents

NBTY, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

(in thousands, except per share amounts)

9. Income Taxes (Continued)

to utilize state tax credits that expire between 2013 and 2016. Therefore, our overall effective income tax rate could vary as a result of these factors.

        The effective income tax rate for the three months ended December 31, 2008 and 2007 was 36.1% and 33.8%, respectively. The effective income tax rate was higher for the three months ended December 31, 2008 as compared to the prior comparable period due to a higher effective state rate as a result of increased operations in California from the Leiner acquisition.

        We accrue interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At December 31, 2008, we had $1,914 and $898 accrued for the potential payment of interest and penalties, respectively. As of December 31, 2008, we were subject to U.S. Federal Income Tax examinations for the tax years 2005-2008, and to non-US examinations for the tax years of 2003–2008. In addition, we are generally subject to state and local examinations for fiscal years 2005–2008.

Income Taxes

        We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will, more likely than not, go unused. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reversed. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. We believe adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

        Effective October 1, 2007, we adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109" ("FIN 48"). In accordance with FIN 48, we recognized a cumulative-effect adjustment of $3,025, increasing our liability for unrecognized tax benefits, interest and penalties and reducing the October 1, 2007 balance of retained earnings.

Income Taxes

        We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree to which tax assets and credit carryforwards will result in a benefit based on expected
profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will, more likely than not, go unused. If it
becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reversed. Management makes judgments as to the interpretation of the tax laws that
might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these
jurisdictions. We believe adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of
reserves may be necessary.

        Effective
October 1, 2007, we adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement
No. 109" ("FIN 48"). In accordance with FIN 48, we recognized a cumulative-effect adjustment of $3,025, increasing our liability for unrecognized tax benefits, interest and
penalties and reducing the October 1, 2007 balance of retained earnings.

Income Taxes

The Company exercises significant judgment in determining its income tax provision due to transactions, credits and calculations where the ultimate tax determination is uncertain. Uncertainties arise as a consequence of the actual source of taxable income between domestic and foreign locations, the outcome of tax audits and the ultimate utilization of tax credits. Although the Company believes its estimates are reasonable, the final tax determination could differ from the recorded income tax provision and accruals. In such case, the Company would adjust the income tax provision in the period in which the facts that give rise to

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9. Income Taxes

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

13

NBTY, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(in thousands, except per share amounts)

9. Income Taxes (Continued)

        The effective income tax rate for the three months ended June 30, 2008 and June 30, 2007 was 34.0% and 33.5%, respectively. The effective income tax rate for the nine months ended June 30, 2008 and June 30, 2007 was 33.6% and 32.0%, respectively. The effective income tax rate was higher for the nine months ended June 30, 2008 as compared to the prior comparable period primarily due to the reinvestment of foreign earnings at a lower tax rate in fiscal 2007. The effective income tax rates are generally lower than the U.S. federal statutory rate, primarily due to the structure of our foreign subsidiaries which could also continue to impact results in future fiscal quarters.

        Effective October 1, 2007, we adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109" ("FIN 48"). In accordance with FIN 48, we recognized a cumulative-effect adjustment of $3,025, increasing our liability for unrecognized tax benefits, interest and penalties and reducing the October 1, 2007 balance of retained earnings.

        At October 1, 2007, we had $10,446 in unrecognized tax benefits, the recognition of which would have an effect of $6,288 on income tax expense and the effective tax rate. We do not believe that the amount will significantly change in the next 12 months.

        We accrue interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At October 1, 2007, we had accrued $1,313 and $1,019 for the potential payment of interest and penalties, respectively. As of October 1, 2007, we are subject to U.S. Federal Income Tax examinations for the tax years 2004 through 2007, and to non-US examinations for the tax years of 2002–2007. In addition, we are generally subject to state and local examinations for fiscal years 2004–2007, except in California where we are undergoing examinations for fiscal years 1999–2001.

        There were no significant changes to unrecognized tax benefits or accrued penalties and interest during the nine months ended June 30, 2008.

9. Income Taxes

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

        The effective income tax rate for the three months ended March 31, 2008 and March 31, 2007 was 32.9% and 28.9%, respectively. The effective income tax rate for the six months ended March 31, 2008 and March 31, 2007 was 33.4% and 31.3%, respectively. The effective income tax rate was higher for the six months ended March 31, 2008 as compared to the prior comparable period primarily due to the reinvestment of foreign earnings at a lower tax rate in fiscal 2007. The effective income tax rates are generally lower than the U.S. federal statutory rate, primarily due to the structure of our foreign subsidiaries which could also continue to impact future fiscal quarters. Effective October 1, 2007, we adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109" ("FIN 48"). In accordance with FIN 48, we recognized a cumulative-effect adjustment of $3,025, increasing our liability for unrecognized tax benefits, interest and penalties and reducing the October 1, 2007 balance of retained earnings.

        At October 1, 2007, we had $10,446 in unrecognized tax benefits, the recognition of which would have an effect of $6,288 on income tax expense and the effective tax rate. We do not believe that the amount will significantly change in the next 12 months.

        We accrue interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At October 1, 2007, we had accrued $1,313 and $1,019 for the potential payment of interest and penalties, respectively. As of October 1, 2007, we are subject to U.S. Federal Income Tax examinations for the tax years 2004 through 2007, and to non-US examinations for the tax years of 2002–2007, In addition, we are generally subject to state and local examinations for fiscal years 2004–2007, except in California where we are undergoing examinations for fiscal years 1999–2001.

        There were no significant changes to any of these amounts during the six months ended March 31, 2008.

9. Income Taxes

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

        The effective income tax rate for the three months ended December 31, 2007 and December 31, 2006 was 33.8%. The effective income tax rates are generally lower than the U.S. federal statutory rate, primarily due to the structure of our foreign subsidiaries which could also continue to impact future fiscal quarters. Effective October 1, 2007, we adopted FIN 48, "Accounting for Uncertainty in Income Taxes." In accordance with FIN 48, we recognized a cumulative-effect adjustment of $3,025, increasing our liability for unrecognized tax benefits, interest and penalties and reducing the October 1, 2007 balance of retained earnings.

        At October 1, 2007, we had $10,446 in unrecognized tax benefits, the recognition of which would have an effect of $6,288 on income tax expense and the effective tax rate. We do not believe that the amount will significantly change in the next 12 months.

        We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. This methodology is consistent with previous periods. At October 1, 2007, we had accrued $1,313 and $1,019 for the potential payment of interest and penalties, respectively. As of October 1, 2007, we are subject to U.S. Federal Income Tax examinations for the tax years 2004 through 2007, and to non-US examinations for the tax years of 2002 - 2007, In addition, we are generally subject to state and local examinations for fiscal years 2004 - 2007, except in California where we are undergoing examinations for fiscal years 1999 - 2001.

        There were no significant changes to any of these amounts during the three months ended December 31, 2007.

Income Taxes

        We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We estimate the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will, more likely than not, go unused. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reversed. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. We believe adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

10. Income Taxes

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

15

NBTY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars and shares in thousands, except per share amounts)

could vary as a result of these factors. The effective income tax rate for the three months ended March 31, 2007 was 28.9%, compared to 28.8% for the prior comparable period. The effective income tax rate for the six months ended March 31, 2007 was 31.3%, compared to 27.0% for the prior comparable period. The fiscal year 2007 tax rate is impacted by our decision to partially reinvest foreign earnings in a lower tax jurisdiction, as well as our ability to partially utilize our prior year state and local investment tax credits. The fiscal year 2006 tax rate is primarily impacted by the Foreign Earnings Repatriation (“FER”) provision in the American Jobs Creation Act of 2004, which only impacted quarters in fiscal year 2006. In the prior year, we repatriated foreign earnings at a more beneficial tax rate under the FER provision in the American Jobs Creations Act of 2004.

40

NBTY, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (Continued)

(Dollars and shares in thousands, except per share amounts)

rate primarily due to the enhanced structure of foreign subsidiaries, which could continue to impact future fiscal quarters, as well as the impact of the FER provision of the American Jobs Creation Act of 2004 noted above.

In the prior year, the Company realized a significantly lower tax cost by repatriating funds in accordance with the FER provision. The Company developed a Domestic Reinvestment Plan to reinvest the repatriated funds in the U.S. in qualifying activities, pursuant to the terms of the FER provision and subsequent guidance issued by the IRS. During the three months ended December 31, 2005, the Company had estimated and recorded an incremental benefit of $2,119 (or 6.9% benefit).

Income Taxes

        The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined that such assets will more likely than not go unused. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reversed. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management's opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

The Company’s income tax expense is impacted by a number of factors, including federal taxes, its international tax structure, state tax rates in the jurisdictions where the Company conducts business, and the Company’s ability to utilize state tax credits that will begin to expire in 2013. Therefore, the Company’s overall effective income tax rate could vary as a result of these factors. The effective income tax rate for the nine months ended June 30, 2006 was 27.0%, as compared to 36.2% in the prior comparable period. The decline in the effective rate is mainly attributable to (a) the non-deductible goodwill impairment charge recorded in the nine months ended June 30, 2005 (2.5% impact to the rate), and (b) the impact of the Foreign Earnings Repatriation (“FER”) provision in the American Jobs Creation Act of 2004, which will only impact quarters in fiscal year 2006 (see discussion below). As the Company has principally repatriated foreign earnings in prior years, it is essentially repatriating current year foreign earnings at a more beneficial rate under the American Jobs Creations Act of 2004. To the extent there are foreign earnings generated during each of the quarters in fiscal 2006, this will result in a tax benefit for each of the quarters. The Company has estimated and recorded an incremental benefit of $5,802 for the nine months ended June 30, 2006, based on the results for the nine months. Because the actual benefit will be based on the full year’s results, the Company will continue to monitor the expected tax impact of the FER provision, and make adjustments as necessary.   The effective income tax rates are generally less than the U.S. federal statutory tax rate primarily due to the enhanced structure of foreign subsidiaries, which could also continue to impact future fiscal quarters, as well as the impact of the FER provision of the American Jobs Creation Act of 2004 noted above.

58

NBTY, INC. and SUBSIDIARIES
MANAGEMENT’S DISCUSSION and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS (Continued)
(In thousands, except per share amounts and number of locations)

The Company has completed its evaluation of the application of the FER provision and determined that it will likely realize a benefit by repatriating funds in accordance with the FER provision. As such, the Company has developed a Domestic Reinvestment Plan to reinvest the repatriated funds in the U.S. in qualifying activities, pursuant to the terms of the FER provision and subsequent guidance issued by the IRS. This plan authorizes the repatriation of up to $122,500 during the fiscal year ending September 30, 2006. A portion of the repatriation includes foreign earnings related to the fiscal year ended September 30, 2005 and to earlier fiscal years.

54

NBTY, INC. and SUBSIDIARIES
MANAGEMENT’S DISCUSSION  and ANALYSIS of FINANCIAL
CONDITION and RESULTS of OPERATIONS (Continued)
(In thousands, except per share amounts and number of locations)

The Company’s income tax expense is impacted by a number of factors, including federal taxes, its international tax structure, state tax rates in the jurisdictions where the Company conducts business, and the Company’s ability to utilize state tax credits that will begin to expire in 2013. Therefore, the Company’s overall effective income tax rate could vary as a result of these factors. The effective income tax rate for the six months ended March 31, 2006 was 27.0%, as compared to 34.2% in the prior comparable period. The decline in the effective rate is mainly attributable to the impact of the Foreign Earnings Repatriation (“FER”) provision in the American Jobs Creation Act of 2004, which will only impact quarters in fiscal year 2006 (see discussion below). As the Company has principally repatriated foreign earnings in prior years, it is essentially repatriating current year foreign earnings at a more beneficial rate under the American Jobs Creations Act of 2004. To the extent there are foreign earnings generated during each of the quarters in fiscal 2006, this will result in a tax benefit for each of the quarters. The Company has estimated and recorded an incremental benefit of $4,742 (or 6.7% benefit) for the six months ended March 31, 2006, based on the results for the six months. Because the actual benefit will be based on the full year’s results, the Company will continue to monitor the expected tax impact of the FER provision, and adjust each quarter as necessary.   The effective income tax rates are generally less than the U.S. federal statutory tax rate primarily due to the enhanced structure of foreign subsidiaries, which could also continue to impact future fiscal quarters, as well as the impact of the FER provision of the American Jobs Creation Act of 2004 noted above.

The Company has completed its evaluation of the application of the FER provision and determined that it will likely realize a benefit by repatriating funds in accordance with the FER provision. As such, the Company has developed a Domestic Reinvestment Plan to reinvest the repatriated funds in the U.S. in qualifying activities, pursuant to the terms of the FER provision and subsequent guidance issued by the IRS. This plan calls for the repatriation of up to $122,500 during the fiscal year ending September 30, 2006. A portion of the repatriation includes foreign earnings related to the fiscal year ended September 30, 2005 and to earlier fiscal years.

Income Taxes

10.   Income Taxes

9.    Income Taxes