The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs and other information that is not historical information. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential," "continue," "seek" or the negative of these terms or other comparable terminology or by discussions of strategy.

All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but they are inherently uncertain. We may not realize our expectations and our beliefs may not prove correct. Actual results could differ materially from those described or implied by such forward-looking statements. Important factors that could cause our actual results to differ materially from the forward-looking statements are set forth in this quarterly report on Form 10-Q, under the heading "Risk Factors" and include, among others:

· the current global economic downturn or recession;

· difficulty expanding our manufacturing and distribution facilities;

· significant competition in our industry;

· unfavorable publicity or consumer perception of our products on the Internet;

· the incurrence of material product liability and product recall costs;

· costs of compliance and our failure to comply with government regulations;

· our inability to defend intellectual property claims;

· our failure to keep pace with the demands of our customers for new products;

· disruptions in our manufacturing system, including our information technology systems, or losses of manufacturing certifications; and

· the lack of long-term experience with human consumption of some of our products with innovative ingredients.

Overview

We are a leading online retailer and direct marketer, based on annual sales volume, of health and wellness products such as vitamins, dietary supplements, minerals, herbs, anti-oxidants, organic body and personal care products and sports nutrition and health foods. We offer our customers a selection of over 23,000 SKUs from over 1,000 third-party brands, such as New Chapter, Atkins, Nature's Way, Twinlab, Burt's Bees and Kashi and our own proprietary brands, Nutraceutical Sciences Institute (NSI), Cosmeceutical Sciences Institute (CSI), Best of All, Smart Basics and Walker Diet. We sell these products directly to consumers through our website, www.vitacost.com, as well as through our catalogs. Our website and catalogs allow customers to easily browse and purchase products at prices, on average, 30% to 60% lower than manufacturers' suggested retail prices. We strive to offer our customers the broadest product selection supported by current scientific and medical research at the best value, while providing superior customer service and timely and accurate delivery.

Our success is driven primarily by our ability to attract new customers and grow our product offerings. Our customers are typically individuals seeking value in their purchases of health and wellness products. Our active customer base, which we define as customers who have purchased from us within the last 12 months, has steadily increased from approximately 270,000 at the end of 2005 to approximately 1,035,000 as of September 30, 2009. For the first three quarters of 2009, our per-customer acquisition cost, determined by dividing our acquisition-related marketing costs by the number of gross new customers, was $12.68 On average, our customers make purchases from us two to three times a year, and over the last twelve months, our average order value has ranged between $72 and $77. Our 2008 customer surveys reveal that over 95% of respondents are likely to reorder, citing as key factors our product selection and quality, competitive prices and speed and accuracy of shipment.

We began operations in 1994 as a catalog retailer of third-party vitamins and supplements under the name Nature's Wealth Company. In 1999, we launched Vitacost.com and introduced our proprietary vitamins and supplements under our NSI brand. In 2000, we began operations under the name Vitacost.com, Inc. During 2008, we began manufacturing certain proprietary products in-house and currently have the capacity to produce in excess of one billion tablets and capsules annually. Since our inception, we have shipped over ten million orders to our customers.

Sources of Revenue

We derive our revenue principally through the sale of product and freight billed to customers associated with the shipment of product. Our primary source of revenue is the sale of products. For the nine months ended September 30, 2009, product net sales accounted for approximately 93% of our total net sales, as compared to 92% for the nine months ended September 30, 2008. Freight billed to customers for the nine months ended September 30, 2009 accounted for approximately 7% of our total net sales, as compared to 8% for the nine months ended September 30, 2008.

Cost of Goods Sold and Operating Expenses

Cost of Goods Sold. Cost of goods sold consists primarily of the cost of the product and the cost of shipping the product to the customer.

Fulfillment. Fulfillment expenses include the costs of warehouse supplies, equipment, maintenance, employees and rent.

Sales and Marketing. Sales and marketing expenses include advertising and promotional expenditures, website referral expenditures, including third-party content license fees, traditional media advertising, catalog expenses and payroll related expenses for personnel engaged in marketing, sales, website development and maintenance, and new product research, development and introduction. We expense advertising costs as incurred.

General and Administrative. General and administrative expenses consist of management and executive compensation, customer service compensation, credit card fees, professional services and general corporate expenses, such as depreciation, amortization, telephone expenses, office supplies and repairs and maintenance on office equipment.

Results of Operations

The following table sets forth certain condensed consolidated statements of
operation data as a percentage of net sales for the three and nine months ended
September 30, 2009 and 2008, respectively:

                                       Three Months Ended           Nine Months Ended
                                         September 30,                September 30,
                                          (unaudited)                  (unaudited)
                                      2008            2009         2008           2009
       Net sales                        100.0    %     100.0         100.0   %     100.0
       Cost of goods sold                76.0           68.8          74.7          68.1
       Gross profit                      24.0           31.2          25.3          31.9
       Operating expenses:
       Fulfillment                        5.5            4.7           5.4           4.3
       Sales and marketing                8.4            7.6           9.0           7.0
       General and administrative        10.0           32.6           9.8          16.9
       Total operating expense           23.9           44.9          24.2          28.2
       Operating income (loss)            0.1          (13.9 )         1.1           3.7
       Net (loss) income                 (0.4 )         (8.0 )         0.5           2.4

During 2008, we transitioned the manufacturing of our proprietary capsules and tablets from third-party manufacturers to in-house manufacturing and experienced approximately $3.2 million in losses related to this transition phase. We believe that over the next 12 to 18 months that the manufacturing of our proprietary capsules and tablets will add additional incremental gross profit.

Comparison of Three Months Ended September 30, 2009 to Three Months Ended
September 30, 2008

Net Sales. Net sales increased by $11.7 million, or 31.6%, to $48.4 million for
the three months ended September 30, 2009 from $36.7 million for the three
months ended September 30, 2008.

A summary of net sales for the three months ended September 30, 2009 and 2008 is
as follows (in thousands):

                                         Three Months Ended
                                            September 30,              $             %
                                             (unaudited)           Increase       Increase
                                          2008          2009
   Third-party product (1)             $   22,622     $ 30,192     $   7,570           33.5 %
   NSI and other proprietary product       11,305       14,694         3,389           30.0
   Billing freight                          2,817        3,468           651           23.1
                                       $   36,744     $ 48,354     $  11,610           31.6 %

(1) Third-party product includes advertising and fees earned from affiliate programs of approximately $424,000 million and $406,000 for the three months ended September 30, 2009 and 2008, respectively.

Net sales of our proprietary products, including our NSI-branded products, increased by $3.4 million, or 30.0%, from $11.3 million for the three months ended September 30, 2008 to $14.7 million for the three months ended September 30, 2009, and sales of third-party products increased by $7.6 million, or 33.5%, from $22.6 million for the three months ended September 30, 2008 to $30.2 million for the three months ended September 30, 2009. The increase in net sales was primarily the result of the net increase in our customer base and from an increase in average order value. Our customer base increased from approximately 757,000 active customers at September 30, 2008 to approximately 1,035,000 active customers at September 30, 2009. Although prices remain competitive in the supplement market, our overall average order value, including freight billed to customers, increased from $73 for the three months ended September 30, 2008 to $76 for the three months ended September 30, 2009 due to customers ordering more products per order.

We believe that the significant increases in our customer base and number of customer orders are primarily due to consistently providing good value, selection, timeliness and accurate delivery of customer orders, and the scientific and educational content of our website. We believe that we will continue to grow our customer base and number of customer orders at rates at or above the growth rates of the overall health and wellness market.

Cost of Goods Sold. Cost of goods sold increased by $5.3 million, or 19.2%, to $33.2 million for the three months ended September 30, 2009 from $27.9 million for the three months ended September 30, 2008. As a percentage of net sales, cost of goods sold decreased to 68.8% for 2009 from 76.0% for 2008 primarily due to selling higher margin products.

Gross Profit. As a result of the changes discussed in net sales and cost of goods sold, gross profit increased by $6.2 million, or 70.7%, to $15.1 million for the three months ended September 30, 2009 from $8.8 million for the three months ended September 30, 2008 and gross profit as a percentage of net sales increased to 31.2% in 2009 from 24.0% in 2008. Additionally, shipping costs, net of freight billed to customers, decreased by $2.0 million or 71.3% to $0.8 million for the three months ended September 30, 2009 from $2.8 million for the three months ended September 30, 2008 despite a 31.6% increase in sales for the same periods.

Our gross profit is affected by product mix, consumer and competitor price elasticity, and increased purchasing power due to higher sales volume of third-party product and the raw materials used for manufacturing our proprietary products. Our increase in gross profit and gross profit as a percentage of sales for the three months ended September 30, 2009, compared to the three months ended September 30, 2008, was primarily due to increased purchasing power due to higher sales volume of third-party product and the raw materials used for manufacturing our proprietary products.

Fulfillment. Fulfillment expense increased $0.3, or 14.4%, to $2.3 million for the three months ended September 30, 2009 from $2.0 million for the three months ended September 30, 2008. As a percentage of net sales, fulfillment expense decreased to 4.7% for 2009 from 5.5% for 2008. This decrease in fulfillment expense as a percentage of net sales was primarily attributable to utilization of excess fulfillment capacity.

Sales and Marketing. Sales and marketing expense increased $0.6, or 19.6%, to $3.7 million for the three months ended September 30, 2009 from $3.1 million for the three months ended September 30, 2008. The aggregate dollar increase in sales and marketing expense is the result of certain incentive programs and on-line advertising that are variable and, therefore, increase as volume increases. As a percentage of sales, sales and marketing expense decreased to 7.6% for 2009 from 8.4% for 2008, due primarily to reducing less effective marketing programs.

General and Administrative. General and administrative expenses increased $12.1, or 330.9%, to $15.8 million for the three months ended September 30, 2009 from $3.7 million for the three months ended September 30, 2008. As a percentage of sales, general and administrative expenses increased to 32.6% for 2009 from 10.1% for 2008, primarily due to stock-based compensation expense incurred in connection with IPO Executive Stock Option Grants as described below. Excluding this $10.9 million of stock based compensation expense, general and administrative expenses increased $1.2 million, or 32.0%, to $4.9 million for the three months ended September 30, 2009 from $3.7 million for the three months ended September 30, 2008. As a percentage of sales, general and administrative expenses would have remained flat at 10.1% for 2009 and 2008.

Stock-based Compensation Expense in Connection with IPO Executive Stock Option Grants. On June 30, 2009, we amended the employment agreements of certain of our named executive officers, including our Chief Executive Officer and Chief Financial and Accounting Officer. Pursuant to the amendments, upon completion of our initial public offering, all stock options currently owned by these officers became fully vested and nonforfeitable. Additionally, we issued additional fully vested, nonforfeitable options to these officers. In connection with the full vesting of the existing stock options and issuance of the new stock options, we recorded an aggregate non-cash expense of $10.9 million in the third quarter of 2009, included in general and administrative expenses.

Interest Expense. Interest expense decreased $20,000, or 8.3%, to $219,000 for the three months ended September 30, 2009 from $239,000 for the three months ended September 30, 2008.

Income Tax Benefit (expense). Income tax benefit increased by $3.0 million, or 100.%, to $3.0 million for the three months ended September 30, 2009. The change is primarily the result of operating income of $4,301,000, net of stock based compensation expense of $11,013,000 for the three months ended September 30, 2009 compared to $140,000, net of stock based compensation of $70,000 million for the three months ended September 30, 2008.

Comparison of Nine Months Ended September 30, 2009 to Nine Months Ended
September 30, 2008

Net Sales. Net sales increased by $36.1 million, or 34.2%, to $141.5 million for
the nine months ended September 30, 2009 from $105.4 million for the nine months
ended September 30, 2008.

A summary of net sales for the nine months ended September 30, 2009 and 2008 is
as follows (in thousands):

                                          Nine Months Ended
                                            September 30,              $             %
                                             (unaudited)           Increase       Increase
                                         2008          2009
   Third-party product (1)             $  64,377     $  88,520     $  24,143           37.5 %
   NSI and other proprietary product      33,060        43,033         9,973           30.2
   Billing freight                         8,000         9,963         1,963           24.5
                                       $ 105,437     $ 141,516     $  36,079           34.2 %

(1) Third-party product includes advertising and fees earned from affiliate programs of approximately $1.5 million and $1.1 for the nine months ended September 30, 2009 and 2008, respectively.

Net sales of our proprietary products, including our NSI-branded products, increased by $10.0 million, or 30.2%, from $33.0 million for the nine months ended September 30, 2008 to $43.0 million for the nine months ended September 30, 2009, and sales of third-party products increased by $24.1 million, or 37.5%, from $64.4 million for the nine months ended September 30, 2008 to $88.5 million for the nine months ended September 30, 2009. The increase in net sales was primarily the result of the net increase in our customer base and from an increase in average order value. Our customer base increased from approximately 757,000 active customers at September 30, 2008 to approximately 1,035,000 active customers at September 30, 2009. Although prices remain competitive in the supplement market, our overall average order value, including freight billed to customers, increased from $73 for the nine months ended September 30, 2008 to $75 for the nine months ended September 30, 2009 due to customers ordering more products per order.

We believe that the significant increases in our customer base and number of customer orders are primarily due to consistently providing good value, selection, timeliness and accurate delivery of customer orders, and the scientific and educational content of our website. We believe that we will continue to grow our customer base and number of customer orders at rates at or above the growth rates of the overall health and wellness market.

Cost of Goods Sold. Cost of goods sold increased by $17.6 million, or 22.3%, to $96.4 million for the nine months ended September 30, 2009 from $78.8 million for the nine months ended September 30, 2008. As a percentage of net sales, cost of goods sold decreased to 68.1% for 2009 from 74.7% for 2008 primarily due to selling higher margin products.

Gross Profit. As a result of the changes discussed in net sales and cost of goods sold, gross profit increased by $18.6 million, or 69.5%, to $45.2 million for the nine months ended September 30, 2009 from $26.6 million for the nine months ended September 30, 2008 and gross profit as a percentage of net sales increased to 31.9% in 2009 from 25.3% in 2008. Additionally, shipping costs, net of freight billed to customers, decreased by $1.2 million or 38.6% to $2.1 million for the nine months ended September 30, 2009 from $3.3 million for the nine months ended September 30, 2008 despite a 34.2% increase in sales for the same periods.

Our gross profit is affected by product mix, consumer and competitor price elasticity, and increased purchasing power due to higher sales volume of third-party product and the raw materials used for manufacturing our proprietary products. Our increase in gross profit and gross profit as a percentage of sales for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, was primarily due to increased purchasing power due to higher sales volume of third-party product and the raw materials used for manufacturing our proprietary products. Although past performance is no guarantee of future results, we believe, based on current trends, we will be able to sustain the improved gross margins that contributed to our gross profit levels for the nine months ended September 30, 2009.

Fulfillment. Fulfillment expense increased $0.3 million, or 5.8%, to $6.0 million for the nine months ended September 30, 2009 from $5.7 million for the nine months ended September 30, 2008. As a percentage of net sales, fulfillment expense decreased to 4.3% for 2009 from 5.4% for 2008. This decrease in fulfillment expense as a percentage of net sales was primarily attributable to utilization of excess fulfillment capacity.

Sales and Marketing. Sales and marketing expense increased $0.5 million, or 5.0%, to $10.0 million for the nine months ended September 30, 2009 from $9.5 million for the nine months ended September 30, 2008. The aggregate dollar increase in sales and marketing expense is the result of certain incentive programs and on-line advertising that are variable and, therefore, increase as volume increases. As a percentage of sales, sales and marketing expense decreased to 7.0% for 2009 from 9.0% for 2008, due primarily to reducing less effective marketing programs.

General and Administrative. General and administrative expenses increased $13.6 million, or 132.44%, to $24.0 million for the nine months ended September 30, 2009 from $10.3 million for the nine months ended September 30, 2008, primarily due to stock-based compensation expense in connection with IPO Executive Stock Option Grants as described below. As a percentage of sales, general and administrative expenses increased to 16.9% for 2009 from 9.8% for 2008. Excluding this $10.9 million of stock based compensation expense, general and administrative expenses increased $2.7 million, or 26.7%, to $13.1 million for the nine months ended September 30, 2009 from $10.3 million for the nine months ended September 30, 2008, while as a percentage of sales, general and administrative expenses excluding the $10.9 million of stock based compensation decreased to 9.2% for 2009 from 9.8% for 2008, primarily due to better utilization of fixed related costs.

Stock-based Compensation Expense in Connection with IPO Executive Stock Option Grants. On June 30, 2009, we amended the employment agreements of certain of our named executive officers, including our Chief Executive Officer and Chief Financial and Accounting Officer. Pursuant to the amendments, upon completion of our initial public offering, all stock options currently owned by these officers became fully vested and nonforfeitable. Additionally, we issued additional fully vested, nonforfeitable options to these officers. In connection with the full vesting of the existing stock options and issuance of the new stock options, we recorded an aggregate non-cash expense of $10.9 million in the third quarter of 2009.

Interest Expense. Interest expense decreased $88,000, or 16.2%, to $458,000 for the nine months ended September 30, 2009 from $546,000 for the nine months ended September 30, 2008. The change is primarily a result of the change in the fair value of interest rate swaps into which we have entered. Changes in the fair value of the interest rate swaps are included in interest expense.

Income Tax Benefit (expense). Income tax expense increased by $1.4 million, or 1,526.1%, to $1.5 million for the nine months ended September 30, 2009 from $93,000 for the nine months ended September 30, 2008. The change is primarily the result of operating income of $5.2 million for the nine months ended September 30, 2009 compared to $1.1 million for the nine months ended September 30, 2008.

Cash and Cash Equivalents. Cash and cash equivalents increased by $48.3 million or 78,795% to $48.4 million as of September 30, 2009 from $61,000 as of December 31, 2008. This is primarily a result of net proceeds received from the intial public offering completed in September 2009.

Property and Equipment. Net property and equipment increased by $1.5 million, or 8.0%, to $20.8 million as of September 30, 2009, from $19.3 million as of December 31, 2008. The Company purchased machinery and equipment for their manufacturing and distribution facilities.

Current Liabilities. The line of credit balance decreased by $9.4 million, or 100%, to no outstanding balance as of September 30, 2009 from $9.4 million as of December 31, 2008. A portion of the proceeds generated from the initial public offering were used to pay off the line of credit.

Comparison of Nine Months Ended September 30, 2009 to Nine Months Ended September 30, 2008

Net Cash Provided by (Used in) Operating Activities. For the nine months ended September 30, 2009, net cash provided by (used in) operations was $14.3 million compared to $(0.9) million for the nine months ended September 30, 2008, primarily as a result of net income of $3.3 million, net of stock based compensation expense of $11.2 million for the nine months ended September 30, 2009 compared to $0.6 million for the nine months ended September 30, 2008, net of $0.2 million in stock based compensation expense. Additionally, inventory increased by $2.1 million for the nine months ended September 30, 2009 compared to an increase of $4.4 for the nine months ended September 30, 2008, and an increase in accrued expenses of $2.4 million for the nine months ended September 30, 2009 compared to an increase of $0.4 million for the nine months ended September 30, 2008. The increase in accrued expenses is partially due to costs incurred as a result of the initial public offering in September 2009.

Net Cash Provided by (Used in) Investing Activities. For the nine months ended September 30, 2009, net cash used in investing activities was $5.1 million compared to $4.6 million for the nine months ended September 30, 2008. Our investing activities consisted primarily of the acquisition of machinery and equipment for the manufacturing and distribution facilities in North Carolina and Nevada.

Net Cash Provided by (Used in) Financing Activities. For the nine months ended September 30, 2009, net cash provided by financing activities was $39.0 million compared to $5.5 million for the nine months ended September 30, 2008. During 2009, we received approximately $47.1 million in proceeds, net of issuance costs of $6.0 million, for the sale of common stock in connection with our initial public offering which was completed on September 29, 2009. Excluding the effect of our initial public offering, financing activities for the nine months ended September 30, 2009 consisted primarily of repayments of a line of credit of $9.4 million, as well as repayments of notes payable of $1.3 million. Additionally, the Company received $1.6 million during the nine months ended September 30, 2009 as a repayment of a note receivable from the exercise of stock options. During the nine months ended September 30, 2008, cash provided by financing activities consisted primarily of $4.3 million of borrowings on a line of credit, and $2.6 million of borrowings on notes payable from related parties.

Liquidity and Capital Resources

Since our inception through 2006, we had primarily funded our operations through the sale of equity securities and cash generated from operations. During 2007, we funded operations and investments in manufacturing and distribution . . .