SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number:
000-25867





NAUTILUS, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Washington                                                     |  | 94-3002667                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

16400 S.E. Nautilus Drive

Vancouver, Washington 98683

(Address of principal executive offices, including zip code)

(360) 859-2900

(Registrants telephone number, including area code)





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

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

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 12b-2 of the Exchange Act.



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large Accelerated Filer |  |  ̈ |  | Accelerated Filer         |  |  ̈
|                        |  |   | 
|Non-Accelerated Filer   |  |  ̈ |  | Smaller Reporting Company |  | x

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

Number of shares of issuers common stock outstanding as of April 30, 2010: 30,744,336









---

NAUTILUS, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

TABLE OF CONTENTS



|                              |  |                                                                                       |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                       |  | Page
|                              | 
|PART I. FINANCIAL INFORMATION |  | 3                                                                                    
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements:                                                                 |  | 3   
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|                              |  |                                                                                      
|                              |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 16  
|                              | 
|PART II. OTHER INFORMATION    |  | 17                                                                                   
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 17  
|                              |  |                                                                                      
|Item 1A.                      |  | Risk Factors                                                                          |  | 17  
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits                                                                              |  | 17  
|                              |  |                                                                                      
|Signatures                    |  |                                                                                       |  | 18  



2



---

PART I. FINANCIAL INFORMATION



|Item 1. | FINANCIAL STATEMENTS
|------- | --------------------

NAUTILUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands)



|                                                                                                                                    |  |               |        |                   |   |        
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ----------------- | - | -------
|                                                                                                                                    |  | March 31,2010 |        | December 
31,2009
|ASSETS                                                                                                                              |  |               |        |                   |   |        
|Current assets:                                                                                                                     |  |               |        |                   |   |        
|Cash and cash equivalents                                                                                                           |  | $             | 11,953 |                   | $ | 7,289  
|Trade receivables, net of allowances of $4,424 in 2010 and $4,160 in 2009                                                           |  |               | 18,905 |                   |   | 27,799 
|Inventories                                                                                                                         |  |               | 14,809 |                   |   | 13,119 
|Prepaids and other current assets                                                                                                   |  |               | 5,322  |                   |   | 5,097  
|Income taxes receivable                                                                                                             |  |               | 238    |                   |   | 13,178 
|Assets of discontinued operation held-for-sale                                                                                      |  |               | 4,184  |                   |   | 10,781 
|                                                                                                                                    |  |               |        |                   |   |        
|Total current assets                                                                                                                |  |               | 55,411 |                   |   | 77,263 
|Restricted cash                                                                                                                     |  |               | 4,353  |                   |   | 4,933  
|Property, plant and equipment, net                                                                                                  |  |               | 6,792  |                   |   | 8,042  
|Goodwill                                                                                                                            |  |               | 2,876  |                   |   | 2,794  
|Other intangible assets, net                                                                                                        |  |               | 20,322 |                   |   | 20,838 
|Other assets                                                                                                                        |  |               | 1,424  |                   |   | 1,302  
|                                                                                                                                    |  |               |        |                   |   |        
|Total assets                                                                                                                        |  | $             | 91,178 |                   | $ | 115,172
|                                                                                                                                    |  |               |        |                   |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                |  |               |        |                   |   |        
|Current liabilities:                                                                                                                |  |               |        |                   |   |        
|Trade payables                                                                                                                      |  | $             | 24,443 |                   | $ | 37,107 
|Accrued liabilities                                                                                                                 |  |               | 7,586  |                   |   | 10,744 
|Accrued warranty obligations, current portion                                                                                       |  |               | 5,849  |                   |   | 7,129  
|Deferred income tax liabilities                                                                                                     |  |               | 1,099  |                   |   | 1,220  
|                                                                                                                                    |  |               |        |                   |   |        
|Total current liabilities                                                                                                           |  |               | 38,977 |                   |   | 56,200 
|Income taxes payable                                                                                                                |  |               | 2,947  |                   |   | 2,866  
|Deferred income tax liabilities  non-current                                                                                       |  |               | 1,291  |                   |   | 754    
|Other non-current liabilities                                                                                                       |  |               | 2,677  |                   |   | 2,869  
|                                                                                                                                    |  |               |        |                   |   |        
|Total liabilities                                                                                                                   |  |               | 45,892 |                   |   | 62,689 
|                                                                                                                                    |  |               |        |                   |   |        
|Commitments and contingencies (Note 12)                                                                                             |  |               |        |                   |   |        
|Stockholders equity:                                                                                                               |  |               |        |                   |   |        
|Common stock  no par value, 75,000 shares authorized, 30,744 shares issued and outstanding at March 31, 2010 and
December 31, 2009 |  |               | 4,570  |                   |   | 4,414  
|Retained earnings                                                                                                                   |  |               | 33,345 |                   |   | 41,136 
|Accumulated other comprehensive income                                                                                              |  |               | 7,371  |                   |   | 6,933  
|                                                                                                                                    |  |               |        |                   |   |        
|Total stockholders equity                                                                                                          |  |               | 45,286 |                   |   | 52,483 
|                                                                                                                                    |  |               |        |                   |   |        
|Total liabilities and stockholders equity                                                                                          |  | $             | 91,178 |                   | $ | 115,172
|                                                                                                                                    |  |               |        |                   |   |        

See accompanying notes to condensed consolidated
financial statements.



3



---

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)



|                                                    |  |                             |        |   |      |   |         |  
|--------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                    |  | Three Months EndedMarch 31, |       
|                                                    |  | 2010                        |        |   | 2009 |  
|Net sales                                           |  | $                           | 45,644 |   |      | $ | 54,055  |  
|Cost of sales                                       |  |                             | 22,679 |   |      |   | 23,751  |  
|                                                    |  |                             |        |   |      |   |         |  
|Gross profit                                        |  |                             | 22,965 |   |      |   | 30,304  |  
|                                                    |  |                             |        |   |      |   |         |  
|Operating expenses:                                 |  |                             |        |   |      |   |         |  
|Selling and marketing                               |  |                             | 18,943 |   |      |   | 22,659  |  
|General and administrative                          |  |                             | 5,159  |   |      |   | 7,888   |  
|Research and development                            |  |                             | 803    |   |      |   | 1,423   |  
|Restructuring                                       |  |                             |       |   |      |   | 2,049   |  
|                                                    |  |                             |        |   |      |   |         |  
|Total operating expenses                            |  |                             | 24,905 |   |      |   | 34,019  |  
|                                                    |  |                             |        |   |      |   |         |  
|Operating loss                                      |  |                             | (1,940 | ) |      |   | (3,715  | )
|                                                    |  |                             |        |   |      |   |         |  
|Other income and expenses:                          |  |                             |        |   |      |   |         |  
|Interest income                                     |  |                             | 11     |   |      |   | 9       |  
|Interest expense                                    |  |                             |       |   |      |   | (147    | )
|Other expense                                       |  |                             | (24    | ) |      |   | (292    | )
|                                                    |  |                             |        |   |      |   |         |  
|Total other expenses                                |  |                             | (13    | ) |      |   | (430    | )
|                                                    |  |                             |        |   |      |   |         |  
|Loss from continuing operations before income taxes |  |                             | (1,953 | ) |      |   | (4,145  | )
|Income tax expense                                  |  |                             | 418    |   |      |   | 1,279   |  
|                                                    |  |                             |        |   |      |   |         |  
|Loss from continuing operations                     |  |                             | (2,371 | ) |      |   | (5,424  | )
|Discontinued operation:                             |  |                             |        |   |      |   |         |  
|Loss from discontinued operation                    |  |                             | (5,387 | ) |      |   | (7,929  | )
|Income tax expense from discontinued operation      |  |                             | 33     |   |      |   | 466     |  
|                                                    |  |                             |        |   |      |   |         |  
|Loss from discontinued operation, net of tax        |  |                             | (5,420 | ) |      |   | (8,395  | )
|                                                    |  |                             |        |   |      |   |         |  
|Net loss                                            |  | $                           | (7,791 | ) |      | $ | (13,819 | )
|                                                    |  |                             |        |   |      |   |         |  
|Loss per share from continuing operations:          |  |                             |        |   |      |   |         |  
|Basic and diluted                                   |  | $                           | (0.08  | ) |      | $ | (0.18   | )
|Loss per share from discontinued operation:         |  |                             |        |   |      |   |         |  
|Basic and diluted                                   |  | $                           | (0.17  | ) |      | $ | (0.27   | )
|Loss per share:                                     |  |                             |        |   |      |   |         |  
|Basic and diluted                                   |  | $                           | (0.25  | ) |      | $ | (0.45   | )
|Weighted average shares outstanding:                |  |                             |        |   |      |   |         |  
|Basic and diluted                                   |  |                             | 30,744 |   |      |   | 30,614  |  

See accompanying notes
to condensed consolidated financial statements.



4



---

NAUTILUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)



|                                                                                |  |                              |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                |  | Three Months EndedMarch 
31, |        
|                                                                                |  | 2010                         |         |   | 2009 |  
|Cash flows from operating activities:                                           |  |                              |         |   |      |   |         |  
|Loss from continuing operations                                                 |  | $                            | (2,371  | ) |      | $ | (5,424  | )
|Loss from discontinued operation                                                |  |                              | (5,420  | ) |      |   | (8,395  | )
|                                                                                |  |                              |         |   |      |   |         |  
|Net loss                                                                        |  |                              | (7,791  | ) |      |   | (13,819 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                              |         |   |      |   |         |  
|Depreciation and amortization                                                   |  |                              | 1,772   |   |      |   | 3,038   |  
|Allowance for doubtful accounts                                                 |  |                              | 556     |   |      |   | 883     |  
|Inventory lower-of-cost-or-market adjustments                                   |  |                              | 1,686   |   |      |   | 549     |  
|Stock-based compensation expense                                                |  |                              | 156     |   |      |   | 424     |  
|Loss on asset disposals                                                         |  |                              | 17      |   |      |   | 1,417   |  
|Reduction of previously-estimated loss on disposal of commercial business       |  |                              | (1,218  | ) |      |   |        |  
|Deferred income taxes, net of valuation allowances                              |  |                              | 580     |   |      |   | 951     |  
|Other                                                                           |  |                              |        |   |      |   | 33      |  
|Changes in operating assets and liabilities:                                    |  |                              |         |   |      |   |         |  
|Trade receivables                                                               |  |                              | 8,460   |   |      |   | 21,492  |  
|Inventories                                                                     |  |                              | (147    | ) |      |   | 3,156   |  
|Prepaid and other current assets                                                |  |                              | 134     |   |      |   | (1,287  | )
|Income taxes                                                                    |  |                              | 12,715  |   |      |   | 631     |  
|Trade payables                                                                  |  |                              | (12,415 | ) |      |   | (3,426  | )
|Accrued liabilities, including warranty obligations                             |  |                              | (3,572  | ) |      |   | (1,262  | )
|                                                                                |  |                              |         |   |      |   |         |  
|Net cash provided by operating activities                                       |  |                              | 933     |   |      |   | 12,780  |  
|                                                                                |  |                              |         |   |      |   |         |  
|Cash flows from investing activities:                                           |  |                              |         |   |      |   |         |  
|Proceeds from sale of discontinued operation                                    |  |                              | 2,651   |   |      |   |        |  
|Proceeds from other asset sales                                                 |  |                              | 10      |   |      |   | 128     |  
|Purchases of equipment                                                          |  |                              | (37     | ) |      |   | (818    | )
|Net decrease in restricted cash                                                 |  |                              | 580     |   |      |   |        |  
|                                                                                |  |                              |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                             |  |                              | 3,204   |   |      |   | (690    | )
|                                                                                |  |                              |         |   |      |   |         |  
|Cash flows from financing activities:                                           |  |                              |         |   |      |   |         |  
|Net decrease in short-term borrowings                                           |  |                              |        |   |      |   | (14,701 | )
|Bank financing costs                                                            |  |                              | (144    | ) |      |   |        |  
|Other                                                                           |  |                              |        |   |      |   | (33     | )
|                                                                                |  |                              |         |   |      |   |         |  
|Net cash used in financing activities                                           |  |                              | (144    | ) |      |   | (14,734 | )
|                                                                                |  |                              |         |   |      |   |         |  
|Net effect of currency exchange rate changes                                    |  |                              | 671     |   |      |   | 220     |  
|                                                                                |  |                              |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                            |  |                              | 4,664   |   |      |   | (2,424  | )
|Cash and cash equivalents, beginning of period                                  |  |                              | 7,289   |   |      |   | 5,547   |  
|                                                                                |  |                              |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                        |  | $                            | 11,953  |   |      | $ | 3,123   |  
|                                                                                |  |                              |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                               |  |                              |         |   |      |   |         |  
|Cash refunded (paid) for income taxes                                           |  | $                            | 12,743  |   |      | $ | (98     | )
|                                                                                |  |                              |         |   |      |   |         |  
|Cash paid for interest                                                          |  | $                            |        |   |      | $ | 186     |  
|                                                                                |  |                              |         |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



5



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NAUTILUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)
General Information

Basis of Consolidation and Presentation

The accompanying condensed consolidated financial statements present the results of operations, financial position and cash flows of Nautilus, Inc. and
its subsidiaries (collectively, Nautilus or the Company), all of which are wholly owned. Intercompany transactions and balances have been eliminated in consolidation.

The accompanying condensed consolidated financial statements have not been audited. Nautilus has condensed or omitted certain information and footnote
disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Management believes the disclosures are adequate to make the
information presented not misleading. However, you should read these condensed consolidated financial statements in conjunction with the Companys consolidated financial statements and notes thereto for the year ended December 31, 2009,
included in its Annual Report on Form 10-K (the 2009 Form 10-K).

The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Further information regarding significant estimates can be found in the Companys 2009 Form 10-K.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly the
financial position of Nautilus as of March 31, 2010 and December 31, 2009, and the results of operations and cash flows for the three months ended March 31, 2010 and 2009. Interim results are not necessarily indicative of results for
a full year. The Companys revenues typically vary seasonally and this seasonality can have a significant effect on operating results, inventory levels and working capital needs.

Unless indicated otherwise, all information regarding the Companys operating results pertains to its continuing operations.

New Accounting Pronouncements

No
new accounting pronouncements had, or are reasonably likely to have, a material impact on our consolidated financial position, results of operations or cash flows.

Reclassifications

The results of
the commercial business, including restructuring expenses, have been reclassified as discontinued operations in the Companys financial statements for all periods presented.



6



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(2) Discontinued operation

On September 25, 2009, in light of continuing operating losses in its commercial business and in order to focus exclusively on management of its
direct and retail consumer businesses, the Company committed to a plan for the complete divestiture of its commercial business, which qualified for held-for-sale accounting treatment. The commercial business is presented as a discontinued operation
in the Companys condensed consolidated statement of operations for all periods.

In the first quarter of 2010, the Company recognized a
$1.2 million reduction in the amount of pre-tax loss previously estimated in connection with the disposal of its commercial business. Following is a summary of the operating results of the discontinued commercial business for the three months ended
March 31, 2010 and 2009:



|                                                |  |                             |        |   |      |   |        |  
|----------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                |  | Three months endedMarch
31, |       
|(In thousands)                                  |  | 2010                        |        |   | 2009 |  
|Revenue                                         |  | $                           | 9,835  |   |      | $ | 18,031 |  
|                                                |  |                             |        |   |      |   |        |  
|Loss before income taxes                        |  |                             | (6,605 | ) |      |   | (7,929 | )
|Reduction of previously-estimated disposal loss |  |                             | 1,218  |   |      |   |       |  
|Income tax expense                              |  |                             | (33    | ) |      |   | (466   | )
|                                                |  |                             |        |   |      |   |        |  
|Loss from discontinued operation                |  | $                           | (5,420 | ) |      | $ | (8,395 | )
|                                                |  |                             |        |   |      |   |        |  

Discontinued operation assets held-for-sale and related disposal loss impairments as of March 31, 2010 were as follows:



|                                                    |  |           |        |   |                              |   |        |       |  |   |        |  
|--------------------------------------------------- |  | --------- | ------ | - | ---------------------------- | - | ------ | ----- |  | - | ------ | -
|(In thousands)                                      |  | Inventory |        |   | Property, Plantand Equipment |   |        | Total | 
|Carrying value before impairment adjustment         |  | $         | 3,874  |   |                              | $ | 3,959  |       |  | $ | 7,833  |  
|Disposal loss impairment                            |  |           | (1,619 | ) |                              |   | (2,030 | )     |  |   | (3,649 | )
|                                                    |  |           |        |   |                              |   |        |       |  |   |        |  
|Assets of discontinued operation held-for-sale, net |  | $         | 2,255  |   |                              | $ | 1,929  |       |  | $ | 4,184  |  
|                                                    |  |           |        |   |                              |   |        |       |  |   |        |  

Currently, the Company expects to incur additional cash charges related to its planned divestiture of the commercial
business, including estimated employee termination severance payments of approximately $0.9 million and estimated termination charges for leases and other commercial contract obligations of approximately $1.1 million, which have not been recognized
because such liabilities have not yet been incurred. The amounts of such additional costs in future periods may differ from these estimates depending on changes that may occur in the underlying facts and circumstances, and the amount of the
difference may be material.

(3) Restructuring Activities

In the first quarter of 2009, Nautilus announced a plan aimed at reducing operating costs and improving the overall alignment of spending with expected
revenues. The plan impacted all Company functions through personnel reductions and other cost-saving initiatives, including the discontinuation of certain product lines, the abandonment of certain information technology software and reductions in
leased office space.

The following is a summary of restructuring expenses for the three months ended March 31, 2009:



|                                                                               |  |               |      
|------------------------------------------------------------------------------ |  | ------------- | -----
|(In thousands)                                                                 |  | March 31,2009
|Abandonment of information technology software and related services agreements |  | $             | 1,799
|Reductions in leased office space and other restructuring activities           |  |               | 250  
|                                                                               |  |               |      
|Total                                                                          |  | $             | 2,049
|                                                                               |  |               |      

The following is a summary of liabilities for exit costs and
restructuring activities, included in Accrued liabilities and Other non-current liabilities in the Companys condensed consolidated balance sheets:



|                                |  |                        |        |   |                            |   |        |                  |  |   |        |  
|------------------------------- |  | ---------------------- | ------ | - | -------------------------- | - | ------ | ---------------- |  | - | ------ | -
|(In thousands)                  |  | Severance 
andBenefits |        |   | Facilities andother Leases |   |        | TotalLiabilities | 
|Balance as of January 1, 2009   |  | $                      | 1,684  |   |                            | $ |       |                  |  | $ | 1,684  |  
|Accruals                        |  |                        | 563    |   |                            |   | 5,230  |                  |  |   | 5,793  |  
|Payments                        |  |                        | (1,884 | ) |                            |   | (3,530 | )                |  |   | (5,414 | )
|                                |  |                        |        |   |                            |   |        |                  |  |   |        |  
|Balance as of December 31, 2009 |  |                        | 363    |   |                            |   | 1,700  |                  |  |   | 2,063  |  
|Accruals                        |  |                        | 521    |   |                            |   | 409    |                  |  |   | 930    |  
|Payments                        |  |                        | (800   | ) |                            |   | (325   | )                |  |   | (1,125 | )
|                                |  |                        |        |   |                            |   |        |                  |  |   |        |  
|Balance as of March 31, 2010    |  | $                      | 84     |   |                            | $ | 1,784  |                  |  | $ | 1,868  |  
|                                |  |                        |        |   |                            |   |        |                  |  |   |        |  



7



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(4) Inventories

Inventories consisted of the following at March 31, 2010 and December 31, 2009:



|                     |  |               |        |                   |   |       
|-------------------- |  | ------------- | ------ | ----------------- | - | ------
|(In thousands)       |  | March 31,2010 |        | December 
31,2009
|Finished goods       |  | $             | 13,489 |                   | $ | 11,850
|Parts and components |  |               | 1,320  |                   |   | 1,269 
|                     |  |               |        |                   |   |       
|                     |  | $             | 14,809 |                   | $ | 13,119
|                     |  |               |        |                   |   |       

Inventories are stated net of valuation allowances related to excess
parts and finished goods of $0.9 million and $0.7 million at March 31, 2010 and December 31, 2009, respectively. For the three-month periods ended March 31, changes in inventory valuation allowances increased cost of sales by $0.2
million in 2010 and decreased cost of sales by $0.1 million in 2009.

(5) Property, Plant and Equipment

Property, plant and equipment consisted of the following at March 31, 2010 and December 31, 2009:



|                        |  |                                 |      |                |                         |                   |   |                |   |      |   |                         |  |   |                |  |   |         |   |  |   |      
|----------------------- |  | ------------------------------- | ---- | -------------- | ----------------------- | ----------------- | - | -------------- | - | ---- | - | ----------------------- |  | - | -------------- |  | - | ------- | - |  | - | -----
|(In thousands)          |  | Estimated useful life(in
years) |      | March 31, 2010 |                         | December 31, 2009
|                        |  |                                 | Cost |                | AccumulatedDepreciation |                   |   | Carrying Value |   | Cost |   | AccumulatedDepreciation |  |   | Carrying Value
|Leasehold improvements  |  | 5 to 20                         |      | $              | 2,582                   |                   | $ | (980           | ) |      | $ | 1,602                   |  | $ | 2,767          |  | $ | (909    | ) |  | $ | 1,858
|Computer equipment      |  | 2 to 5                          |      |                | 39,196                  |                   |   | (36,343        | ) |      |   | 2,853                   |  |   | 41,225         |  |   | (37,635 | ) |  |   | 3,590
|Machinery and equipment |  | 3 to 5                          |      |                | 7,931                   |                   |   | (6,590         | ) |      |   | 1,341                   |  |   | 8,393          |  |   | (6,823  | ) |  |   | 1,570
|Furniture and fixtures  |  | 5                               |      |                | 917                     |                   |   | (562           | ) |      |   | 355                     |  |   | 2,573          |  |   | (2,103  | ) |  |   | 470  
|Construction in process |  | N/A                             |      |                | 641                     |                   |   |               |   |      |   | 641                     |  |   | 554            |  |   |        |   |  |   | 554  
|                        |  |                                 |      |                |                         |                   |   |                |   |      |   |                         |  |   |                |  |   |         |   |  |   |      
|Total                   |  |                                 |      | $              | 51,267                  |                   | $ | (44,475        | ) |      | $ | 6,792                   |  | $ | 55,512         |  | $ | (47,470 | ) |  | $ | 8,042
|                        |  |                                 |      |                |                         |                   |   |                |   |      |   |                         |  |   |                |  |   |         |   |  |   |      



8



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(6) Goodwill and Other Intangible Assets

Goodwill and other intangible assets consisted of the following at March 31, 2010 and December 31, 2009:



|                                   |  |                                 |  |               |        |   |                  |   |        |  
|---------------------------------- |  | ------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|(In thousands)                     |  | Estimated useful life (inyears) |  | March 31,2010 |        |   | December 31,2009 |  
|Goodwill                           |  | N/A                             |  | $             | 2,876  |   |                  | $ | 2,794  |  
|                                   |  |                                 |  |               |        |   |                  |   |        |  
|Other intangible assets:           |  |                                 |  |               |        |   |                  |   |        |  
|Indefinite life trademarks         |  | N/A                             |  | $             | 9,052  |   |                  | $ | 9,052  |  
|Patents                            |  | 1 to 16                         |  |               | 18,154 |   |                  |   | 18,154 |  
|                                   |  |                                 |  |               |        |   |                  |   |        |  
|Total cost                         |  |                                 |  |               | 27,206 |   |                  |   | 27,206 |  
|                                   |  |                                 |  |               |        |   |                  |   |        |  
|Accumulated amortization - patents |  |                                 |  |               | (6,884 | ) |                  |   | (6,368 | )
|                                   |  |                                 |  |               |        |   |                  |   |        |  
|                                   |  |                                 |  | $             | 20,322 |   |                  | $ | 20,838 |  
|                                   |  |                                 |  |               |        |   |                  |   |        |  

Nautilus reviews goodwill and other indefinite-lived intangible assets for impairment in the fourth quarter of each year, or
more frequently when events or changes in circumstances indicate the assets may be impaired. The change in goodwill since December 31, 2009 is due to currency exchange rate fluctuations.

(7) Borrowings

On
December 29, 2009, in connection with the sale of certain assets of our
StairmasterTMand
SchwinnTMFitness product lines, the Company satisfied all
outstanding obligations under its previous loan agreement and it was terminated.

On December 29, 2009, the Company entered into a Letter
of Credit Agreement (the Letter of Credit Agreement) with Bank of America (BofA). The Letter of Credit Agreement provides up to $6.0 million in standby letters of credit and expires on December 31, 2010 (Expiration
Date). BofA will issue standby letters of credit, with a maximum maturity not to exceed 365 days beyond the Expiration Date. At March 31, 2010, the Company had $2.2 million in standby letters of credit issued under the Letter of Credit
Agreement. Standby letters of credit under the Letter of Credit Agreement are secured by a cash collateral account held by BofA in an amount not less than 105% of the amount of the outstanding letters of credit.

On March 8, 2010, the Company entered into a new Loan and Security Agreement (the New Loan Agreement) with Bank of the West, providing
for a $15.0 million revolving secured credit line. The New Loan Agreement is available for working capital, standby letters of credit and general corporate purposes through September 2012, assuming the Company satisfies certain terms and conditions
at the time borrowings are requested. The interest rate on any future borrowings under the New Loan Agreement will be based on the banks prime rate or LIBOR, based on our financial condition at the time the Company elects to borrow. The New
Loan Agreement includes a fee for the unused portion of the credit facility, which fee will vary depending on our borrowing base availability.

The New Loan Agreement is collateralized by substantially all of the Companys assets and contains customary covenants, including minimum current
ratio, minimum liquidity, minimum EBITDA and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The New Loan Agreement also contains customary events of default. Upon an event
of default, the lenders would have the option of accelerating all obligations under the New Loan Agreement. At March 31, 2010, the Company had no outstanding borrowings and $1.7 million in standby letters of credit under the New Loan Agreement.
Standby letters of credit under the New Loan Agreement are secured by a cash collateral account held by Bank of the West in an amount not less than 105% of the amount of the outstanding letters of credit.



9



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(8) Income Taxes

During the first quarter of 2010, the Company reported income tax expense of $0.4 million, compared to $1.3 million in the first quarter of 2009. Income
tax expense primarily relates to taxable income generated in non-U.S. jurisdictions.

In the first quarters of 2010 and 2009, the Company
increased its valuation allowance to reduce certain deferred tax assets, primarily U.S. federal net operating loss carry-forwards and tax credits generated in those periods, to the amounts more likely than not to be realized and, therefore, did not
recognize any associated income tax benefit. There were no material changes to the Companys uncertain tax positions in the first quarter of 2010.

(9) Loss Per Share

Basic loss per share
is calculated based on the weighted-average number of common shares outstanding during the period. Diluted loss per share is calculated based on the weighted-average number of common shares outstanding, after giving effect to the potential dilution
that could occur upon exercise of dilutive securities, as determined using the treasury stock method.

Following is a calculation of basic and
diluted loss per share for the three-months ended March 31, 2010 and 2009:



|                                                               |  |                             |        |   |      |   |         |  
|-------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                               |  | Three Months EndedMarch 31, |       
|(In thousands, except per share amounts)                       |  | 2010                        |        |   | 2009 |  
|Numerator:                                                     |  |                             |        |   |      |   |         |  
|Loss from continuing operations                                |  | $                           | (2,371 | ) |      | $ | (5,424  | )
|Loss from discontinued operation                               |  |                             | (5,420 | ) |      |   | (8,395  | )
|                                                               |  |                             |        |   |      |   |         |  
|Net loss                                                       |  | $                           | (7,791 | ) |      | $ | (13,819 | )
|                                                               |  |                             |        |   |      |   |         |  
|Denominator:                                                   |  |                             |        |   |      |   |         |  
|Basic and diluted shares outstanding                           |  |                             | 30,744 |   |      |   | 30,614  |  
|                                                               |  |                             |        |   |      |   |         |  
|Calculations:                                                  |  |                             |        |   |      |   |         |  
|Loss per share from continuing operations - basic and diluted  |  | $                           | (0.08  | ) |      | $ | (0.18   | )
|                                                               |  |                             |        |   |      |   |         |  
|Loss per share from discontinued operation - basic and diluted |  |                             | (0.17  | ) |      |   | (0.27   | )
|                                                               |  |                             |        |   |      |   |         |  
|Net loss per share - basic and diluted                         |  | $                           | (0.25  | ) |      | $ | (0.45   | )
|                                                               |  |                             |        |   |      |   |         |  

Potentially dilutive average shares of 1.3 million and 2.0 million for the three months ended March 31, 2010
and 2009, respectively, were not included in the computation of diluted earnings per share because they would not have had a dilutive effect.

(10) Comprehensive Loss

Following is a
summary of the components of comprehensive loss, net of taxes, for the three months ended March 31, 2010 and 2009:



|                                         |  |                             |        |   |      |   |         |  
|---------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                         |  | Three months endedMarch
31, |       
|(in thousands)                           |  | 2010                        |        |   | 2009 |  
|Net loss                                 |  | $                           | (7,791 | ) |      | $ | (13,819 | )
|Foreign currency translation adjustments |  |                             | 438    |   |      |   | (849    | )
|                                         |  |                             |        |   |      |   |         |  
|Comprehensive loss                       |  | $                           | (7,353 | ) |      | $ | (14,668 | )
|                                         |  |                             |        |   |      |   |         |  



10



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(11) Reportable Segments and Related Information

The Company has two reportable segments: Direct and Retail. The Companys commercial business discontinued operation is not a reportable segment.
Contribution is the measure of profit or loss used by the Companys chief operating decision maker, and is defined as net sales, less product costs and operating expenses directly attributable to the segment. Segment operating expenses include
employment costs, selling and marketing costs, general and administrative expenses and research and development costs directly related to segment operations. Restructuring costs are unallocated to allow for better comparisons of segment operating
results among periods. Summary information by operating segment for the three months ended March 31, 2010 and 2009 is as follows:



|                                                                                |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                |  | Three months endedMarch
31, |       
|(In thousands)                                                                  |  | 2010                        |        |   | 2009 |  
|Net sales:                                                                      |  |                             |        |   |      |   |        |  
|Direct                                                                          |  | $                           | 28,503 |   |      | $ | 40,716 |  
|Retail                                                                          |  |                             | 15,931 |   |      |   | 12,548 |  
|Unallocated corporate (royalty income)                                          |  |                             | 1,210  |   |      |   | 791    |  
|                                                                                |  |                             |        |   |      |   |        |  
|Consolidated net sales                                                          |  | $                           | 45,644 |   |      | $ | 54,055 |  
|                                                                                |  |                             |        |   |      |   |        |  
|Contribution:                                                                   |  |                             |        |   |      |   |        |  
|Direct                                                                          |  | $                           | (1,536 | ) |      | $ | 2,738  |  
|Retail                                                                          |  |                             | 2,260  |   |      |   | 1,383  |  
|Unallocated corporate                                                           |  |                             | 1,210  |   |      |   | 446    |  
|                                                                                |  |                             |        |   |      |   |        |  
|Consolidated contribution                                                       |  | $                           | 1,934  |   |      | $ | 4,567  |  
|                                                                                |  |                             |        |   |      |   |        |  
|Reconciliation of consolidated contribution to loss from continuing operations: |  |                             |        |   |      |   |        |  
|Consolidated contribution                                                       |  | $                           | 1,934  |   |      | $ | 4,567  |  
|Less unallocated corporate expenses:                                            |  |                             |        |   |      |   |        |  
|Selling and marketing                                                           |  |                             |       |   |      |   | (151   | )
|General and administrative                                                      |  |                             | (3,841 | ) |      |   | (5,595 | )
|Research and development                                                        |  |                             | (33    | ) |      |   | (487   | )
|Restructuring                                                                   |  |                             |       |   |      |   | (2,049 | )
|Other                                                                           |  |                             | (13    | ) |      |   | (430   | )
|Income taxes                                                                    |  |                             | (418   | ) |      |   | (1,279 | )
|                                                                                |  |                             |        |   |      |   |        |  
|Loss from continuing operations                                                 |  | $                           | (2,371 | ) |      | $ | (5,424 | )
|                                                                                |  |                             |        |   |      |   |        |  

(12) Commitments and Contingencies

Legal Matters

The Company is
party to various legal proceedings arising from normal business activities. In addition, the Companys tax filings are subject to audit by authorities in the jurisdictions where it conducts business, which may result in assessments of
additional taxes. Management believes it has adequately provided for obligations that would result from these legal and tax proceedings where it is probable it will pay some amounts and the amounts can be reasonably estimated. In some cases,
however, it is too early to predict a final outcome. Management believes that the ultimate resolution of these matters will not have a material effect on the Companys financial position, results of operations or cash flows.

Guarantees, Commitments and Off-Balance Sheet Arrangements

The Company has long lead times for inventory purchases and therefore needs to secure factory capacity from its vendors in advance. At March 31,
2010, the Company had approximately $10.8 million in non-cancellable market-based purchase obligations, all of which were for inventory purchases expected to be received in 2010.

Prior to its divestiture, the Companys discontinued commercial business would, from time-to-time, involve a third-party with lease and financing
arrangements to assist customers in purchasing products. While these financings generally were without recourse to Nautilus, in certain cases the Company offered a guarantee or other recourse provisions. At March 31, 2010, the maximum potential
liability under all outstanding recourse provisions was approximately $1.4 million. The Company is not aware of any circumstances or events that have occurred for which it would be liable under these recourse provisions.

At March 31, 2010, the Company had $3.9 million in outstanding commercial letters of credit expiring through September 2011.



11



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should
read this discussion and analysis in conjunction with the financial statements and notes thereto found in Item 1 of this Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2009 (the 2009 Form 10-K). All references to the first quarters of 2010 and 2009 mean the three-month periods ended March 31, 2010 and 2009, respectively. Unless the context otherwise requires,
Nautilus, we, us and our refer to Nautilus, Inc. and its subsidiaries. Unless indicated otherwise, all information regarding our operating results pertains to our continuing operations.

Our results of operations may vary significantly from period-to-period. Our revenues will fluctuate due to the seasonality of our industry; customer
buying patterns; product innovation; the nature and level of competition for health and fitness products; our ability to procure products to meet customer demand; and the level of spending on, and effectiveness of, our media and advertising
programs. In addition, our operating results are highly susceptible to the availability of consumer credit, both in the U.S. and abroad, the overall condition of the U.S. economy and economies of other countries where we market our products, by
fluctuations in the costs or availability of materials used to manufacture our products, higher or lower fuel prices, changes in the cost of distribution or other services, variations in our product sales mix and the relative success of strategies
we employ to improve the efficiency and effectiveness of our organization. Historically our operating expenses have been influenced by media costs to produce and broadcast advertisements, facility costs, operating costs of our information and
communications systems, costs to develop and maintain our Internet websites, bad debt expenses and costs related to attracting and retaining key personnel, asset impairment losses and restructuring charges.

As a result of the above and other factors, our period-to-period operating results may not be indicative of future performance. You should not place
undue reliance on our operating results and should consider our prospects in light of the risks, expenses and difficulties typically encountered by us and other companies, both within and outside our industry, in the current and expected future
economic environments. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability. For more information, see our discussion of Risk Factors located at
Part I, Item 1A of our 2009 Form 10-K.

Forward-Looking Statements

This Form 10-Q contains forward-looking statements. Forward-looking statements include any statements related to our expectations regarding future
performance or conditions, including any statements regarding anticipated sales growth across markets, distribution channels, and product categories, expenses and gross margins, expense as a percentage of revenue, anticipated earnings, new product
introductions, manufacturing plans and activities, future capital expenditures, our turnaround plan, financing and working capital requirements and resources. These forward-looking statements, and others we make from time to time, are subject to a
number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including the risks described in Part II, Item 1A, Risk Factors, which are
incorporated herein by reference. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

Available Information

We make our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, available free of charge on our website. In addition, our code of business conduct and ethics, corporate governance policies,
and the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee are available on our corporate website. The information presented on our website is not part of this report.

Overview

Nautilus is a fitness products
company providing innovative, quality solutions to help people achieve a fit and healthy lifestyle. We are a leading designer, developer and marketer of fitness products sold around the world. We believe our brands are some of the strongest in the
industry. We market our products through two business segments: direct and retail. Our direct business offers products directly to consumers through direct advertising, catalogs and the internet. Our retail business offers our products for resale to
consumers through a network of retailer customers, predominantly located in the U.S. and Canada.

During the third quarter of 2009, management
committed to a plan for the complete divestiture of the Companys commercial business unit with the expectation that successful completion of this plan would improve overall operating results. Consequently, our commercial business unit has been
classified as a discontinued operation. Our commercial business offered products to health clubs, schools, hospitals and other organizations. By the end of the first quarter of 2010, the disposition of most commercial business assets had been
substantially completed and we expect to dispose of the remaining assets over the course of this year.



12



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Nautilus is now focusing its resources exclusively on supplying fitness equipment to consumers through the
direct and retail sales channels, which we believe offer the best prospects for profitability in the medium term. Due in part to the capital released from our divestiture of the commercial business, we have strengthened our ability to invest in the
consumer businesses and our balance sheet position is currently better than it was a year ago.

Despite maintaining strong
cost controls we have continued to invest in new product development, introducing the new
NautilusTMMobiaTMlow impact cardio product in the direct channel in
late 2009. In 2010, we plan to upgrade our SchwinnTMFitness and BowflexTMproduct lines for both the retail
and the direct channels.

Our operating results improved in the first quarter of 2010, compared to the first quarter last year, driven by an
increase in operating income from our retail segment, company-wide cost reduction initiatives and significant restructuring expenses incurred in the first quarter of 2009. Sales in our retail channel improved in the first quarter of 2010, compared
to the first quarter last year, as our customers completed their inventory reductions and consumer demand increased.

Improvements in our retail business results were partially offset by reduced contribution from our direct segment. In our direct
channel, initial sales of the Nautilus MobiaTMand stable
sales of cardio products overall were more than offset by continued slowing sales of
BowflexTMhome gyms, which are more impacted by reductions
in credit approval than our cardio products. At this point, we believe that the biggest challenge facing our direct business is the restricted availability of financing to consumers. Credit approval rates decreased by 26% from the fourth quarter
2009 to the first quarter 2010 and we do not believe the credit quality of our prospective customers applying for financing has declined in proportion to the reduction in the rate of credit approvals by our third-party financing partner. We are
currently seeking a new provider for our direct business consumer credit financing.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS
ENDED MARCH 31, 2010 and 2009

The tables below set forth selected financial information derived from our condensed consolidated financial
statements. The discussion that follows should be read in conjunction with our condensed consolidated financial statements and the related notes. All comparisons to prior year results are in reference to continuing operations only in each period,
unless otherwise indicated.



|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|--------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------- | -------- |  | - | -------- | - |  | ------ | --
|                                                    |  | (Unaudited and in thousands) |       
|                                                    |  | Three Months Ended March 31, |       
|                                                    |  | 2010                         |        |   | 2009 |   |         | $ change |  |   | % change |  
|Net sales                                           |  | $                            | 45,644 |   |      | $ | 54,055  |          |  | $ | (8,411   | ) |  | (15.6  | )%
|Cost of sales                                       |  |                              | 22,679 |   |      |   | 23,751  |          |  |   | (1,072   | ) |  | (4.5   | )%
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Gross profit                                        |  |                              | 22,965 |   |      |   | 30,304  |          |  |   | (7,339   | ) |  | (24.2  | )%
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Operating expenses:                                 |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Selling and marketing                               |  |                              | 18,943 |   |      |   | 22,659  |          |  |   | (3,716   | ) |  | (16.4  | )%
|General and administrative                          |  |                              | 5,159  |   |      |   | 7,888   |          |  |   | (2,729   | ) |  | (34.6  | )%
|Research and development                            |  |                              | 803    |   |      |   | 1,423   |          |  |   | (620     | ) |  | (43.6  | )%
|Restructuring                                       |  |                              |       |   |      |   | 2,049   |          |  |   | (2,049   | ) |  | (100.0 | )%
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Total operating expenses                            |  |                              | 24,905 |   |      |   | 34,019  |          |  |   | (9,114   | ) |  | (26.8  | )%
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Operating loss                                      |  |                              | (1,940 | ) |      |   | (3,715  | )        |  |   | (1,775   | ) |  | (47.8  | )%
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Other income and expenses:                          |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Interest income                                     |  |                              | 11     |   |      |   | 9       |          |  |   | 2        |   |  | 22.2   | % 
|Interest expense                                    |  |                              |       |   |      |   | (147    | )        |  |   | 147      |   |  | 100.0  | % 
|Other expenses                                      |  |                              | (24    | ) |      |   | (292    | )        |  |   | 268      |   |  | 91.8   | % 
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Total other expenses                                |  |                              | (13    | ) |      |   | (430    | )        |  |   | 417      |   |  | 97.0   | % 
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Loss from continuing operations before income taxes |  |                              | (1,953 | ) |      |   | (4,145  | )        |  |   | 2,192    |   |  | 52.9   | % 
|Income tax expense                                  |  |                              | 418    |   |      |   | 1,279   |          |  |   | (861     | ) |  | (67.3  | )%
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Loss from continuing operations                     |  |                              | (2,371 | ) |      |   | (5,424  | )        |  |   | 3,053    |   |  | 56.3   | % 
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Loss from discontinued operation, net of tax        |  |                              | (5,420 | ) |      |   | (8,395  | )        |  |   | 2,975    |   |  | 35.4   | % 
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   
|Net loss                                            |  | $                            | (7,791 | ) |      | $ | (13,819 | )        |  | $ | 6,028    |   |  | 43.6   | % 
|                                                    |  |                              |        |   |      |   |         |          |  |   |          |   |  |        |   



13



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|                                       |  |                              |        |   |        |   |        |          |  |   |         |   |  |          |   
|-------------------------------------- |  | ---------------------------- | ------ | - | ------ | - | ------ | -------- |  | - | ------- | - |  | -------- | --
|                                       |  | (Unaudited and in thousands) |        |   |        |   |        |          | 
|                                       |  | Three Months Ended March 31, |        |   | Change |   |        | % Change | 
|                                       |  | 2010                         |        |   | 2009   |   |        |         
|Net sales:                             |  |                              |        |   |        |   |        |          |  |   |         |   |  |          |   
|Direct business                        |  | $                            | 28,503 |   |        | $ | 40,716 |          |  | $ | (12,213 | ) |  | (30.0    | )%
|Retail business                        |  |                              | 15,931 |   |        |   | 12,548 |          |  |   | 3,383   |   |  | 27.0     | % 
|Unallocated corporate (royalty income) |  |                              | 1,210  |   |        |   | 791    |          |  |   | 419     |   |  | 53.0     | % 
|                                       |  |                              |        |   |        |   |        |          |  |   |         |   |  |          |   
|Total net sales                        |  | $                            | 45,644 |   |        | $ | 54,055 |          |  | $ | (8,411  | ) |  | (15.6    | )%
|                                       |  |                              |        |   |        |   |        |          |  |   |         |   |  |          |   
|Gross profit:                          |  |                              |        |   |        |   |        |          |  |   |         |   |  |          |   
|Direct business                        |  | $                            | 17,541 |   |        | $ | 25,655 |          |  | $ | (8,114  | ) |  | (31.6    | )%
|Retail business                        |  |                              | 4,214  |   |        |   | 4,203  |          |  |   | 11      |   |  | 0.3      | % 
|Unallocated corporate                  |  |                              | 1,210  |   |        |   | 446    |          |  |   | 764     |   |  | 171.3    | % 
|                                       |  |                              |        |   |        |   |        |          |  |   |         |   |  |          |   
|Total gross profit                     |  | $                            | 22,965 |   |        | $ | 30,304 |          |  | $ | (7,339  | ) |  | (24.2    | )%
|                                       |  |                              |        |   |        |   |        |          |  |   |         |   |  |          |   
|Gross profit margin (% of net sales):  |  |                              |        |   |        |   |        |          |  |   |         |   |  |          |   
|Direct business                        |  |                              | 61.5   | % |        |   | 63.0   | %        |  |   | (1.5    | ) |  | % points |   
|Retail business                        |  |                              | 26.5   | % |        |   | 33.5   | %        |  |   | (7.0    | ) |  | % points |   
|Total gross profit margin              |  |                              | 50.3   | % |        |   | 56.1   | %        |  |   | (5.8    | ) |  | % points |   

Direct business

Net sales of our direct business were $28.5 million in the first quarter of 2010, a decrease of $12.2 million, or 30.0%, compared to $40.7
million in the first quarter of 2009. The decrease in direct net sales was due primarily to a 37% year-over-year decrease in the rate of credit approvals by our consumer credit financing partner.

Gross profit margin of our direct business was 61.5% in the first quarter of 2010, a decrease of 1.5 percentage points compared to the first quarter of
2009. The decrease in gross profit margin was attributable primarily to changes in product mix and increased customer discounts taken in conjunction with certain sales promotions.

Retail business

Net sales of our
retail business were $15.9 million in the first quarter of 2010, an increase of $3.4 million, or 27.0%, compared to $12.5 million in the first quarter of 2009. The increase in retail net sales was due primarily to strong customer demand for our
newly redesigned fitness bikes and elliptical products and the introduction of treadmills in the retail channel.

Gross profit margin of our
retail business was 26.5% in the first quarter of 2010, a decrease of 7.0 percentage points compared to the first quarter of 2009. Higher gross profit margin in the first quarter of 2009 was due primarily to adjustments to certain
previously-recognized reserves for, among other things, warranty and freight costs as a result of our 2008 restructuring efforts and reduced customer product returns.

Operating Expenses

Operating
expenses in the first quarter of 2010 were $24.9 million, a decrease of $9.1 million, or 26.8%, compared to the first quarter of 2009, primarily due to cost-saving initiatives implemented throughout 2009, as well as reduced selling and marketing
costs as we continued to better align those expenses with expected revenue. Operating expenses in the first quarter of 2009 included $2.0 million in expenses associated with restructuring activities.

Selling and Marketing

Selling
and marketing expenses were $18.9 million in the first quarter of 2010, a decrease of $3.7 million, or 16.4%, compared to the first quarter of 2009. Advertising expense of our direct business in the first quarter of 2010 was approximately $12.9
million, a decrease of approximately $1.8 million, or 12.3%, compared to the first quarter of 2009. The comparative reduction in advertising expenses was attributable primarily to managements decision to scale back television media spend in
order to balance the ability to convert customer leads into sales in the current environment, where advertising fees have increased over the same period last year while consumer financing approval rates have declined substantially. In addition, bad
debt expense decreased by $0.7 million and third-party customer financing commission fees decreased by approximately $0.5 million, primarily due to lower credit approval rates and reduced use of our financing promotions. Other selling and marketing
expenses declined by approximately $0.7 million, primarily due to cost-saving initiatives and lower sales volumes.



14



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General and Administrative

General and administrative expenses were $5.2 million in the first quarter of 2010, a decrease of $2.7 million, or 34.6%, compared to the first quarter of
2009, primarily due to cost-saving initiatives. General and administrative expenses in the first quarter of 2009 were reduced by the resolution of a legal matter, which was settled for $0.8 million less than the amount previously estimated.

Research and Development

Research and development expenses were $0.8 million in the first quarter of 2010, a decrease of $0.6 million, or 43.6%, compared to the first quarter of
2009, primarily due to personnel reductions undertaken as part of our 2009 cost-saving initiatives.

Restructuring

No restructuring costs were incurred in the first quarter of 2010. In the first quarter of 2009, restructuring expense included $1.8 million for
abandonment of certain information technology software and $0.2 million related to reductions in leased office space.

Interest expense

We repaid all outstanding bank borrowings in December 2009 and, as a result, incurred no interest expense in the first quarter of
2010, compared to $0.1 million in the first quarter of 2009.

Income Tax Expense

Income tax expense was $0.4 million in the first quarter of 2010, compared to $1.3 million in the first quarter of 2009. Income tax expense primarily
relates to taxable income generated outside of the United States.

We increased our valuation allowance in the first quarters of 2010 and 2009
to reduce certain deferred tax assets generated during the respective periods to their anticipated net realizable value. As a result, we did not recognize income tax benefits associated with our operating losses in those periods.

Discontinued Operation

We
recorded a loss from discontinued operation, net of income taxes, of $5.4 million in the first quarter of 2010 compared to a loss of $8.4 million in the first quarter of 2009. In the first quarter of 2010, we recognized a $1.2 million reduction in
the amount of pre-tax impairments previously estimated in connection with our disposal of the commercial business.

LIQUIDITY AND CAPITAL
RESOURCES

In summary, our cash flows were as follows (unaudited and in thousands):



|                                                    |  |                             |       |   |      |   |         |  
|--------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ------- | -
|                                                    |  | Three Months EndedMarch 31, |      
|                                                    |  | 2010                        |       |   | 2009 |  
|Net cash provided by operating activities           |  | $                           | 933   |   |      | $ | 12,780  |  
|Net cash provided by (used in) investing activities |  |                             | 3,204 |   |      |   | (690    | )
|Net cash used in financing activities               |  |                             | (144  | ) |      |   | (14,734 | )

At March 31, 2010, we had $12.0 million of
cash and cash equivalents. Our principal sources of liquidity are our cash and cash equivalents, as well as the cash flow that we generate from our operations. We believe that our existing cash and cash equivalents and cash generated from operations
will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months.

Cash provided by operating
activities of $0.9 million in the first quarter of 2010 included $12.7 million from income tax refunds and $8.5 million from the reduction of trade receivables, partially offset by reductions in trade payables and accrued liabilities of $12.4
million and $3.6 million, respectively. Significant reductions in trade receivables, trade payables and accrued liabilities in the first quarter of 2010 largely resulted from winding down our commercial business discontinued operation.

Cash provided by operations of $12.8 million in the first quarter of 2009 included significant reductions in trade receivables and inventories of $21.5
million and $3.2 million, respectively, as we reduced working capital invested in our commercial business in anticipation of divesting that segment.

Cash provided by investing activities of $3.2 million in the first quarter of 2010 included $2.7 million in proceeds from the sale of portions of our
discontinued commercial business and $0.6 million from a decrease in restricted cash collateralizing our outstanding letters of credit. Cash used in investing activities of $0.7 million in the first quarter of 2009 included $0.8 million for
purchases of equipment, partially offset by $0.1 million in proceeds from sales of equipment.

Cash used in financing activities of $0.1
million in the first quarter of 2010 consisted of financing costs related to our new bank agreement. Cash used in financing activities of $14.7 million in the first quarter of 2009 consisted of repayments of borrowings under our former bank
agreement.



15



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Financing Arrangements

On December 29, 2009, we entered into a Letter of Credit Agreement (the Letter of Credit Agreement) with Bank of America
(BofA). The Letter of Credit Agreement provides up to $6.0 million in standby letters of credit and expires on December 31, 2010 (Expiration Date). During this agreement period, BofA will issue standby letters of credit,
with a maximum maturity not to exceed 365 days beyond the Expiration Date. At March 31, 2010 we had $2.2 million in standby letters of credit issued under the Letter of Credit Agreement. Standby letters of credit under the Letter of Credit
Agreement are secured by a cash collateral account held by BofA in an amount not less than 105% of the amount of the outstanding letters of credit. We expect to terminate the Letter of Credit Agreement with BofA after all outstanding letters of
credit have been transferred to our new lender, Bank of the West.

On March 8, 2010 we entered into a new Loan and Security Agreement
(the New Loan Agreement) with Bank of the West, providing for a $15.0 million revolving secured credit line. The New Loan Agreement is available for working capital, standby letters of credit and general corporate purposes through
September 2012, assuming we satisfy certain terms and conditions at the time borrowings are requested. There is no assurance we will be able to satisfy these terms and conditions in the future. The interest rate on any future borrowings under the
New Loan Agreement will be based on the banks prime rate or LIBOR, based on our financial condition at the time we elect to borrow. The New Loan Agreement includes a fee for the unused portion of the credit facility, which will vary depending
on our borrowing base availability.

The New Loan Agreement is collateralized by substantially all of our assets and contains customary
covenants, including minimum current ratio, minimum liquidity, minimum EBITDA and limitations on capital expenditures, mergers and acquisitions, indebtedness, liens, dispositions, dividends and investments. The New Loan Agreement also contains
customary events of default. Upon an event of default, the lenders would have the option of accelerating all obligations under the New Loan Agreement.

At March 31, 2010 we had no outstanding borrowings and $1.7 million in standby letters of credit under the New Loan Agreement. Standby letters of
credit under the New Loan Agreement are secured by a cash collateral account held by Bank of the West in an amount not less than 105% of the amount of the outstanding letters of credit.

Off-Balance Sheet Arrangements

In the past, our discontinued commercial business would, from time-to-time, involve a third-party with lease and financing arrangements to assist
customers in purchasing our products. While most of these financings were without recourse to Nautilus, in certain cases we offered a guarantee or other recourse provisions. At March 31, 2010 and December 31, 2009, the maximum contingent
liability under all outstanding recourse provisions was approximately $1.4 million in each period.

Commitments and Contingencies

For a description of our commitments and contingencies, refer to Note 12 to the condensed consolidated financial statements in
Item 1.

Seasonality

We expect our sales from fitness equipment products to vary seasonally. Sales are typically strongest in the first and fourth quarters, and are generally
weakest in the second quarter. We believe the broadcast of national network season finales and seasonal weather patterns influence television viewership and cause our television commercials on national cable television to be less effective in the
second quarter than in other periods of the year. In addition, during the spring and summer months, consumers tend to be involved in outdoor activities, including exercise, which impacts sales of fitness equipment used indoors. This seasonality can
have a significant effect on our operating results, inventory levels and working capital needs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our critical accounting policies have not changed from those discussed in our 2009 Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

No new
accounting pronouncements had, or are reasonably likely to have, a material impact on our consolidated financial position, results of operations or cash flows.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

We have established a system of disclosure controls and procedures that is designed to ensure that
information relating to the Company, which is required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (Exchange Act), is recorded, processed, summarized and reported within the time
periods specified by the SECs rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), in a timely fashion.
An evaluation of the effectiveness of the design and operation of our disclosure



16



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controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) was performed as of the end of the period covered by this Form 10-Q. This evaluation was performed under the
supervision and with the participation of management, including our CEO and CFO. Based upon that evaluation, our CEO and CFO have concluded that these disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2010, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.
OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

For a description of
the legal proceedings that affect us, refer to Note 12 to the condensed consolidated financial statements in Part I, Item 1.



|Item 1A. | Risk Factors
|-------- | ------------

Nautilus operates in an
environment that involves a number of risks and uncertainties. The risks and uncertainties described in our 2009 Form 10-K are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that are not
considered material, and therefore not mentioned herein, may impair our business operations. If any of the risks described in our 2009 Form 10-K actually occur, our business, operating results and financial position could be harmed. There has not
been a material change to the risk factors as set forth in our 2009 Form 10-K.



|Item 6. | Exhibits
|------- | --------

The following exhibits are
filed herewith.



|            |  |                                                                                                                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                     
|            | 
|10.1        |  | Asset Purchase Agreement dated as of February 18, 2010 between Nautilus, Inc. and Med-Fit Systems, Inc.  Incorporated by reference to Exhibit 10.27 to the
Companys Annual Report on Form 10-K, as filed with the Commission on March 8, 2010.                
|            | 
|10.2        |  | Commercial License Agreement dated as of February 18, 2010 between Nautilus, Inc. and Med-Fit Systems, Inc. Incorporated by reference to Exhibit 10.28 to the
Companys Annual Report on Form 10-K, as filed with the Commission on March 8, 2010.             
|            | 
|10.3        |  | Lease Agreement dated as of February 19, 2010 between Nautilus, Inc. and Med-Fit Systems, Inc.  Incorporated by reference to Exhibit 10.29 to the Companys
Annual Report on Form 10-K, as filed with the Commission on March 8, 2010.                         
|            | 
|10.4        |  | Credit Agreement dated as of March 8, 2010 between Nautilus, Inc. and Bank of the West  Incorporated by reference to Exhibit 10.30 to the Companys Annual
Report on Form 10-K, as filed with the Commission on March 8, 2010.                                 
|            | 
|10.5        |  | Security Agreement dated as of March 8, 2010 between Nautilus, Inc. and Bank of the West. Incorporated by reference to Exhibit 10.31 to the Companys Annual
Report on Form 10-K, as filed with the Commission on March 8, 2010.                               
|            | 
|31.1        |  | Certification of Principal Executive Officer pursuant to Rule 13a-14 (a) of the Securities Exchange Act of 1934, as amended                                                                                                                                     
|            | 
|31.2        |  | Certification of Principal Financial Officer pursuant to Rule 13a-14 (a) of the Securities Exchange Act of 1934, as amended                                                                                                                                     
|            | 
|32.1        |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



17



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SIGNATURES

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.



|             |  |  |  |                |  |                                                                   
|------------ |  |  |  | -------------- |  | ------------------------------------------------------------------
|             |  |  |  | NAUTILUS, INC.
|             |  |  | 
|May 12, 2010 |  |  |  | By:            |  | /s/ Edward J. Bramson                                             
|Date         |  |  |  |                |  | Edward J. Bramson                                                 
|             |  |  |  |                |  | Chairman and Chief Executive Officer
(Principal Executive Officer)
|             |  |  | 
|May 12, 2010 |  |  |  | By:            |  | /s/ Kenneth L. Fish                                               
|Date         |  |  |  |                |  | Kenneth L. Fish                                                   
|             |  |  |  |                |  | Chief Financial Officer
(Principal Financial Officer)             



18