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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**x****Annual report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

** **

**for the fiscal year ended December 31, 2006.**

 

**OR**

 

**o****Transition report under Section 13 or 15(d) of theSecurities Exchange Act of 1934**

** **

**for the transition period from                        to                        ..**

 

**Commission file number  0-8707**

 

 

**NATURE’S SUNSHINE PRODUCTS, INC.**

(Exact name of Registrant asspecified in its charter)

 

| **Utah**                         | ** ** | **87-0327982**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (IRS Employer       |
| incorporation or  organization)  |       | Identification No.) |

 

**75 East 1700 South**

**Provo, Utah  84606**

(Address of principalexecutive offices and zip code)

 

**(801) 342-4300**

(Registrant’s telephonenumber, including area code)

 

Securities registeredpursuant to Section 12(b) of the Act:

**None**

 

Securities registeredpursuant to Section 12(g) of the Act:

**Common Stock, no par value.**

 

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x.

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o No x.

 

Indicateby check mark whether the registrant has (1) filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes oNo x.

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer o                                              |   | Accelerated  filer x         |
|------------------------------------------------------------------------|--------|------------------------------|
|                                                                   |   |                         |
| Non-accelerated filer (Do not check if a  smaller reporting company) o |   | Smaller  reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes oNo x.

 

The aggregate market value of the voting stock held by non-affiliates ofthe registrant on June 30, 2008 was approximately $82,797,216 based on theclosing price of $6.75 as quoted by the National Quotation Bureau’s Pink Sheetson June 30, 2008

 

The number of shares of Common Stock, no par value, outstanding on June 30,2008 is 15,510,159 shares.

** **

**DocumentsIncorporated by Reference**: For items incorporated by reference, see List of Exhibits in Item 15 ofthis Form 10-K.

 

 

 

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**TABLE OFCONTENTS**

 
| PART 1   |                                                                                                                | 6      |
|---------------|---------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                |   |
| ITEM 1.       | BUSINESS                                                                                                            | 6      |
|          |                                                                                                                |   |
| ITEM 1A.      | RISK FACTORS                                                                                                        | 10     |
|          |                                                                                                                |   |
| ITEM 1B.      | UNRESOLVED  STAFF COMMENTS                                                                                          | 16     |
|          |                                                                                                                |   |
| ITEM  2.      | PROPERTIES                                                                                                          | 17     |
|          |                                                                                                                |   |
| ITEM 3.       | LEGAL PROCEEDINGS                                                                                                   | 17     |
|          |                                                                                                                |   |
| ITEM 4.       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                | 19     |
|          |                                                                                                                |   |
| PART II  |                                                                                                                | 20     |
|          |                                                                                                                |   |
| ITEM 5.       | MARKET FOR  REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES | 20     |
|          |                                                                                                                |   |
| ITEM 7.       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         | 24     |
|          |                                                                                                                |   |
| ITEM 7A.      | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         | 36     |
|          |                                                                                                                |   |
| ITEM 8.       | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 38     |
|          |                                                                                                                |   |
| ITEM 9.       | CHANGE IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                | 71     |
|          |                                                                                                                |   |
| ITEM 9A.      | CONTROLS AND  PROCEDURES                                                                                            | 73     |
|          |                                                                                                                |   |
| ITEM 9B.      | OTHER EVENTS                                                                                                        | 82     |
|          |                                                                                                                |   |
| PART III |                                                                                                                | 82     |
|          |                                                                                                                |   |
| ITEM 10.      | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                             | 82     |
|          |                                                                                                                |   |
| ITEM 11.      | EXECUTIVE  COMPENSATION                                                                                             | 85     |
|          |                                                                                                                |   |
| ITEM 12.      | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                    | 93     |
|          |                                                                                                                |   |
| ITEM 13.      | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                          | 95     |
|          |                                                                                                                |   |
| ITEM 14.      | PRINCIPAL  ACCOUNTANT FEES AND SERVICES.                                                                            | 95     |
|          |                                                                                                                |   |
| PART IV  |                                                                                                                | 97     |
|          |                                                                                                                |   |
| ITEM 15.      | FINANCIAL  STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K                                               | 97     |
|          |                                                                                                                |   |
| SIGNATURES    |                                                                                                                | 98     |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Certain informationincluded or incorporated by reference in this report may be deemed to be “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements may include, but are not limited to,statements relating to our objectives, plans and strategies. All statements(other than statements of historical fact) that address activities, events ordevelopments that we intend, expect, project, believe or anticipate will or mayoccur in the future are forward-looking statements. These statements are oftencharacterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,”“intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy”and similar expressions, and are based on assumptions and assessments made by managementin light of their experience and their perception of historical trends, currentconditions, expected future developments and other factors they believe to beappropriate. Forward-looking statements are not guarantees of futureperformance and are subject to risks and uncertainties. Important factors thatcould cause actual results, developments and business decisions to differmaterially from forward-looking statements are described in this report,including the risks set forth under “Risk Factors” in Item 1A.

 

Throughout this report,we refer to Nature’s Sunshine Products, Inc., together with itssubsidiaries, as “we,” “us,” “our Company” or “the Company.”

 

**EXPLANATORY NOTE**

 

In this Annual Report on Form 10-K,we are restating our consolidated statement of operations, consolidatedstatement of changes in shareholders’ equity and comprehensive income (loss),and consolidated statement of cash flows for the year ended December 31,2004. An overview of the principal adjustments to our financial statements as aresult of the restatement is set forth in Note 2 to our consolidated financialstatements, set forth in Item 8 of this Report. We are also providingconsolidated balance sheets, consolidated statements of operations,consolidated statements of changes in stockholders’ equity and comprehensiveincome (loss), and consolidated statements of cash flows for the years ended December 31,2005 and December 31, 2006. The information set forth in such financialstatements for the year ended December 31, 2005 has not been previouslyfiled with the United States Securities and Exchange Commission (the “SEC”),and reflects significant adjustments to the financial statements we filed on Form 10-Qwith the SEC for the quarterly periods ended March 31, June 30 and September 30,2005. The summary of quarterly operations for these periods included in Note 17to our consolidated financial statements, set forth in Item 8 of this report,has been restated for such adjustments. None of the information set forth insuch statements for the year ended December 31, 2006 has been previouslyfiled with the SEC. The restatement of our 2004 and 2005 financial statementsreflect changes resulting from errors identified from Management’scomprehensive review of its accounting policies, practices, and financial records,including matters identified by the independent investigation, as discussedbelow. The Company used all available information in determining the impact ofadjustments identified as a result of Management’s review. The restatementadjustments reduced previously reported net sales revenue, pre-tax income, netincome and net income per diluted share by $5.7 million, $2.2 million, $5.3million, and $0.34 per diluted share, respectively, for the year ended December 31,2004. In addition, it reduced retained earnings as of January 1, 2004 by$85.0 million, of which $71.8 million was related to a correction in theCompany’s accounting for the repurchase and retirement of treasury stockresulting in no change in total shareholders’ equity.

 

We are currently preparingand expect to file the following reports with the SEC subsequent to the filingof this Report:  (i) QuarterlyReports on Form 10-Q for the quarterly periods ended March 31, and June 30,2008; and (ii) the Annual Report on Form 10-K for the year ended December 31,2007.

 

**PREVIOUSLY FILED ANNUAL REPORT ONFORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004 AND QUARTERLY REPORTS ON FORM 10-QFOR THE QUARTERS ENDED MARCH 31, 2005, JUNE 30, 2005, AND SEPTEMBER 30,2005, HAVE NOT BEEN AND WILL NOT BE AMENDED AND SHOULD NOT BE RELIED UPON.**

 

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**InternalInvestigation**

 

As previously announced,in October 2005, the Audit Committee of our Board of Directors (our “AuditCommittee”) commenced an internal investigation regarding certain sales andcommission activities involving certain of our foreign operations. Theinvestigation was subsequently expanded to include other matters related to ourconsolidated financial statements. The Audit Committee engaged anationally-recognized independent law firm to assist in the investigation andthe law firm, in turn, engaged a nationally-recognized independent publicaccounting firm to provide further assistance. The internal investigation wasoverseen by a Special Committee comprised of one independent member of theAudit Committee and an outside independent consultant, who later became adirector and independent member of the Audit Committee. On March 15, 2006,the Audit Committee received an oral preliminary report on the findings of theinvestigation through that date (the “Preliminary Report”). Based on issuesraised in the Preliminary Report, on March 15, 2006, the Audit Committeedetermined that the financial statements****filed with theSEC in connection with the following previously issued reports of the Companyshould not be relied upon:

 

(i) QuarterlyReports on Form 10-Q for each of the first three fiscal quarters of 2005;

 

(ii) Annual Reporton Form 10-K for the fiscal year ended December 31, 2004 (whichincludes financial statements as of December 31, 2004 and 2003 and for thefiscal years ended December 31, 2004, 2003 and 2002); and

 

(iii) QuarterlyReports on Form 10-Q for each of the first three fiscal quarters of 2004,2003 and 2002.

 

**Change inCertifying Accountant**

 

As previously announced,on March 31, 2006, we received a letter from KPMG LLP (“KPMG”) pursuant towhich KPMG resigned as our independent registered public accounting firm.Following KPMG’s resignation, we began the process of obtaining a newindependent registered public accounting firm. On February 2, 2007, ourAudit Committee engaged Deloitte & Touche LLP (“Deloitte”) to serve asour independent registered public accounting firm.

 

**Failureto Report and Delisting**

 

Due primarily to thededication of a substantial amount of our resources to the review andassessment of information we received in the course of the internalinvestigation described above, we have been unable to prepare and file periodicreports for periods ending on or after December 31, 2005 as required bythe Exchange Act. As a result of our inability to file such reports, on April 5,2006, the Nasdaq Listing Qualifications Panel determined to delist our commonstock from The Nasdaq National Market.

 

SinceApril 2006, our common stock has been listed on the Pink Sheets. We intendto seek to be re-listed on a securities exchange when we become current in ourfinancial reporting. There can be no assurance regarding our ability to satisfythe standards for listing on an exchange or that an exchange will approve ourlisting. Nor can there be any assurance at this time when the re-listing wouldoccur. Continuing to be quoted only on Pink Sheets could adversely affect thetrading market—and potentially the market price—of our common stock.

 

**Summary of Restatement and Adjustments**

 

In this AnnualReport on Form 10-K, the Company restated its previously filedconsolidated financial statements for the year ended December 31, 2004 andits previously reported December 31, 2003 consolidated common stock,treasury stock, retained earnings, and accumulated other comprehensive loss torecognize corrected items that relate to periods prior to January 1, 2004.Beginning retained earnings as of January 1, 2004 was reduced by $85.0million, of which $71.8 million was related to a correction in the Company’saccounting for the repurchase and retirement of treasury stock, resulting in nonet change in shareholders’ equity. For the year ended December 31, 2004,the restatement adjustments reduced previously reported net sales revenue,pre-tax income, net income, and net income per diluted share by $5.7 million,$2.2 million, $5.3 million, and $0.34 per diluted share, respectively.

 

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As a result ofadditional procedures performed by the Company, 2004 reported net salesrevenues and net income were adjusted by the following:

 

•                           The Company identified thatit had inconsistently classified certain rebates, shipping and handlingrevenues, and other fees and expenses. These classification matters reducedreported net sales revenue by $1.6 million and a corresponding reduction inoperating expenses and other income, with no impact on reported net income;

 

•                           The Company reevaluated thetiming of revenue recognition of customer orders and determined that titlepassed to the customer upon delivery, while the Company had previously recordedrevenue upon shipment. The Company also had identified certain errors relatedto membership fees, and customer deposits. These adjustments related to thetiming and recognition of certain revenues reduced reported net sales revenueby $1.0 million and reported pre-tax income by $0.9 million;

 

•                           The true-up of accountingrecords for differences between the accounting records of certain foreignsubsidiaries and the consolidated financial statements reduced reported netsales revenue by $2.7 million and reported pre-tax income by $0.9 million;

 

•                           Other matters that arose inthe course of completing additional procedures related to the year ended December 31,2004, reduced reported net sales revenues by $0.4 million and reduced reportedpre-tax income by $0.4 million;

 

•                           Adjustments related to acomprehensive review of the Company’s positions on tax matters reduced reportednet income by $3.1 million, primarily as a result of increased tax reserves incertain countries and their effect on the Company’s tax provision and the taxeffect of the pre-tax restatement adjustments discussed above.

 

The nature and impact of these adjustments aredescribed in greater detail in Footnotes 2 and 17 of Item 8 of this Form 10-K.

 

**LegalProceedings**

 

On July 12, 2007, weannounced that the SEC had instituted an administrative proceeding pursuant to Section 12(j) ofthe Securities Exchange Act of 1934, as amended (“the Exchange Act”), tosuspend or revoke the registration of our common stock under Section 12 ofthe Exchange Act. On November 8, 2007, an administrative law judge in anadministrative proceeding issued an Initial Decision to revoke the registrationof our common stock because of our failure to file required periodic reports.Shortly thereafter, we filed a petition for review with the SEC. On December 5,2007, the SEC granted our petition for review. The SEC had scheduled oralargument regarding the Company’s petition on October 1, 2008. The SEC has nowrescheduled the oral argument for an unspecified future date.  We cannot predict the outcome of such reviewat this time. The Initial Decision of the administrative law judge will notbecome effective prior to the completion of the SEC’s review. We cannot predictwhat, if any, impact the SEC’s ultimate determination may have on our financialstatements or the materiality of such impact, if any. If a final order isissued by the SEC revoking the registration of our common stock, broker-dealerswould not be permitted to effect transactions in shares of our common stockuntil we file a new registration with the SEC under the Exchange Act and thatregistration is made effective.

 

Our financial statements set forth in Item 8 of thisReport, as well as the Selected Financial Data set forth in Item 6 of thisReport, including both the financial information that has been restated fromprior filings and financial information that is set forth for the first time inthis Report, have been prepared in a manner that incorporates to the extentappropriate all information available to us as of the date hereof. Thisavailable information includes updated information of which we are awareresulting from information derived as a result of the internal investigation,and various changes resulting from errors identified in our review of ouraccounting policies, practices and financial records.

 

Given the significant delay in the filing of ourannual report on Form 10-K for 2006, certain amounts and discussions, asindicated, have been updated to include relevant 2007 and current informationas far as practicable to do so.

 

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# **PART 1**

# ** **

## **Item 1. Business**

## ** **

**TheCompany**

 

Nature’sSunshine Products, Inc., founded in 1972 and incorporated in Utah in 1976,together with our subsidiaries, is primarily engaged in the manufacturing andmarketing of nutritional and personal care products. We sell our productsworldwide to a sales force of independent Distributors who use the productsthemselves or resell them to other Distributors or consumers.

 

Our operations areconducted in the United States as well as in various other countries. Oursubsidiaries are located in Mexico, Central America, Canada, Venezuela,Dominican Republic, Japan, Ecuador, the United Kingdom, Colombia, Peru, Israel,Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia, Belarus, China,Poland and Brazil. We export our products to several other countries, includingArgentina, Australia, Chile, New Zealand and Norway.

 

We also sell ourproducts through a separate division, Synergy Worldwide. Synergy Worldwidesells products in Japan, the United States, South Korea, Singapore, Thailand,Taiwan, Malaysia, Hong Kong, Philippines, Indonesia, the United Kingdom,Germany, Austria, the Netherlands and Australia.

 

Our principalexecutive office is located at 75 East 1700 South, Provo, Utah 84606. Ourtelephone number is (801) 342-4300 and our Internet website address ishttp://www.natr.com. We make available free of charge on our website our AnnualReports on Form 10-K, our Quarterly Reports on Form 10-Q, our CurrentReports on Form 8-K, and amendments to those reports, filed or furnishedpursuant to Section 13(a) of the Securities Exchange Act of 1934 assoon as practicable after we electronically file these documents with, orfurnish them to, the Securities and Exchange Commission (the “SEC”).

 

**FinancialInformation by Business Segment**

 

Weare principally engaged in one line of business; namely, manufacturing andmarketing nutritional and personal care products. We conduct our businessthrough three operating business segments. Two of the operating businesssegments operate under the Nature’s Sunshine Products name and are based ongeographic operations: a United States segment (“NSP United States”) and aninternational segment (“NSP International”). Our third operating businesssegment is Synergy Worldwide, a division that was acquired in 2000. SynergyWorldwide offers products with formulations different from those of the Nature’sSunshine Products offerings. In addition, Synergy Worldwide’s marketing andDistributor compensation plans are sufficiently different from those of Nature’sSunshine Products. Information by business segment for each of our last threefiscal years for sales revenue and operating income, and information bybusiness segment as of the end of our last two fiscal years for identifiableassets, are set forth in Note 14 of the Notes to Consolidated Financial Statementsset forth in Item 8 of this Report.

 

**Productsand Manufacturing**

 

Ourline of over 700 products includes herbal products, vitamins and mineralsupplements, personal care, nutritional drinks, and miscellaneous otherproducts. We purchase herbs and other raw materials in bulk and, after qualitycontrol testing, formulate, encapsulate, tablet or concentrate, and packagethem for shipment. Most of our products are manufactured at our facility inSpanish Fork, Utah. Contract manufacturers produce some of our personal careand other miscellaneous products for us in accordance with our specificationsand standards. We have implemented stringent quality control procedures toverify that the contract manufacturers have complied with our specificationsand standards. Our product lines are described below.

 

*HerbalProducts*

 

We manufacture awide selection of herbal products, which are sold in the form of capsules ortablets. These capsules or tablets contain herb powder or a combination of twoor more herb powders. We also produce both single herbs and herb combinationsin the form of liquid herbs and extracts. Liquid herbs are manufactured byconcentrating herb constituents in a vegetable glycerin base. Extracts arecreated by dissolving powdered herbs into liquid solvents that separate the keyelements of the herbs from the fibrous plant material. For the years endedDecember 31, 2006, 2005, and 2004, herbal products accounted forapproximately 54.0, 53.7, and 52.7 percent of net sales revenue, respectively.

 

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*Vitaminsand Mineral Supplements*

 

We manufacture awide variety of single vitamins, which are sold in the form of chewable ornon-chewable tablets. We also manufacture several multiple vitamins and mineralsupplements, including a line containing natural antioxidants. Generally,mineral supplements are sold in the form of tablets; however, certain mineralsare offered only in liquid form. For the years ended December 31, 2006,2005, and 2004, vitamin and mineral supplements accounted for approximately40.3, 40.5, and 41.3 percent of net sales revenue, respectively.

 

*PersonalCare Products*

 

We manufacture orcontract with independent manufacturers to supply a variety of personal careproducts for external use, including oils and lotions, aloe vera gel, herbalshampoo, herbal skin treatment, toothpaste, and skin cleanser. For the yearsended December 31, 2006, 2005, and 2004, personal care products accountedfor approximately 2.4, 2.5, and 2.5 percent of net sales revenue, respectively.

 

*OtherProducts*

 

We manufacture orcontract with independent manufacturers to supply a variety of other products,including a variety of nutritional drinks, homeopathic products, and powders.For the years ended December 31, 2006, 2005, and 2004, other productsaccounted for approximately 3.3, 3.3, and 3.5 percent of net sales revenue,respectively.

 

**Distributionand Marketing**

 

Our independentDistributors (as hereinafter defined) market our products to consumers throughdirect-selling techniques, as well as sponsor other Distributors. We seek tomotivate and provide incentives to our independent Distributors by offeringhigh quality products and providing our Distributors with product support,training seminars, sales conventions, travel programs, and financial benefits.

 

Our products soldin the United States are shipped directly from our manufacturing and warehousefacilities located in Spanish Fork, Utah, as well as from our regionalwarehouses located in Columbus, Ohio; Dallas, Texas; and Atlanta, Georgia. Eachinternational operation maintains warehouse facilities with inventory to supplyits customers.

 

Demand for ourproducts is created primarily from our independent Distributors. As of June 30,2008, we had approximately 718,500 active Distributors worldwide, whichincluded approximately 227,000 Distributors in the United States. A person whojoins our independent sales force begins as a “Distributor”. An individual canbecome a Distributor by signing up under the sponsorship of someone who isalready a Distributor. Each Distributor is required to renew his/herdistributorship on a yearly basis; our experience indicates that approximately45 percent of our Distributors renew annually. Many Distributors sell ourproducts on a part-time basis to friends or associates or use the productsthemselves. A Distributor interested in earning additional income by committingmore time and effort to selling our products may earn “Manager” status. Managerstatus is contingent upon attaining certain purchase volume levels, recruitingadditional Distributors, and demonstrating leadership abilities. We hadapproximately 26,800 Managers worldwide as of June 30, 2008, includingapproximately 7,600 Managers in the United States. Managers resell our productsto Distributors within their sales group, sell our products directly toconsumers, or use the products themselves. Historically, approximately 60percent of Distributors appointed as Managers have continued to maintain thatstatus annually.

 

In the UnitedStates, we generally sell our products on a cash or credit card basis. Fromtime to time, our United States operation extends short-term credit associatedwith product promotions. For certain of our international operations, we useindependent distribution centers and offer credit terms which are generallyconsistent with industry standards within each respective country.

 

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We pay salescommissions (“Volume Incentives”) to our Managers and Distributors based uponthe amount of sales group product purchases. Generally, a portion of theseVolume Incentives are paid to the applicable Manager as a rebate for productpurchases made by the Manager and the Manager’s down-line Distributors. Theremaining portion of these Volume Incentives is paid in the form of commissionsfor purchases made by the Manager’s down-line Distributors. The amounts ofVolume Incentives that we paid during the years ended December 31, 2006,2005, and 2004 are set forth in our Consolidated Financial Statements in Item 8of this report. In addition to the opportunity to receive Volume Incentives,Managers who qualify by attaining certain levels of monthly product purchasesare eligible for additional incentive programs including automobile allowances,sales convention privileges, and travel.

 

**Sourceand Availability of Raw Materials**

 

Raw materials usedin the manufacture of our products are generally available from a number ofsuppliers. To date, we have not experienced any major difficulty in obtainingadequate sources of supply. We attempt to ensure the availability of many ofour raw materials by contracting, in advance, for our annual requirements. Inthe past, we have found alternative sources of raw materials when needed.Although there can be no assurance we will be successful in locating suchsources in the future, we believe we will be able to do so.

 

**Trademarksand Trade Names**

 

We have obtainedtrademark registrations of our basic trademark, “Nature’s Sunshine”, and thelandscape logo for all of our Nature’s Sunshine product lines. We have alsoobtained trademark registrations for “Synergy” for all of our Synergy productlines. We hold trademark registrations in the United States and in many othercountries. Our customers’ recognition and association of our brands andtrademarks with quality is an important element of our operating strategy.

 

**Seasonality**

 

Our business doesnot reflect significant seasonality.

 

**Inventories**

 

In order toprovide a high level of product availability to our independent Distributorsand Managers, we maintain a considerable inventory of raw materials in theUnited States and of finished goods in every country in which we sell ourproducts. Due to different regulatory requirements across the countries inwhich we sell our products, our finished goods inventories reflect product labelsand sometimes product formulations specific for each country. Our inventoriesare subject to obsolescence due to finite shelf lives.

 

**DependenceUpon Customers**

 

We are notdependent upon a single customer or a few customers, the loss of which webelieve would have a material adverse effect on our business.

 

**Backlog**

 

We typically shiporders for our products within 24 hours after receipt. As a result, we have nothistorically experienced significant backlogs.

 

**Competition**

 

Our products aresold in competition with other companies, some of which have greater salesvolumes and financial resources than we do, and which sell brands that are,through advertising and promotions, better known to consumers. We compete inthe nutritional and personal care industry against companies which sell throughretail stores as well as against other direct selling companies. For example,we compete against manufacturers and retailers of nutritional and personal careproducts, which are distributed through supermarkets, drug stores, health foodstores, discount stores, etc. In addition to competition with thesemanufacturers and retailers, we compete for product sales and independentDistributors with many other direct sales companies, including Herbalife,Pharmanex (NuSkin), USANA, Shaklee, Mannatech and Amway. The principalcompetitors in the retail encapsulated and tableted herbal products marketinclude Nature’s Way, NOW, Rexall Sundown, and Nutraceuticals**.**We believe that the principal components of competition inthe direct sales marketing of nutritional and personal care products arequality, price, and brand recognition. In addition, the recruitment, training,travel, and financial incentives for the independent sales force are importantfactors.

 

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**Researchand Development**

 

We conductresearch and development activities at our manufacturing facility located inSpanish Fork, Utah. Our principal emphasis in our research and developmentactivities is the development of new products and the enhancement of existingproducts. The amount, excluding capital expenditures, spent on research anddevelopment activities was approximately $1.9 million, $1.8 million, and $1.7million in 2006, 2005, and 2004, respectively. During the three years in theperiod ended December 31, 2006, we did not contract for any third-partyresearch and development.

 

**Compliancewith Environmental Laws and Regulations**

 

The nature of ourbusiness has not required any material capital expenditures to comply withfederal, state, or local provisions enacted or adopted regulating the dischargeof materials into the environment. No material expenditures to meet suchprovisions are anticipated. Such regulatory provisions have not had anymaterial effect upon our results of operations or competitive position.

 

**Regulation**

 

The formulation,manufacturing, packaging, labeling, advertising, distribution and sale of eachof our major product groups are subject to regulation by one or moregovernmental agencies. The most active of these is the Food and DrugAdministration (“FDA”), which regulates our products under the Federal Food,Drug and Cosmetic Act (“FDCA”) and regulations promulgated thereunder. The FDCAdefines the terms “food” and “dietary supplement” and sets forth variousconditions that unless complied with may constitute adulteration or misbrandingof such products. The FDCA has been amended several times with respect to dietarysupplements, most recently by the Nutrition Labeling and Education Act of 1990(the “NLEA”) and the Dietary Supplement Health and Education Act of 1994 (the “DSHEA”).

 

FDA regulationsrelating specifically to foods and dietary supplements for human use are setforth in Title 21 of the Code of Federal Regulations. These regulations includebasic labeling requirements for both foods and dietary supplements.Additionally, Good Manufacturing Practices (“GMPs”) exist for both foods anddietary supplements. The GMPs for dietary supplements became effective August 27,2007 with a phase-in compliance date of June 2008 for companies with morethan 500 employees.

 

Our products arealso regulated by the Federal Trade Commission (“FTC”), the Consumer ProductSafety Commission (“CPSC”), the United States Department of Agriculture (“USDA”),and the Environmental Protection Agency (“EPA”). Our activities, including ourmulti-level distribution activities, are also regulated by various agencies ofthe states, localities, and foreign countries in which our products are sold.

 

**Employees**

 

The number ofindividuals we employed as of June 30, 2008 was 1,177. We believe that ourrelations with our employees are satisfactory.

 

**InternationalOperations**

 

A significantportion of our net sales are concentrated within the United States, whichrepresents 43.4 percent of net sales in 2006. Outside of the United States,Japan continues to be our largest market, representing 14.4 percent of netsales during 2006. As we continue to expand internationally, our operatingresults will likely become more sensitive to economic and political conditionsin foreign markets, as well as to foreign currency fluctuations.

 

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| **Year Ended December 31,** | ** ** | **2006**    | ** **  | ** ** | ** ** | **2005** | ** ** | ** ** | ** ** | **2004** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-------------|-------------|------------|------------|----------|------------|------------|------------|----------|------------|------------|------------|
| Sales Revenue:                             |       |        |        |       |       |     |       |       |       |     |       |       |       |
| United States                              | ** ** | **$**       | **157,132** | ** ** | **43.4**   | **%**    | $          | 158,052    |       | 44.9     | %          | $          | 192,605    |   | 59.2 | % |
| Foreign                                    |       |        |        |       |       |     |       |       |       |     |       |       |       |
| Japan                                      | ** ** | **52,301**  | ** **  | **14.4**   |       | 55,540   |       | 15.8       |       | 15,544   |       | 4.8        |       |
| Russia                                     | ** ** | **28,394**  | ** **  | **7.8**    |       | 23,710   |       | 6.8        |       | 19,222   |       | 5.9        |       |
| Other                                      | ** ** | **124,395** | ** **  | **34.4**   |       | 114,382  |       | 32.5       |       | 97,953   |       | 30.1       |       |
| Total Foreign                              | ** ** | **205,090** | ** **  | **56.6**   |       | 193,632  |       | 55.1       |       | 132,719  |       | 40.8       |       |
| ** **                                 | ** ** | **$**       | **362,222** | ** ** | **100.0**  | **%**    | $          | 351,684    |       | 100.0    | %          | $          | 325,324    |   | 100.0 | % |

 

Our sales ofnutritional and personal care products are established internationally inJapan, Mexico, Central America, Canada, Venezuela, South Korea, DominicanRepublic, Ecuador, the United Kingdom, Colombia, Thailand, Peru, Singapore,Israel, Brazil, Taiwan, Malaysia, Indonesia, Philippines, Hong Kong, China,Poland, Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia, Belarus,Germany, the Netherlands, Austria, and Australia. We also export our productsto numerous other countries, including Argentina, Chile, New Zealand, andNorway.

 

Our internationaloperations are conducted in a manner we believe is comparable with thoseconducted in the United States; however, in order to conform to localvariations, economic realities, market customs, consumer habits, and regulatoryenvironments, differences may exist in the products and in the distribution andmarketing programs.

 

Our internationaloperations are subject to many of the same risks faced by our United Statesoperations, including competition and the strength of the local economy. Inaddition, our international operations are subject to certain risks inherent incarrying on business abroad, including foreign regulatory restrictions, fluctuationsin monetary exchange rates, import-export controls and the economic andpolitical policies of foreign governments. The significance of these risksincreases as our international operations continue to expand. A significantportion of our long-lived assets are located in the United States, Mexico andVenezuela.

 

## **Item 1A. Risk Factors**

## ** **

*Youshould carefully consider the following risks in evaluating our Company and ourbusiness. In addition, you should keep in mind that the risks described beloware not the only risks that we face. The risks described below are the risksthat we currently believe are material to our business. However, additionalrisks not presently known to us, or risks that we currently believe are notmaterial, may also impair our business operations. You should also refer to theother information set forth in this report, including the information set forthin “Business” and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” as well as our consolidated financial statements andthe related notes. Our business prospects, financial condition, or results ofoperations could be adversely affected by any of the following risks. If we areadversely affected by such risks, then the trading price of our common stockcould decline.*

 

**Risk Factors Related to Delayed Financial Reporting**

 

***The delay in reporting our financial statements and relatedevents has had, and will continue to have, a material adverse effect on us.***

 

Because of the delay in completing our financial statements for theyears ended December 31, 2007, 2006, and 2005, and our restatement ofprior period financial statements, we have been unable to timely file ourrequired periodic reports with the SEC. This report is being filed after it wasdue. We have not filed any Quarterly Reports on Form 10-Q since November 2005,we were not able to timely file our Annual Report on Form 10-K for theyear ended December 31, 2007 or our Quarterly Reports on Form 10-Qfor the quarters ended March 31, 2008, and June 30, 2008. As a resultof these events, we have become subject to significant risks and occurrencesrelating to the following matters, which are described in more detail below:

 

•                  Revocation of our registration under the ExchangeAct;

•                  Limitations on access to public capitalmarkets;

 

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•                  Inability of our common stock to trade on arecognized exchange and potential inability to re-list on a recognizedexchange;

•                  Inability of registered broker-dealers toeffect trades in our outstanding stock;

•                  Impact of material weaknesses in internalcontrol over financial reporting;

•                  Potential changes in tax liabilities; and

•                  Outcome of civil litigation.

 

***We cannot register securities for a public offering oracquisitions until we are current in our financial reporting with the SEC. Wealso will be unable to repurchase our common stock until we are current in ourfinancial reporting with the SEC.***

 

United States securities laws require that we supply current annual andquarterly financial statements in order for us to be able to registersecurities for a public offering or an acquisition. Our ability to registersecurities for a public offering or an acquisition will depend upon retainingour registration under the Exchange Act. If we succeed in doing so, we believewe will be able to register securities for public offerings and acquisitionsafter we become current. However, we will be ineligible to use “short-form”registration that allows us to incorporate by reference our SEC reports intoour registration statements or to use shelf registration until we have filedall of our periodic reports in a timely manner for a period of twelve months.This could increase the costs of selling securities publicly and couldsignificantly delay such sales. We will also be unable to engage in othertransactions involving our common stock, including a stock repurchase, until wehave become current in our financial reporting.

 

***We have hadmaterial weaknesses in our internal controls over financial reporting.***

 

As discussed in Item 9A of this report, Controlsand Procedures, our management team for financial reporting, under thesupervision and with the participation of our chief executive officer and chieffinancial officer, conducted an evaluation of the effectiveness of the designand operation of our internal controls. As of December 31, 2006, theyconcluded that our disclosure controls and procedures and that our internalcontrol over financial reporting were not effective. Although we have made andare continuing to make improvements in our internal controls, if we areunsuccessful in our focused effort to permanently and effectively remediate theweaknesses in our internal control over financial reporting over time, it mayadversely impact our ability to report our financial condition and results ofoperations in the future accurately and in a timely manner, and may potentiallyadversely impact our reputation with stakeholders.

 

***Weare subject to ongoing investigations by the SEC and the United StatesDepartment of Justice.***

 

In March 2006,we voluntarily disclosed to the SEC certain information related to theindependent investigation by the Company’s Audit Committee. Since that time,the SEC has subpoenaed certain documents and voluntarily requested otherinformation in connection with its subsequent investigation related to theseevents. We are cooperating fully with this investigation. We cannot predictwhat impact, if any, and the materiality of such impact, if any, the conclusionof this matter may have on our financial statements.

 

In March 2006,the Company voluntarily disclosed to the United States Department of Justice (“DOJ”)certain information related to the independent investigation by the Company’sAudit Committee. Since that time, the DOJ has requested that the Companyvoluntarily provide documents and other information in connection with itssubsequent investigation related to these events. The Company is cooperatingfully with this investigation. The Company cannot predict what impact, if any,and the materiality of such impact, if any, the conclusion of this matter mayhave on our financial statements.

 

***Taxingauthorities may determine that we owe additional taxes from previous years.***

 

As a result of therestatement and delay in our financial reporting, we will likely have to amendpreviously filed tax returns and reports. Where legal, regulatory oradministrative rules require or allow us to amend our previous taxfilings, we intend to comply with our obligations under applicable law. To theextent that tax authorities do not accept our conclusions about the tax effectsof the restatement, liabilities for taxes could differ from those which havebeen recorded in our consolidated financial statements. If it is determinedthat we have additional tax liabilities, there could be an adverse effect onour financial condition, results of operations and cash flows.

 

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In early 2006, theInternal Revenue Service began an audit of the Company’s income tax returns.This audit is ongoing and covers income tax returns for the years 2003 through2005. We cannot predict what impact, if any, and the materiality of suchimpact, if any, the conclusion of these matters may have on our financialstatements.

 

***Litigationarising in connection with our internal investigation and the restatement ofour financial statements could adversely affect our financial condition oroperations.***

 

As of June 30,2008, we had one securities class action lawsuit pending against us, formermembers of our Board of Directors and present and former members of managementthat relate to the internal investigation and the restatement of our financialstatements. The lawsuit and other legal matters in which we have becomeinvolved following the announcement of the restatement are described in Item 3,“Legal Proceedings.”  The securitiesclass action lawsuit is currently in the early stages of discovery. The courtgranted in part the plaintiffs’ motion to certify the class on September 25,2008. The trial is not scheduled to commence until April 19, 2010. We arenot able to predict the outcome of the litigation; however, if we areunsuccessful in our efforts to defend against the allegations raised in thelitigation, our business and financial condition would likely be negativelyimpacted. Among other consequences of a negative outcome of the litigation, wecould become obligated to pay damages in an amount, which would adverselyaffect our financial condition or our operations.

 

In addition to thepossibility that we could become subject to damages resulting from the lawsuitdescribed above, the lawsuit and other legal matters could have a disruptiveeffect upon the operation of our business and consume the time and attention ofour senior management. In addition, we are likely to incur substantial expensesin connection with such matters, including substantial fees for attorneys.

 

We maintaininsurance that may provide coverage for the potential consequences of anegative outcome of the litigation described above. We have given notice to ourinsurers of the claims. The insurers have responded by requesting additionalinformation and by reserving their rights under the policies, including therights to deny coverage under various policy exclusions or to rescind thepolicies in question as a result of our restatement of our financialstatements. There can be no assurance that the insurers will not seek to denycoverage or rescind the policies; that some or all of the claims will not becovered by such policies; or that, even if covered, our ultimate liability willexceed the available insurance.

 

***Thematters relating to the internal investigation by our Audit Committee and therestatement of our consolidated financial statements have required us to incursubstantial expenses.***

 

As described in theExplanatory Note immediately preceding Part I, Item 1, in this Form 10-K,our Audit Committee conducted an internal investigation, which initiallyfocused on certain of our foreign operations, but subsequently expanded toinclude other matters related to our financial statements and financialreporting. The internal investigation and related activities have required usto incur substantial expenses for legal, accounting, tax and other professionalservices, and has diverted management’s attention from our business.

 

**Risk Factors Related to Our Business**

 

***Changes in laws and regulations regarding network marketingmay prohibit or restrict our ability to sell our products in some markets.***

 

Network marketing systems are frequently subject to laws and regulationsby various government agencies throughout the world. These laws and regulationsare generally intended to prevent fraudulent or deceptive practices and ensurethat sales are made to consumers of the products and that compensation,recognition, and advancement within the marketing organization are based uponsales of the product. Failure to comply with these laws and regulations couldresult in significant penalties. Violations could result from misconduct by anassociate, ambiguity in statutes, changes or new laws and regulations affectingour business, and court related decisions. Furthermore, we may be restricted orprohibited from using network marketing plans in some foreign countries.

 

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***Our products and manufacturing activities are subject toextensive government regulations and could be subject to additional laws and regulations.***

 

The formulation,manufacturing, packaging, labeling, advertising, distribution and sales of eachof our major product groups are subject to regulation by numerous, domestic and foreign governmental agencies andauthorities. These include the FDA, the FTC, the CPSC, the USDA, and otherstate regulatory agencies as well as regulatory agencies in the foreign marketsin which we operate. The markets in which we operate have varied regulationswhich often require us to reformulate products for specific markets, conformproduct labeling to market regulations, and register or qualify products orobtain necessary approvals with the applicable governmental authorities inorder to market our products in these markets. Failure to comply with theregulatory requirements of these various governmental agencies and authoritiescould result in enforcement actions including: cease and desist orders,injunctions, limits on advertising, consumer redress, divestitures of assets,rescission of contracts, or such other relief as may be deemed necessary. Violationof these orders could result in substantial financial or other penalties. Anyaction against us could materially affect our ability to successfully marketour products.

 

In the future, wemay be subject to additional laws or regulations administered by the FDA orother federal, state, local, or foreign regulatory authorities, the repeal oramendment of laws or regulations which we consider favorable and/or morestringent interpretations of current laws or regulations. We can neitherpredict the nature of such future laws, regulations, interpretations, orapplications, nor what effect additional governmental regulations oradministrative orders, when and if promulgated, would have on our business.They could, however, require reformulation of certain products to meet newstandards, recall or discontinuance of certain products not able to bereformulated, imposition of additional record-keeping requirements, expandeddocumentation of the properties of certain products, expanded or alteredlabeling and/or scientific substantiation. Any or all such requirements couldhave a material negative impact on our financial position, results ofoperations, and liquidity.

 

***If we are unable to attract and retain independentDistributors, our business could suffer.***

 

We rely on our independent Distributors to market and sell our productsthrough direct marketing techniques, as well as sponsoring other Distributors.Many Distributors sell our product on a part-time basis to friends orassociates or use the products for themselves. Our Distributors may terminatetheir service at any time, and, like most direct selling companies, weexperience high turnover among Distributors from year to year. As a result, weneed to continue to retain existing Distributors and recruit additionalDistributors in order to maintain and/or increase sales in the future.

 

Several factors affect our ability to attract and retain independentDistributors, including:

 

•                 any adverse publicity regarding us, ourproducts, our distribution channels or our competitors;

 

•                 on-going motivation of our independentDistributors;

 

•                 public’s perceptions about the value andefficacy of our products;

 

•                 public’s perceptions and acceptance ofnetwork-marketing;

 

•                 general and economic business conditions;

 

•                 changes to our compensation arrangementswith our independent Distributors; and

 

•                 competition in recruiting and retainingindependent Distributors and or market saturation.

 

We cannot provide any assurance that our independent Distributors willcontinue to maintain their current levels of productivity or that we will beable to continue to attract and retain Distributors in sufficient numbers tosustain future growth or to maintain present growth levels.

 

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***An economic slowdown in the markets in which we do businesscould reduce consumer demand for our products.***

 

Consumerspending habits, including spending for our products, are affected by, amongother things, prevailing economic conditions, levels of employment, fuelprices, salaries and wages, the availability of consumer credit, consumerconfidence and consumer perception of economic conditions. A general economicslowdown in the markets in which we do business and an uncertain economicoutlook may adversely affect consumer spending habits and customer traffic,which may result in lower net sales. A prolonged global economic downturn couldhave a material negative impact on our financial position, results ofoperation, and liquidity.

 

***Currency exchange rate fluctuations could lower our revenueand net income.***

 

In 2006, we recognized approximately 57 percent of our revenue inmarkets outside the United States in each market’s respective local currency.We purchase inventory primarily in the United States in U.S. dollars. Inpreparing our financial statements, we translate revenues and expenses inforeign countries from their local currencies into U.S. dollars using weighted-averageexchange rates. Because a significant portion of our sales is in foreigncountries, exchange rate fluctuations may have a significant effect on oursales and earnings. Our reported net earnings may be significantly affected byfluctuations in currency exchange rates, with earnings generally increasingwith a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Asoperations expand in countries where foreign currency transactions may be made,our operating results will increasingly be subject to the risks of exchangerate fluctuations and we may not be able to accurately estimate the impact thatthese changes may have on our future results of operations or financialcondition.

 

***Availability and integrity of raw materials could become compromised.***

 

We depend on outside suppliers for raw materials. We acquire all of ourraw materials for the manufacture of our products from third-party suppliers.We have some agreements for the supply of materials used in the manufacture ofour products. We also contract with third-party manufacturers and suppliers forthe production of some of our product**s.**In the eventwe were to lose any significant suppliers and experience any difficulties infinding or transitioning to alternative suppliers, it could result in productshortages or product back orders, which could harm our business. There can beno assurance that suppliers will be able to provide us the raw materials in thequantities we request or at a price we are willing to pay. We are also subjectto the delays caused by any interruption in the production of these materialsincluding weather, crop conditions, transportation interruptions, and naturaldisasters or other catastrophic events.

 

Occasionally, our suppliers have experienced production difficultieswith respect to our products, including the delivery of materials or productsthat do not meet our quality control standards. These quality problems have inthe past resulted in, and in the future could result in, stock outages orshortages of our products, and could harm our sales and create inventorywrite-offs for unusable product.

 

***Geopolitical issues and conflicts could adversely affect ourbusiness.***

 

Because a substantial portion of our business is conducted outside ofthe United States, our business is subject to global political issues andconflicts. If these conflicts or issues escalate, it could harm our foreignoperations. In addition, changes and actions by governments in foreign marketscould harm our business.

 

***Our business is subject to the effects of adverse publicityand negative public perception.***

 

Our ability to attract and retain Distributors, as well as theirability to maintain or grow sales in the future can be affected by eitheradverse publicity or negative public perception in regards to our industry, ourcompetition, our direct marketing model, the quality or efficacy of nutritionalproduct supplements and ingredients, and our business generally. There can beno assurance we will not be subject to adverse publicity or negative publicperception in the future or that it would not have an adverse or materialnegative impact on our financial position, results of operations, andliquidity.

 

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***Taxation and transfer pricing affect our operations.***

 

As a U.S. company doing business in many internationalmarkets, we are subject to foreign tax and intercompany pricing laws, includingthose relating to the flow of funds between our Company and our subsidiaries.These pricing laws are designed to ensure that appropriate levels of income anddeductions are reported by our U.S. and foreign entities and that they aretaxed appropriately. Regulators in the United States and in foreign marketsclosely monitor our corporate structures, intercompany transactions, and how weeffectuate intercompany fund transfers. If regulators challenge our corporatestructures, transfer pricing methodologies or intercompany transfers, ouroperations may be harmed, and our effective tax rate may increase. We areeligible to receive foreign tax credits in the United States for certainforeign taxes actually paid abroad. In the event any audits or assessments areconcluded adversely to us, we may not be able to offset the consolidated effectof foreign income tax assessments through the use of U.S. foreign tax credits.Because the laws and regulations governing U.S. foreign tax credits are complexand subject to periodic legislative amendment, we cannot be sure that we wouldin fact be able to take advantage of any foreign tax credits in the future. Thevarious customs, exchange control and transfer pricing laws are continuallychanging and are subject to the interpretation of governmental agencies.

 

We collect and remit sales tax in states in which wehave determined that nexus exists, which results in the collection of salestax. Other states may, from time to time, claim we have state-relatedactivities constituting a sufficient nexus to require such collection. Asuccessful assertion by one or more states that we should collect sales tax onthe sale of merchandise could result in substantial tax liabilities related topast sales.

 

Despite our best efforts to be aware of and complywith such laws and changes to the interpretations thereof, there is a risk thatwe may not continue to operate in compliance with such laws. We may need toadjust our operating procedures in response to these changes, and such changescould have a material negative impact on our financial position, results ofoperation, and liquidity.

 

***Our business is subject to intellectual property risks.***

 

Most of our products are not protected by patents. Restrictiveregulations governing the precise labeling of ingredients and percentages fornutritional supplements, the large number of manufacturers who produce productswith many active ingredients in common, and the rapid change and frequentreformulation of products make patent protection impractical. As a result weenter into confidentiality agreements with certain of our employees in ourresearch and development activities, our independent associates, suppliers,directors, officers, and consultants to help protect our intellectual property,investment in research and development activities and trade secrets. We havealso obtained trademarks for the Natures Sunshine Products name and logo aswell as the Synergy Worldwide name. There can be no assurance that our effortsto protect our intellectual property and trademarks will be successful. Nor canthere be any assurance that third-parties will not assert claims against us forinfringement of intellectual property rights, which could result in ourbusiness being required to obtain licenses for such rights, payment ofroyalties, or the termination of our manufacturing of infringing products, allof which could have a material negative impact on our financial position,results of operations, and liquidity.

 

***Product liability claims could harm our business.***

 

As a manufacturer and distributor of products that are ingested, weface an inherent risk of exposure to product liability claims in the eventthat, among other things, the use of our products results in injury toconsumers due to tampering by unauthorized third parties or productcontamination. We have historically had a very limited number of product claimsor reports from individuals who have asserted that they have suffered adverseconsequences as a result of using our products. These matters have historicallybeen settled to our satisfaction and have not resulted in material payments. Wehave established a wholly owned captive insurance company to provide us withproduct liability insurance coverage and have accrued an amount that we believeis sufficient to cover probable and reasonable estimable liabilities related toproduct liability claims based upon our history. There can be no assurance thatthese estimates will prove to be sufficient nor can there be any assurance thatthe ultimate outcome of any litigation for product liability will not have amaterial negative impact on our business prospects, financial position, resultsof operations, and liquidity.

 

***Inventory obsolescence due to finite shelf lives couldadversely affect our business.***

 

In order to provide a high level of product availability to ourindependent Distributors and Managers, we maintain a considerable inventory ofraw materials in the United States and of finished goods in every country inwhich we sell our products. Our inventories of both raw materials and finishedgoods have finite shelf lives. If we overestimate the demand for our products,we could experience significant write-downs on our inventory due toobsolescence. Such write-downs could have a material negative impact on ourfinancial position, results of operations, and liquidity.

 

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***System failures could harm our business.***

 

Like many companies, our business is highly dependent upon ourinformation technology infrastructure to effectively and efficiently manage ouroperations, including order entry, customer billing, accurately trackingpurchases and volume incentives, managing accounting, finance, andmanufacturing operations. The occurrences of natural disasters or otherunanticipated problems could result in interruptions in our day-to-day businessthat could adversely affect our business. We have a disaster recovery plan inplace to mitigate the risk. Nevertheless, there can be no assurance that along-term failure or impairment of any of our information systems would notadversely affect our ability to conduct our day-to-day business.

 

***TheCompany could incur obligations relating to the activities of our Distributors.***

 

Wesell our products worldwide to a sales force of independent Distributors whouse the products themselves or resell them to other Distributors or consumers.In the event that local laws and regulations or the interpretation of localslaws and regulations change and require us to treat our independentDistributors as employees, or if our Distributors are deemed by localregulatory authorities in one or more of the jurisdictions in which we operateto be our employees rather than independent contractors, under existing lawsand interpretations, we may be held responsible for a variety of obligationsthat are imposed upon employers relating to their employees, includingemployment related taxes and penalties. Our Distributors also operate injurisdictions, where local legislation and governmental agencies require us tocollect and remit taxes such as sales tax or value added taxes. In addition,there is the possibility that some jurisdictions could seek to hold the Companyresponsible for false product claims or the negligent actions of an independentDistributor. If the Company were found to be responsible for any of theseissues related to our Distributors, it could have a material negative impact onour financial position, results of operations, and liquidity.

 

***Changesin key management.***

 

We believe oursuccess depends in part on our ability to retain our executive officers, and tocontinue to attract additional qualified individuals to our team. We cannotguarantee the continued service by our key officers. The loss or limitation ofany of our executive officers or the inability to attract additional qualifiedmanagement personnel could have a material negative impact on our financialposition, results of operations, and liquidity.

 

***Ourbusiness is involved in a market with intense competition.***

 

Our businessoperates in a market with numerous manufacturers, distributors, and retailersof nutritional products. The market for our products is intensely competitive.Many of our competitors are significantly larger, have greater financialresources, and better name recognition than we do. We also rely on ourindependent Distributors to market and sell our products through directmarketing techniques, as well as sponsoring other Distributors. Our ability tocompete with other direct marketing companies depends greatly on our ability inattracting and retaining our Distributors. In addition, we currently do nothave significant patent or other proprietary protection, and our competitors mayintroduce products with the same or similar ingredients that we use in ourproducts. As a result, we may have difficulty differentiating our products fromour competitors’ products, and competing products entering the nutritionalmarket. There can be no assurance that our future operations would not beharmed as a result of changing market conditions and future competition.

 

## **Item 1B. UnresolvedStaff Comments**

## ** **

On March 23,2006, we received a letter from the Division of Corporation Finance of the SECrequesting more information on the nature of the internal control weaknessesand potential violations of law disclosed in our Current Report on Form 8-K,filed on March 20, 2006, as well as the potential impact on our financialstatements. These staff comments are not yet resolved, but we have responded tothese staff comments with a letter to be filed concurrently with this Report.

 

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## **Item 2. Properties**

## ** **

Our corporateoffices are located in two adjacent office buildings in Provo, Utah. Thefacilities consist of approximately 63,000 square feet and are leased from anunaffiliated third party through lease agreements, which expire in as early asthree years but are renewable upon expiration.

 

Our principalwarehousing and manufacturing facilities are housed in a building consisting ofapproximately 270,000 square feet owned by us and located on approximately tenacres in Spanish Fork, Utah. These facilities support all of our businesssegments.

 

Weown approximately 60,000 square feet of office and warehouse space in Mexicoand approximately 13,000 square feet of office and warehouse space inVenezuela. These facilities support our Nature’s Sunshine Productsinternational segment.

 

Wealso own approximately 53 acres of undeveloped land in Springville, Utah andapproximately 8 acres of undeveloped land in Provo, Utah.

 

We leaseproperties used primarily as distribution warehouses located in Columbus, Ohio;Dallas, Texas; Atlanta, Georgia; and Spanish Fork, Utah; as well as offices anddistribution warehouses in Pleasant Grove, Utah, Japan, Mexico, CentralAmerica, Canada, Venezuela, South Korea, the Dominican Republic, Ecuador, theUnited Kingdom, Colombia, Thailand, Peru, Singapore, Israel, Brazil, Taiwan,and Australia. We believe these facilities are suitable for their respectiveuses and are, in general, adequate for our present and near-term future needs.During 2006, 2005, and 2004, we spent approximately $5.3 million, $3.7 million,and $4.6 million, respectively, for all of our leased facilities.

 

## **Item 3. LegalProceedings**

## ** **

**Class ActionLitigation**

 

Between April 3,2006 and June 2, 2006, five separate shareholder class action lawsuitswere filed against the Company and certain of our present and former officersand directors in the United States District Court for the District of Utah.These matters were consolidated and on November 3, 2006, the plaintiffsfiled a Consolidated Complaint against the Company, our Chief Executive Officerand former director, Douglas Faggioli, our former Chief Financial Officer,Craig D. Huff, and a former director and former Chair of our Audit Committee,Franz L. Cristiani. The Consolidated Complaint asserts three separate claims onbehalf of purchasers of our common stock: (1) a claim against Mr. Faggioliand the Company for violation of Section 10(b) of the Exchange Actand Rule 10b-5 promulgated thereunder, alleging that Mr. Faggiolimade a series of alleged material misrepresentations to the investing public; (2) aclaim against Mr. Faggioli and the Company for violation of Section 10(b) andRule 10b-5, alleging that Mr. Faggioli made a series ofmisrepresentations to the Company’s then independent auditor, KPMG, LLP, forthe purpose of obtaining unqualified or “clean” audit opinions and reviewopinions from KPMG concerning certain of our annual and quarterly financialstatements; and (3) a claim against Messrs. Faggioli, Huff andCristiani for violation of Section 20(a) of the Exchange Act,alleging that the individual defendants have “control person” liability for thepreviously-alleged violations by the Company. The Consolidated Complaint seeksan unspecified amount of compensatory damages, together with interest thereon,litigation costs and expenses, including attorneys’ fees and expert fees, andany such other and further relief as may be allowed by law.

 

On January 5,2007, the Company and Messrs. Faggioli, Huff and Cristiani moved to dismissthe Consolidated Complaint in its entirety. On May 21, 2007, the courtissued its decision denying the motion in large part, but shortening theproposed class period on one of the Plaintiffs’ claims. On June 6, 2007,the Company and the other defendants answered the Consolidated Complaint,wherein they denied all allegations of wrongdoing and raised a number ofaffirmative defenses. On November 1, 2007, the Plaintiffs filed theirmotion for class certification, which the Company opposed. On September 25,2008, the court granted the Plaintiffs’ motion for class certification in part,establishing the class as all persons who purchased or otherwise acquired theCompany’s common stock, and were damaged thereby, from March 16, 2005 to March 20,2006. On May 9, 2008, at the invitation of the Court based upon recentcase law developments, the Company filed a motion to dismiss the Plaintiffs’second cause of action (a 10b-5 claim based on 

 

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non-publicrepresentations to KPMG). The Plaintiffs opposed this motion. On September 23,2008, the Court granted the Company’s motion and dismissed the Plaintiffs’second cause of action.

 

The case iscurrently in the early stages of discovery. The trial is not scheduled tocommence until April 19, 2010. Although we and the other defendants arevigorously defending against the allegations in the lawsuit, and we intend tocontinue doing so, we are unable to predict the outcome of this litigation orwhether the Company will incur any liability associated to the litigation, orto estimate the effect such outcome would have on the financial condition ofthe Company.

 

**ThreatenedDerivative Lawsuits**

 

By letter dated October 4,2007, a shareholder of the Company alleged that a number of the current andformer officers and directors of the Company breached their fiduciary duties tothe Company by supposedly engaging in the same alleged wrongdoing that is thesubject of the class action lawsuit. The shareholder demanded that the Companytake action to recover from the specified officers and directors all damagessustained by the Company as a result of the alleged misconduct, and threatenedto commence a derivative action if the Company failed to act on the shareholder’sdemand within a reasonable period of time.

 

On December 26,2007, before the expiration of the Company’s allotted 90-day period forresponding to the demand, the shareholder presented a second but substantivelyidentical demand on the Company, thereby triggering a new 90-day responseperiod. The Company’s Board of Directors responded to this demand on March 20,2008, rejecting the shareholder’s demands.

 

On May 21,2008, this same shareholder filed a summons and complaint in the FourthJudicial District Court for the State of Utah seeking an order compelling theCompany to produce certain books and records to the shareholder. The Companyfiled its answer to the complaint on June 12, 2008.

 

Although theCompany and the other defendants are vigorously defending against theallegations in the threatened derivative lawsuit above, it is not possible atthis time to predict the outcome of this litigation or whether the Company willincur any liability associated to the litigation, or to estimate the effectsuch outcome would have on the financial condition of the Company.

 

**SEC andDOJ Investigations**

 

In March 2006,we voluntarily disclosed to the SEC certain information related to the independentinvestigation by the Company’s Audit Committee. Since that time, the SEC hassubpoenaed certain documents and voluntarily requested other information inconnection with its subsequent investigation related to these events. We arecooperating fully with this investigation. We cannot predict what impact, ifany, and the materiality of such impact, if any, the conclusion of this mattermay have on our financial statements.

 

In March 2006,the Company voluntarily disclosed to the United States Department of Justice (“DOJ”)certain information related to the independent investigation by the Company’sAudit Committee. Since that time, the DOJ has requested that the Companyvoluntarily provide documents and other information in connection with itssubsequent investigation related to these events. The Company is cooperatingfully with this investigation. The Company cannot predict what impact, if any,and the materiality of such impact, if any, the conclusion of this matter mayhave on our financial statements.

 

**SEC Section 12(j) Proceeding**

 

On July 12,2007, we announced that the SEC had instituted administrative proceedingspursuant to Section 12(j) of the Exchange Act to suspend or revokethe registration of our common stock. On November 8, 2007, an administrativelaw judge in the administrative proceeding issued an Initial Decision to revokethe registration of the Company’s common stock. Shortly thereafter, we filed apetition for review with the SEC. On December 5, 2007, the SEC granted ourpetition for review. The SEC had scheduled oral argument regarding theCompany’s petition on October 1, 2008. The SEC has now rescheduled the oralargument for an unspecified future date.  We cannot predict the outcome of such reviewat this time. The Initial Decision of the administrative law judge will not becomeeffective pending the review. We cannot presently predict what, if any, impactthe SEC’s ultimate determination may have on our financial statements or themateriality of such impact, if any. If a final order is issued by the SECrevoking the registration of our common stock, broker-dealers would not bepermitted to effect transactions in shares of our common stock until we file anew registration with the SEC under the Exchange Act and that registration ismade effective.

 

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**Employee-RelatedLitigation**

 

One of the Company’sforeign subsidiaries is a defendant in litigation regarding primarilyemployee-related matters. The Company has recorded accruals of approximately$0.8 million related to this litigation, which is included in accruedliabilities.

 

## **Item 4. Submission ofMatters to a Vote of Security Holders**

## ** **

None.

 

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**PART II**

 

## **Item 5. Market for Registrant’s Common Equity,Related Shareholder Matters and Issuer Purchases of Equity Securities**

 

**Market and Share Prices**

 

Ourcommon stock was traded on the Nasdaq National Market System (symbol “NATR”)until April 5, 2006, the date that the Nasdaq Listing Qualifications Paneldetermined to delist our common stock from The Nasdaq National Market. Ourstock is currently traded on the Pink Sheets(symbol NATR.PK). The information in the table below reflects the actual highand low sales prices of our stock from January 1, 2006 through April 4,2006 and the high and low bid information from April 5, 2006 through December 31,2007.

 
| ** **     | ** ** | **Market Prices** | ** ** |
|----------------|------------|------------------------|------------|
| **2007**       | ** ** | **Best Ask**      | ** ** | **Best Bid** | ** ** |
| First Quarter  |       | $                      | 12.60      |   | $ | 11.45 |   |
| Second Quarter |       | 12.35                  |       | 10.20 |   |
| Third Quarter  |       | 14.45                  |       | 11.50 |   |
| Fourth Quarter |       | 12.50                  |       | 8.10 |   |
|                |            |                        |            |  |  |  |  |

 
| ** **                                 | ** ** | **Market Prices** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| **2006**                                   | ** ** | **High/Best  Ask**     | ** ** | **Low/Best  Bid** | ** ** |
| First Quarter                              |       | $                      | 18.88      |   | $ | 10.23 |   |
| Second Quarter  through April 4, 2006 |       | 12.64                  |       | 7.83 |   |
| Second Quarter  from April 5, 2006    |       | 12.00                  |       | 8.46 |   |
| Third Quarter                              |       | 12.25                  |       | 8.15 |   |
| Fourth Quarter                             |       | 12.00                  |       | 9.91 |   |
|                                            |            |                        |            |  |  |  |  |

 

ThePink Sheets quotations (provided for time periods after April 4, 2006)reflect inter-dealer prices, without retail mark-up, mark-down or commissionand may not necessarily represent actual transactions.

 

**Recent Sales of Unregistered Securities**

 

SinceOctober 1, 2005, we have issued and sold the following unregisteredsecurities:

 

OnJuly 10, 2006, we issued and sold 500 shares of common stock into themarket on behalf of Karen Nichols pursuant to a net exercise of stock optionsgranted under our 1995 Stock Plan and payment to Ms. Nichols of cashproceeds in excess of the exercise price, less applicable tax withholdings. Noexemption from the registration requirements of Section 5 of theSecurities Act is claimed.

 

OnFebruary 1, 2007, we issued and sold 95,690 shares of common stock toDouglas Faggioli, our Chief Executive Officer, for cash consideration in anaggregate amount of $735,665 upon the exercise of stock options granted underour 1995 Stock Plan. This sale is exempt from the registration requirement of Section 5of the Securities Act pursuant to Section 4(2) of the Securities Act.

 

OnFebruary 2, 2007, we issued and sold 61,330 shares of common stock toEugene L. Hughes, our founder and Director, for cash consideration in anaggregate amount of $471,505 upon the exercise of stock options granted underour 1995 Stock Plan. This sale is exempt from the registration requirement of Section 5of the Securities Act pursuant to Section 4(2) of the Securities Act.

 

OnFebruary 6, 2007, we issued and sold 5,340 shares of common stock to KentHastings, our Director of Export Markets, for cash consideration in anaggregate amount of $41,054 upon the exercise of stock options granted underour 1995 Stock Plan. This sale is exempt from the registration requirement of Section 5of the Securities Act pursuant to Section 4(2) of the Securities Act.

 

On July 27, 2007, weissued and sold 500 shares of common stock to the estate of Robert Schaffer forcash consideration in an aggregate amount of $4,157 upon the exercise of stockoptions granted under our 1995 Stock Plan. This sale isexempt from the registration requirement of Section 5 of the SecuritiesAct pursuant to Section 4(2) of the Securities Act.

 

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**Dividends**

 

Therewere approximately 842 shareholders of record as of June 30, 2008. During2006 and 2005, the Company paid quarterly cash dividends of $0.05 per commonshare. The Company expects to continue to pay cash dividends in the future.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 
| **Plan category**                                          | ** ** | **Number of securities to  be issued upon exercise of   outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  issuance under equity  compensation plans  (excluding securities  reflected in column (a))** | ** **   |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|
| ** **                                                      | ** ** | **(a)**                                                                                                                                                    | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                              | ** **   |
| **Equity  compensation plans approved by security holders**     |       |                                                                                                                                                       | 142,590    |                                                                                                        |       |                                                                                                                                                                                                 | $ 12.05 |   |   |   | — |   |   |
| **Equity  compensation plans not approved by security holders** |       |                                                                                                                                                       | 140,300    |                                                                                                        |       |                                                                                                                                                                                                 | 11.85        |   |   |   | — |   |   |
| **Total**                                                       |       |                                                                                                                                                       | 282,890    |                                                                                                        |       |                                                                                                                                                                                                 | $ 11.95 |   |   |   | — |   |   |

 

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**Performance Graph**

 

The graph below depicts our common stock as an index,assuming $100.00 was invested on January 1, 2002 along with the compositeprices of companies listed in the NASDAQ and our peer group. Standard &Poor’s Investment Services has provided us with this information. Thecomparisons in the graph are required by regulations of the SEC and are notintended to forecast or be indicative of the possible future performance of ourcommon stock. The publicly-traded companies in our peer group are USANA HealthSciences, Inc., Nu Skin Enterprises, Inc., Herbalife International, Inc.,and Mannatech, Incorporated.

 

 

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**Item 6. Selected Financial Data**

***(Dollarand Share Amounts in Thousands, Except for Per Share Information)***

 

The selectedconsolidated financial data presented below is summarized from our results ofoperations for each of the three years in the period ended December 31,2006 (restated for 2004), as well as selected consolidated balance sheet dataas of December 31, 2006, 2005, 2004, and 2003. All restatement adjustmentsrelating to periods prior to January 1, 2004 have been presented asadjustments to retained earnings as of December 31, 2003. In light of thesubstantial time, effort and expense incurred since December 2006 tocomplete the restatement of our consolidated financial statements for 2004, wehave determined that extensive additional efforts would be required to restateall 2003 and 2002 financial data. In particular, turnover of relevant personneland limitations of systems and data all limit our ability to reconstructadditional financial information for 2003 and 2002. Previously published informationfor 2003 and 2002 should not be relied upon.

 

**IncomeStatement Data**

 
| ** **    | ** ** | **Net Sales  Revenue** | ** ** | **Cost of  Goods Sold** | ** **        | **Volume  Incentives** | ** ** | **Selling, General  and Administrative** | ** ** | **Operating  Income** | ** **         | **Income Before  Income Taxes** | ** ** | **Net (Loss)  Income** | ** ** |
|---------------|------------|-----------------------------|------------|-----------------------------------|-------------------|------------------------|------------|----------------------------------------------------|------------|-----------------------|--------------------|-------------------------------------------|------------|-----------------------------|------------|
| **2006**      | ** ** | **$ 362,222**          | ** ** | ** **                        | **$ 68,745** | ** **             | ** ** | **$ 145,827**                                 | ** ** | ** **            | **$ 139,645** | ** **                                | ** ** | **$ 8,005**            | ** ** | ** ** | **$ 8,629** | ** ** | ** ** | **$ (3,565** | **)** | ** ** |
| 2005          |       | 351,684                     |       |                              | 67,593            |                   |       | 144,125                                            |       |                  | 128,381            |                                      |       | 11,585                      |       |   | 11,423 |   |   | 3,504 |   |   |
| 2004          |       |                        |       |                              |              |                   |       |                                               |       |                  |               |                                      |       |                        |       |   |   |   |   |   |   |   |
| (as restated) |       | 325,324                     |       |                              | 61,263            |                   |       | 129,752                                            |       |                  | 115,299            |                                      |       | 19,010                      |       |   | 20,702 |   |   | 11,772 |   |   |

 

**BalanceSheet Data**

 
| ** **    | ** ** | **Working  Capital** | ** ** | **Current  Ratio** | ** ** | **Inventories** | ** ** | **Property, Plant and  Equipment, Net** | ** ** | **Total  Assets** | ** **        | **Long-term  Obligations** | ** ** | **Shareholders’  Equity** | ** ** |
|---------------|------------|----------------------|------------|--------------------|------------|-----------------|------------|--------------------------------------------------------|------------|-------------------|-------------------|----------------------------|------------|--------------------------------|------------|
| **2006**      | ** ** | **$ 23,968**    | ** ** | ** **         | **1.31**   | **%**           | ** ** | **$ 38,639**                                      | ** ** | ** **        | **$ 30,581** | ** **                 | ** ** | **$ 148,347**             | ** ** | ** ** | **$ 2,190** | ** ** | ** ** | **$ 68,186** | ** ** | ** ** |
| 2005          |       | 27,928               |       |               | 1.40       |            |       | 34,988                                                 |       |              | 34,075            |                       |       | 147,286                        |       |   | 2,284 |   |   | 75,407 |   |   |
| 2004          |       |                 |       |               |       |            |       |                                                   |       |              |              |                       |       |                           |       |   |   |   |   |   |   |   |
| (as restated) |       | 34,181               |       |               | 1.53       |            |       | 35,444                                                 |       |              | 35,869            |                       |       | 143,981                        |       |   | 3,491 |   |   | 75,854 |   |   |
| 2003          |       |                 |       |               |       |            |       |                                                   |       |              |              |                       |       |                           |       |   |   |   |   |   |   |   |
| (as restated) |       | 35,566               |       |               | 1.72       |            |       | 25,062                                                 |       |              | 33,358            |                       |       | 123,507                        |       |   | 3,586 |   |   | 67,970 |   |   |

 

**CommonShare Summary**

 
| ** **    | ** ** | **Cash Dividend  Per Share** | ** ** | **Basic Net (Loss)  Income Per Share** | ** **       | **Diluted Net (Loss)  Income Per Share** | ** ** | **Basic Weighted  Average Shares** | ** ** | **Diluted Weighted  Average Shares** | ** ** |
|---------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| **2006**      | ** ** | **$ 0.20**                        | ** ** | ** **                                                 | **$ (0.23** | **)**                                                        | ** ** | **$ (0.23**                             | **)**      | ** **                                     | **15,344** | ** ** | ** ** | **15,344** | ** ** | ** ** |
| 2005          |       | 0.20                                   |       |                                                       | 0.23             |                                                         |       | 0.23                                         |       |                                           | 15,211     |   |   | 15,515 |   |   |
| 2004          |       |                                   |       |                                                       |             |                                                         |       |                                         |       |                                           |       |   |   |   |   |   |
| (as restated) |       | 0.20                                   |       |                                                       | 0.79             |                                                         |       | 0.76                                         |       |                                           | 14,917     |   |   | 15,478 |   |   |

 

Other relevantnonfinancial data is presented below:

 

**OtherInformation**

 
| ** ** | ** ** | **Number of  Independent Managers** | ** ** | **Square Footage of  Property in Use** | ** ** | **Number of  Company Employees** | ** ** |
|------------|------------|-----------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------|------------|
| **2006**   | ** ** | **24,292**                                    | ** ** | **852,235**                                                | ** ** | **1,181**                                  | ** ** |
| 2005       |       | 21,309                                        |       | 816,296                                                    |       | 1,100                                      |       |
| 2004       |       | 18,374                                        |       | 921,677                                                    |       | 1,069                                      |       |
| 2003       |       | 15,151                                        |       | 806,343                                                    |       | 1,037                                      |       |
| 2002       |       | 14,000                                        |       | 863,688                                                    |       | 1,037                                      |       |

 

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## **Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

In this Annual Report on Form 10-K, we are restating ourconsolidated statement of operations, consolidated statement of changes inshareholders’ equity and comprehensive income (loss), and consolidatedstatement of cash flows for the year ended December 31, 2004. An overviewof the principal adjustments to our financial statements as a result of therestatement is set forth in Note 2 to our consolidated financial statements,set forth in Item 8 of this Report. We are also providing consolidated balancesheets, consolidated statements of operations, consolidated statements ofchanges in stockholders’ equity and comprehensive income (loss), andconsolidated statements of cash flows for the years ended December 31,2006 and December 31, 2005. The information set forth in such financialstatements for the year ended December 31, 2005 has not been previouslyfiled with the United States Securities and Exchange Commission ( the “SEC”),and reflects significant adjustments to the financial statements we filed on Form 10-Qwith the SEC for the quarterly periods ended March 31, June 30 and September 30,2005. The summary of quarterly operations for these periods included in Note 17to our consolidated financial statements, set forth in Item 8 of this report,has been restated for such adjustments. None of the information set forth insuch statements for the year ended December 31, 2006 has been previouslyfiled with the SEC. The restatement of our 2004 and 2005 financial statementsreflect changes resulting from errors identified from Management’scomprehensive review of its accounting policies, practices, and financialrecords, as well as including matters identified by the independentinvestigation. The Company used all available information in determining theimpact of adjustments identified as a result of their review. The restatementadjustments reduced previously reported net sales revenue, pre-tax income, netincome and net income per diluted share by $5.7 million, $2.2 million, $5.3million, and $0.34 per diluted share, respectively, for the year ended December 31,2004. In addition, it reduced retained earnings as of January 1, 2004 by $85.0million, of which $71.8 million was related to a correction in the Company’saccounting for the repurchase and retirement of treasury stock resulting in nochange in total shareholders’ equity.

 

As aresult of additional procedures performed by the Company, 2004 reported netsales revenues and net income were adjusted by the following:

 

·      TheCompany identified that it had inconsistently classified certain rebates,shipping and handling revenues, and other fees and expenses. Theseclassification matters reduced reported net sales revenue by $1.6 million and acorresponding reduction in operating expenses and other income, with no impacton reported net income;

 

·      TheCompany reevaluated the timing of revenue recognition of customer orders anddetermined that title passed to the customer upon delivery, while the Companyhad previously recorded revenue upon shipment. The Company also had identifiedcertain errors related to membership fees, and customer deposits. Theseadjustments related to the timing and recognition of certain revenues reducedreported net sales revenue by $1.0 million and reported pre-tax income by $0.9million;

 

·      Thetrue-up of accounting records for differences between the accounting records ofcertain foreign subsidiaries and the consolidated financial statements reducedreported net sales revenue by $2.7 million and reported pre-tax income by $0.9million;

 

·      Othermatters that arose in the course of completing additional procedures related tothe year ended December 31, 2004, reduced reported net sales revenues by$0.4 million and reduced reported pre-tax income by $0.4 million;

 

·      Adjustmentsrelated to a comprehensive review of the Company’s positions on tax mattersreduced reported net income by $3.1 million, primarily as a result of increasedtax reserves in certain countries and their effect on the Company’s taxprovision and the tax effect of the pre-tax restatement adjustments discussedabove.

 

The nature and impact ofthese adjustments are described in greater detail in Footnotes 2 and 17 of Item8 of this Form 10-K.

 

The followingdiscussion highlights the principal factors that have affected our financialcondition, results of operations, liquidity and capital resources for theperiods described. This discussion should be read in conjunction with ourConsolidated Financial Statements and the related notes in Item 8 of this Form 10-K.This discussion contains forward-looking statements. Please see “CautionaryStatements Regarding Forward-Looking Statements” for the risks, uncertaintiesand assumptions associated with these forward-looking statements.

 

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**OVERVIEW**

 

*OurBusiness, Industry and Target Market*

 

Nature’s Sunshine Products, Inc. and itssubsidiaries are primarily engaged in the manufacturing and marketing of herbalproducts, vitamin and mineral supplements, personal care, and miscellaneousproducts. Nature’s Sunshine Products, Inc. is a Utah corporation with itsprincipal place of business in Provo, Utah. We sell our products to a salesforce of independent Distributors and Managers who use the products themselvesor resell them to other Distributors or consumers. The formulation,manufacturing, packaging, labeling, advertising, distribution and sale of eachof our major product groups are subject to regulation by one or moregovernmental agencies.

 

We market our products in the United States, Mexico,Central America, Canada, Venezuela, the Dominican Republic, Japan, Ecuador, theUnited Kingdom, Columbia, Peru, Israel, Russia, Ukraine, Latvia, Lithuania,Kazakhstan, Mongolia, Belarus, China, Poland, and Brazil. We also export ourproducts to several other countries, including Argentina, Australia, Chile, NewZealand, and Norway.

 

We also sell our products through a separate divisionand operating business segment, Synergy Worldwide, which was acquired in 2000.Synergy Worldwide offers products with formulations different from those of theNature’s Sunshine Products offerings. In addition, Synergy Worldwide’smarketing and Distributor compensation plans are sufficiently different fromthose of Nature’s Sunshine Products. Synergy Worldwide sells products in Japan,the United States, South Korea, Singapore, Thailand, Taiwan, Malaysia, HongKong, the Philippines, Indonesia, the United Kingdom, Germany, Austria, theNetherlands and Australia.

 

In 2006, we experienced healthy net sales revenuegrowth in our Nature’s Sunshine Products International business segment, whileour domestic business segment sales remained flat and our Synergy Worldwidebusiness segment experienced a slight decline in net sales revenue. Over thesame period, our cost of goods sold remained constant as a percentage of netsales revenue, but our selling, general and administrative expenses increasedsomewhat primarily as a result of costs associated with our internalinvestigation and non-income tax contingencies. As a result, our net operatingincome remained essentially unchanged. On our consolidated balance sheets, wemaintained a fairly consistent profile from 2005 to 2006. The most significantchange from 2005 to 2006, an increase in our accrued liabilities from $33.1million to $43.8 million, was primarily due to an increase in income andnon-income tax contingency accruals of $8.6 million.

 

**CriticalAccounting Policies and Estimates**

 

Our consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) and formthe basis for the following discussion and analysis on critical accountingpolicies and estimates. The preparation of these financial statements requiresus to make estimates and assumptions that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On a regular basis we evaluate our estimatesand assumptions. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results could differ from these estimates and those differencescould have a material effect on our financial position and results ofoperations. Management has discussed the development, selection and disclosureof these estimates with the Board of Directors and its Audit Committee.

 

A summary of our significant accounting policies isprovided in Note 1 of the Notes to Consolidated Financial Statements in Item 8of this Report. We believe the critical accounting policies and estimatesdescribed below reflect our more significant estimates and assumptions used inthe preparation of our consolidated financial statements. The impact and anyassociated risks on our business that are related to these policies are alsodiscussed throughout this “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” where such policies affect reported andexpected financial results.

 

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*RevenueRecognition*

 

Net sales revenue and related volume incentiveexpenses are recorded when persuasive evidence of an arrangement exists,collectability is reasonably assured, the amount is fixed and determinable, andtitle and risk of loss have passed, generally when the merchandise has beendelivered. Amounts received for undelivered merchandise are recorded asdeferred revenue. Sales revenue is recorded net of the rebate portion of volumeincentives, and a reserve for product returns, which reduces revenue, isaccrued based on historical experience. From time to time, the Company’s UnitedStates operation extends short-term credit associated with product promotions.In addition, for certain of the Company’s international operations, the Companyoffers credit terms consistent with industry standards within the country ofoperation. Payments to Distributors and Managers for sales incentives orrebates are recorded as a reduction of revenue. Membership fees are recorded asrevenue over the life of the membership, primarily one year. Prepaid eventregistration fees are deferred and recognized as revenues when the relatedevent is held.

 

*Inventories*

 

Inventories are stated atthe lower-of-cost-or-market, using the first-in, first-out method. Thecomponents of inventory cost include raw materials, labor, and overhead. Toestimate any necessary lower-of-cost-or-market adjustments, various assumptionsare made in regard to excess or slow-moving inventories, non-conforminginventories, expiration dates, current and future product demand, productionplanning, and market conditions.

 

*Self-insuranceLiabilities*

 

As a manufacturer anddistributor of products that are ingested, we face an inherent risk of exposureto product liability claims in the event that, among other things, the use ofour products results in injury to consumers due to tampering by unauthorizedthird parties or product contamination. We have historically had a very limitednumber of product claims or reports from individuals who have asserted thatthey have suffered adverse consequences as a result of using our products.These matters have historically been settled to our satisfaction and have notresulted in material payments. We have established a wholly owned captiveinsurance company to provide us with product liability insurance coverage andhave accrued an amount that we believe is sufficient to cover probable andreasonable estimable liabilities related to product liability claims based uponour history. However, there can be no assurance that these estimates will proveto be sufficient nor can there be any assurance that the ultimate outcome ofany litigation for product liability will not have a material negative impacton our business prospects, financial position, results of operations, orliquidity.

 

We self-insure forcertain employee medical benefits. The recorded liabilities for self-insuredrisks are calculated using actuarial methods and are not discounted. Theliabilities include amounts for actual claims and claims incurred but notreported. Actual experience, including claim frequency and severity as well ashealth care inflation, could result in actual liabilities being more or lessthan the amounts currently recorded.

 

*IncentiveTrip Accrual*

 

We accrue for expensesfor incentive trips associated with our direct sales marketing program, whichrewards independent Distributors and Managers with paid attendance at ourconventions and meetings. Expenses associated with incentive trips are accruedover qualification periods as they are earned. We specifically analyzeincentive trip accruals based on historical and current sales trends as well ascontractual obligations when evaluating the adequacy of the incentive tripaccrual. Actual results could result in liabilities being more or less than theamounts recorded. We have accrued convention and meeting costs of approximately$3.8 million at December 31, 2006 and 2005.

 

*Impairmentof Long-Lived Assets*

 

The Companyreviews its long-lived assets, such as property, plant and equipment andintangible assets for impairment when events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable. TheCompany uses an estimate of future undiscounted net cash flows of the relatedassets or groups of assets over their remaining lives in measuring whether theassets are recoverable. An impairment loss is calculated by determining thedifference between the carrying values and the fair values of these assets. At December 31,2006 and 2005, the Company did not consider any of its long-lived assets to beimpaired.

 

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*Contingencies*

 

We are involved incertain legal proceedings. When a loss is considered probable in connectionwith litigation or income tax and non-income tax contingencies and when a losscan be reasonably estimated with a range, we record our best estimate withinthe range related to the contingency. If there is no best estimate, we recordthe minimum of the range. As additional information becomes available, weassess the potential liability related to the contingency and revise the estimates.Revision in estimates of the potential liabilities could materially impact ourresults of operations in the period of adjustment.

 

*Income Taxes*

 

Our income tax expense,deferred tax assets and liabilities and contingent reserves reflect management’sbest assessment of estimated future taxes to be paid. We are subject to incometaxes in both the U.S. and numerous foreign jurisdictions. Significantjudgments and estimates are required in determining the consolidated income taxexpense.

 

Deferred income taxes arise from temporary differencesbetween the tax and financial statement recognition of revenue and expense. Inevaluating our ability to recover our deferred tax assets we consider allavailable positive and negative evidence, including scheduled reversals ofdeferred tax liabilities, projected future taxable income, tax planningstrategies and recent financial operations. In projecting future taxableincome, we develop assumptions including the amount of future state, federaland foreign pretax operating income, the reversal of temporary differences, andthe implementation of feasible and prudent tax planning strategies. Theseassumptions require significant judgment about the forecasts of future taxableincome and are consistent with the plans and estimates we are using to managethe underlying businesses.

 

As of December 31,2006, we have foreign income tax net operating loss carryforwards of $7,092that will expire at various dates from 2007 through 2011. The Company has approximately $3,348 of foreigntax credits, which begin to expire at various times starting in 2012.

 

We believe that it is more likely than not that thebenefit from certain deferred tax assets, including foreign net operating losscarryforwards and foreign tax credits, will not be realized. In recognition ofthis risk, we have provided a valuation allowance of $7,822 for certaindeferred tax assets, including foreign net operating loss carryforwards andforeign tax credits. If our assumptions change and we determine we will be ableto realize these deferred tax assets, the tax benefits relating to any reversalof the valuation allowance on deferred tax assets at December 31, 2006will be accounted for as a reduction of income tax expense.

 

Changes in tax laws and rates could also affectrecorded deferred tax assets and liabilities in the future. Management is notaware of any such changes that would have a material effect on the Company’sresults of operations, cash flows or financial position.

 

The calculation of our tax liabilities involvesdealing with uncertainties in the application of complex tax laws andregulations in a multitude of jurisdictions across our global operations.

 

In July 2006, the FASB issued FinancialInterpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” whichclarifies the accounting for uncertainty in income taxes recognized in thefinancial statements in accordance with SFAS 109, “Accounting for Income Taxes.”FIN 48 provides that a tax benefit from an uncertain tax position may berecognized when it is more likely than not that the position will be sustainedupon examination, including resolutions of any related appeals or litigationprocesses, based on the technical merits.

 

Income tax positions mustmeet a more-likely-than-not recognition threshold at the effective date to berecognized upon the adoption of FIN 48 and in subsequent periods. Thisinterpretation also provides guidance on measurement, derecognition,classification, interest and penalties, accounting in interim periods,disclosure and 

 

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transition. We adoptedFIN 48 effective January 1, 2007. The adoption of FIN 48 did not have amaterial effect on our consolidated financial statements.

 

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**RESULTSOF OPERATIONS**

 

The following table summarizes our consolidatedoperating results as a percentage of net sales revenue for the periodsindicated:

 
| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                      | ** ** | ** **                                 |       |   |   |   |   |
| Net sales  revenue                        | ** ** | **100.0**                                  | **%**      | 100.0 | % | 100.0 | % |
|                                      |       |                                       |       |   |   |   |   |
| Costs and  Expenses:                      |       |                                       |       |   |   |   |   |
| Cost of goods  sold                       | ** ** | **19.0**                                   |       | 19.2 |   | 18.8 |   |
| Volume  incentives                        | ** ** | **40.3**                                   |       | 41.0 |   | 39.9 |   |
| Selling, general  and administrative      | ** ** | **38.5**                                   |       | 36.5 |   | 35.5 |   |
| ** **                                |       | **97.8**                                   |       | 96.7 |   | 94.2 |   |
|                                      |       |                                       |       |   |   |   |   |
| Operating Income                          | ** ** | **2.2**                                    |       | 3.3 |   | 5.8 |   |
|                                      |       |                                       |       |   |   |   |   |
| Other Income  (Expense):                  |       |                                       |       |   |   |   |   |
| Interest and  other income, net           | ** ** | **0.4**                                    |       | 0.2 |   | 0.3 |   |
| Interest expense                          | ** ** | **(0.2**                                   | **)**      | (0.2 | ) | — |   |
| Foreign exchange  (losses) gains, net     |       | —                                     |       | (0.1 | ) | 0.2 |   |
| ** **                                |       | **0.2**                                    |       | (0.1 | ) | 0.5 |   |
|                                      |       |                                       |       |   |   |   |   |
| Income Before  Provision for Income Taxes | ** ** | **2.4**                                    |       | 3.2 |   | 6.3 |   |
| Provision for  Income Taxes               | ** ** | **3.4**                                    |       | 2.2 |   | 2.7 |   |
|                                      |       |                                       |       |   |   |   |   |
| Net (Loss)  Income                        | ** ** | **(1.0**                                   | **)%**     | 1.0 | % | 3.6 | % |

 

***YearEnded December 31, 2006 as Compared to the Year Ended December 31,2005***

 

With this Annual Report, we have presented ourfinancial statements for our fiscal years 2006 and 2005, incorporating to theextent appropriate all information available to us as of the date hereof. Wehave not previously filed our financial statements for fiscal years 2006 or2005.

 

*Net SalesRevenue*

 

Consolidatednet sales revenue for the year ended December 31, 2006, was $362.2 millioncompared to $351.7 million in 2005, an increase of approximately 3.0 percent.During 2006, the increase in net sales revenue is primarily due to continuedgrowth in the Company’s international business segment.

 

We distribute ourproducts to consumers through an independent sales force comprised of Managersand Distributors. Active Managers totaled approximately 24,300 and 21,300 at December 31,2006 and 2005, respectively. Active Distributors totaled approximately 668,600and 588,100 at December 31, 2006 and 2005, respectively. We anticipate thenumber of active Distributors to increase as we expand our existing operations,enter new international markets, and as current Distributors grow theirbusinesses.

 

Net sales revenue relatedto the NSP United States business segment operations increased approximately0.1 percent in 2006 to $148.4 million compared to $148.3 million in 2005. Thisslight increase was the result of both our price increases in our United Statesmarket of 1.9 percent in 2006 (due to higher material costs) and a slightdecrease in sales volumes of 1.8 percent.

 

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NSPInternational net sales revenue increased to $130.6 million in 2006 compared to$120.0 million in 2005, an increase of approximately 8.8 percent. The increasein international net sales revenue in 2006 compared to 2005 is primarily theresult of continued growth in our operations in Russia, Venezuela, Canada, andMexico. We implement price increases annually to compensate for foreigncurrency devaluations and increases in the cost of finished products.Management believes the price increases will be acceptable to its sales forceand will result in increased net sales revenue.

 

SynergyWorldwide net sales revenue decreased to $83.2 million in 2006 compared to$83.4 million in 2005, a decrease of approximately 0.2 percent. The slightdecrease in Synergy Worldwide net sales is primarily due to increasedcompetition in the United States and Japanese markets, which have been offsetby continued growth in the Korean and South Asian markets. Further informationrelated to the NSP United States, NSP International and Synergy Worldwidebusiness segments is set forth in Note 14 of Notes to Consolidated FinancialStatements in Item 8 of this Report.

 

*Cost ofGoods Sold*

 

Cost of goods sold as apercent of net sales revenue decreased slightly in 2006 compared to 2005primarily as a result of (1) decreased importation costs in several of ourinternational operations, and (2) increased efficiency gained from ourexpanded manufacturing facility.

 

*VolumeIncentives*

 

Volume incentives are asignificant part of our direct sales marketing program and represent commissionpayments made to our independent Distributors and Managers. These payments aredesigned to provide incentives for reaching higher sales levels and forrecruiting additional Distributors. Volume incentives as a percent of net salesrevenue decreased slightly during 2006 as compared to 2005, primarily as aresult of the decreased sales revenue in our Synergy Worldwide business segmentwhere volume incentives are slightly higher than in the United States and ourother international operations, and as a result of sales in new markets wherelower levels of volume incentives were paid.

 

*Selling,General and Administrative*

 

Selling,general and administrative expenses increased $11.2 million in 2006 compared to2005, from $128.4 million to $139.6 million, as a result of expenses related tothe internal investigation previously mentioned of $6.9 million and $5.1million related to non-income tax contingencies. Selling, general andadministrative expenses as a percent of net sales revenue increased to 38.5percent in 2006 compared to 36.5 percent in 2005. Selling, generaland administrativeexpenses includes general marketing and sales expenses, but not commissions,which are included under Volume Incentives, and also includes research anddevelopment expenses and general administrative expenses. The amount, excludingcapital expenditures, spent on research and development activities increasedslightly, from $1.8 million in 2005 to $1.9 million in 2006.

 

*IncomeTaxes*

 

The effective income taxrate was 141 percent for 2006, compared to 69 percent for 2005. The effectiverate for 2006 differed from the federal statutory rate of 35 percent primarilyrelated to (i) additional tax contingencies, which increased the effectiverate by approximately 54 percent, (ii) a change in deferred tax assetvaluation allowances which increased the effective rate by approximately 29percent, (iii) a taxable gain on the sale of intercompany assetseliminated for book purposes which increased the effective rate byapproximately 13 percent, (iv) a foreign exchange tax gain on anintercompany payable, which increased the effective rate by 10 percent, and (v) foreignand state tax rate differentials as well as permanent nondeductible ordeductible items accounting for the remaining increase.

 

The effective rate for2005 differed from the federal statutory rate of 35 percent primarily due toadditional tax contingencies which increased the effective rate byapproximately 39 percent, and foreign and state tax rate differentials, as wellas permanent nondeductible or deductible items accounting for the remainingincrease.

 

***YearEnded December 31, 2005 as Compared to the Year Ended December 31,2004***

 

With this Annual Report, we have presented both ourfinancial statements for our fiscal year 2005 and our restated financialstatements for our fiscal year 2004, incorporating to the extent appropriateall information available to us as of 

 

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the date hereof.The restatement of our financial statements reflects changes resulting fromerrors identified from Management’s comprehensive review of its accountingpolicies, practices, and financial records, as well as matters identified bythe independent investigation. We have not previously filed our financialstatements for fiscal year 2005.

 

*Net SalesRevenue*

 

Consolidatednet sales revenue for the year ended December 31, 2005, was $351.7 millioncompared to $325.3 million in 2004, an increase of approximately 8.1 percent.During 2005, the increase in net sales revenue is primarily due to continuedgrowth in the Company’s international business segment as well as expansion ofthe Company’s Synergy Worldwide business segment, which operates primarily inAsia.

 

We distribute our productsto consumers through an independent sales force comprised of Managers andDistributors. Active Managers totaled approximately 21,300 and 18,400 at December 31,2005, and 2004, respectively. Active Distributors totaled approximately 588,100and 562,000 at December 2005 and 2004, respectively.

 

Net sales revenue relatedto the NSP United States business segment operations increased approximately4.7 percent in 2005 to $148.3 million compared to $141.6 million in 2004. Thisincrease is the result of price increases of 1.3 percent in our United Statesmarket that went into effect in 2005 due to higher raw material costs, andincreased sales volumes of 3.4 percent as a result of an increase in the numberof Distributors in the United States.

 

NSPInternational net sales revenue increased to $120.0 million in 2005 compared to$102.9 million in 2004, an increase of approximately 16.6 percent. The increasein international net sales revenue in 2005 is primarily the result of continuedgrowth in our operations in Russia and Ukraine of approximately $11.3 millionor 50 percent, Canada of $1.8 million or 17 percent, Japan of $2.3 million or38 percent, and Mexico of $1.8 million or 7 percent over the prior years,respectively. These increases are the results of developing new markets andgrowth in the number of Distributors as a result of strengthening Distributorrelationships in existing markets.

 

SynergyWorldwide net sales revenue increased to $83.4 million in 2005 compared to$80.9 million in 2004, an increase of approximately 3.1 percent. The increasein sales is primarily the result of continued growth in the segment’sSingapore, Philippines, Indonesia and Malaysia markets as a result of thenumber of Distributors nearly doubling in these markets. Further informationrelated to the NSP United States, NSP International and Synergy Worldwidebusiness segments is set forth in the Note 14 of Notes to ConsolidatedFinancial Statements in Item 8 of this Report.

 

*Cost ofGoods Sold*

 

Cost of goods sold as apercent of net sales revenue increased in 2005 compared to 2004 primarily as aresult of increased costs for raw materials, packaging, and manufacturing,which were partially offset by decreased importation costs in several of ourinternational operations, increased efficiency gained from our expandedmanufacturing facility, and increased net sales revenue in our SynergyWorldwide operations where costs of goods sold are lower as a percent of netsales revenue.

 

*VolumeIncentives*

 

Volume incentives are asignificant part of our direct sales marketing program and represent commissionpayments made to our independent Distributors and Managers. These payments aredesigned to provide incentives for reaching higher sales levels and forrecruiting additional Distributors. Volume incentives as a percent of net salesrevenue increased slightly during 2005 as compared to 2004, primarily as aresult of the increased sales revenue in our Synergy Worldwide business segmentwhere volume incentives are slightly higher than in the United States and ourother international operations.

 

*Selling,General and Administrative*

 

Selling,general and administrative expenses increased $13.1 million in 2005 compared to2004, of which $9.3 million is a result of increased sales within the US,International, and Synergy Worldwide segments, and costs related to theinternal investigation previously mentioned of $0.4 

 

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million.Selling, general and administrative expenses as a percent of net sales revenueincreased to 36.5 percent in 2005 compared to 35.5 percent in 2004. Thiscategory includes costs for research and development, distribution, andincentive programs such as our conventions. The amount spent on research anddevelopment activities, excluding capital expenditures, increased slightly,from $1.7 million in 2004 to $1.8 million in 2005.

 

*IncomeTaxes*

 

The effective income taxrate was 69 percent for 2005, compared to 43 percent for 2004. The effectiverate for 2005 differed from the federal statutory rate of 35 percent primarily becauseof additional foreign tax contingencies, which increased the effective rate byapproximately 39 percent, and foreign and state tax rate differentials, as wellas permanent nondeductible or deductible items accounting for the remainingincrease.

 

The effective rate for2004 differed from the federal statutory rate of 35 percent primarily as aresult of additional tax contingencies which increased the effective rate byapproximately 11 percent, and change in foreign tax credits which decreased theeffective rate by approximately 7 percent and foreign and state tax ratedifferentials, as well as permanent nondeductible or deductible itemsaccounting for the remaining increase.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our principal use of cash is to pay for operatingexpenses, including volume incentives, capital assets, inventory purchases,funding of international expansion, and the payment of quarterly dividends. Wehave generally relied upon cash flows from operations to fund operatingactivities, and have at times drawn on an operating line of credit in order tofund stock repurchases and other strategic transactions. At December 31,2006, we had $39.1 million in cash and cash equivalents and $6.1 million ininvestments, which was available to be used along with our normal cash flowsfrom operations to fund any unanticipated shortfalls in future cash flows.

 

As of December 31, 2006, working capital was$24.0 million, compared to $27.9 million as of December 31, 2005. Thedecrease in our working capital was primarily due to an increase in taxcontingency accruals of $8.6 million in 2006, which was partially offset byincreases in cash and inventory of $1.2 million and $3.7 million, respectively.

 

Our net consolidated cash inflows (outflows) are asfollows (*in thousands*):

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating  activities | ** ** | $                                          | 14,252     |   | $ | 17,012 |   | $ | 17,368 |   |
| Investing activities  |       | (3,959                                     | )          | (3,679 | ) | (5,748 | ) |
| Financing  activities |       | (9,303                                     | )          | (7,256 | ) | (4,074 | ) |
|                       |            |                                            |            |  |  |  |  |  |  |  |

 

*OperatingActivities*

 

For the year ended December 31, 2006, wegenerated cash from operating activities of $14.3 million compared to $17.0million in 2005. The decrease in cash generated from operating activities wasprimarily due to our net loss of $3.6 million for 2006 compared to net incomeof $3.5 million the previous year, as well as increases in the cash used topurchase inventory, the timing of payments and accruals for accrued volumeincentives, changes in deferred income tax assets and liabilities, and adecrease in the tax benefit related to the exercise of stock options from 2005to 2006. This decrease was offset by decreases in the use of cash for accounts receivabledue to higher receivable turnover, prepaids and other assets, as well as thetiming of payments in accounts payable and accrued liabilities. Approximately$8.6 million of the increase in accrued liabilities was related to accruals forincome and non-income tax contingencies. Cash flows provided by operatingactivities in 2004 were approximately $17.4 million.

 

*InvestingActivities*

 

For the year ended December 31, 2006, net cashflow used in investing activities was approximately $4.0 million which included$2.7 million related to capital expenditures for equipment, computer systems,and software, and $0.8 million for the acquisition of intangibles related tothe purchase of product formulations.

 

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For the year ended December 31, 2005, net cashflow used in investing activities was approximately $3.7 million, whichincluded $4.3 million of capital expenditures for equipment, computer systemsand software, as well as leasehold improvements made to enhance existingoperations, as well as the expansion of international markets.

 

For the year ended December 31, 2004, cash flowused in investing activities was approximately $5.7 million, which consistedprimarily of capital expenditures of $8.3 million. The high level of capitalexpenditures in 2004 was primarily due to the expansion of our SynergyWorldwide business segment. This use of cash was offset by $2.3 million in net proceedsrelated to the net sales of investments, and $0.2 million related to the saleof equipment.

 

*FinancingActivities*

 

For the years ended December 31,2006, 2005, and 2004, cash flows used for financing activities wereapproximately $9.3 million, $7.3 million, and $4.1 million, respectively. In2006, we used funds of $7.0 million to pay off our outstanding line of credit.Additional information with respect to the line of credit is set forth in Note7 of the Notes to Consolidated Financial Statements set forth in Item 8 of thisReport.

 

During 2005, we used cashof approximately $11.4 million to purchase approximately 513,000 shares at$22.15 per share and, during 2004, we used $17.0 million (including relatedfees) to purchase 1,000,000 of our shares in a Dutch Auction tender of $16.50per share. These Dutch Auction tenders were open to all shareholders of theCompany, including employees. As of December 31, 2006, there were no plansapproved by the Board of Directors to purchase any additional shares.

 

During2006, 2005, and 2004, we used cash of $3.1 million, $3.1 million, and $3.0million to pay quarterly cash dividend payments, respectively. We expect tocontinue to pay cash dividends in the future.

 

Theuses of cash for financing activities above were partially offset by proceedsreceived from option holders exercising their options of $0.6 million, $7.7million, and $13.4 million for the years ended December 31, 2006, 2005,and 2004, respectively.

 

We believe that our working capital requirements canbe met through our available cash and cash equivalents and cash generated fromoperating activities for the foreseeable future; however, a prolonged economicdownturn or a decrease in the demand for our products could adversely affectour long-term liquidity. In the event of a significant decrease in cashprovided by our operating activities, we might need to obtain additionalexternal sources of funding.

 

We do not currently maintain a long-term creditfacility or any other external sources of long-term funding; however, webelieve that such funding could be obtained on competitive terms in the eventadditional sources of funds become necessary.

 

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**CONTRACTUALOBLIGATIONS**

 

The following tablesummarizes information about contractual obligations as of December 31,2006 (*in thousands*):

 
| ** **                                                     | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| Operating leases  obligations                                  |       | $         | 10,894     |                                | $          | 4,625              |       | $                  | 5,248      |                        | $          | 721 |   | $ | 300 |   |
| Purchase  obligations(1)                                       |       | 8,301     |       | 8,301                               |       | —             |       | —             |       | —                      |       |
| Other long-term  liabilities reflected on the balance sheet(2) |       | 1,594     |       | —                              |       | —             |       | —             |       | 1,594                       |       |
| Total                                                          |       | $         | 20,789     |                                | $          | 12,926             |       | $                  | 5,248      |                        | $          | 721 |   | $ | 1,894 |   |

 

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(1)   Purchaseobligations include non-cancelable purchase agreements for both botanical andnon-botanical raw materials related to our forecasted 2007 productionestimates, as well as related packaging materials.

 

(2)   TheCompany provides a nonqualified deferred compensation plan for its officers andcertain key employees. Under this plan, participants may defer up to 100percent of their annual salary and bonus (less the participant’s share ofemployment taxes). The deferrals become an obligation owed to the participantby the Company under the plan. Upon separation of the participant from theservice of the Company, the obligation owed to the participant under the planwill be paid as a lump sum or over a period of either three or five years. Aswe cannot easily determine when our officers and key employees will separatefrom the Company, we have classified the obligation greater than five years forpayment.

 

**OFF BALANCE SHEET ARRANGEMENTS**

 

We have no off-balance sheet arrangements other than operating leases.We do not believe that these operating leases are material to our current orfuture financial position, results of operations, revenues or expenses,liquidity, capital expenditures, or capital resources.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

On January 1, 2006,we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R),“Share-Based Payment”**(“SFAS No. 123(R)”), whichrequires all share-based payments to employees and directors, including grantsof employee stock options, to be recognized in the statement of income based ontheir fair values. This accounting utilizes a “modified grant-date” approach inwhich the fair value of an equity award is estimated on the grant date withoutregard to service or performance vesting conditions. We adopted SFAS No. 123(R) usingthe “modified prospective” transition method. Under this transition method,compensation expense was recognized beginning January 1, 2006, based onthe requirements of SFAS No. 123(R) for all stock options vestingafter December 31, 2005. The impact of adopting SFAS No. 123(R) wasimmaterial to our net income and earnings per common share for the year ended December 31,2006. See Notes 1 and 10 to Consolidated Financial Statements for moreinformation.

 

On January 1, 2006,we adopted SFAS No. 154, “AccountingChanges and Error Corrections” (“SFAS No. 154”). SFAS No. 154is a replacement of Accounting Principles Board Opinion (“APB”) No. 20, “Accounting Changes”, and SFAS No. 3,“Reporting Accounting Changes in InterimFinancial Statements”. SFAS No. 154 provides guidance on theaccounting for and reporting of accounting changes and error corrections. Itestablishes retrospective application as the required method for reporting achange in accounting principle. SFAS No. 154 provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable and how to report a change in such circumstances.SFAS No. 154 also provides that a change in method of depreciating or amortizinga long-lived non-financial asset be accounted for as a change in estimateeffected by a change in accounting principle, and also provides that correctionof errors in previously issued financial statements should be termed a “restatement.”  SFAS No. 154 became effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The restatement discussed in Note 2 of theConsolidated Financial Statements was accounted for and reported in accordancewith SFAS No. 154. The impact of adopting SFAS No. 154 was immaterialto the net loss and net loss per share for the year ended December 31,2006.

 

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On January 1, 2006,we adopted SFAS No. 151, “Inventory Costs, an amendment of APB No. 43,Chapter 4”, which requires certain inventory related costs including abnormalamounts of idle facility expense, freight, handling costs, and wasted materials(spoilage) to be expensed as incurred. In addition, the statement also requiresthat the allocation of fixed production costs to conversion costs be based onthe normal capacity of the production facilities. The adoption of this standarddid not have a material effect on our consolidated financial statements.

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements”, whichbecame effective for the Company on January 1, 2008. This statementdefines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements. SFAS No. 157 does notrequire any new fair value measurements, but applies to assets and liabilitiesthat are required to be recorded at fair value under other accountingstandards. In February 2008, the FASB issued FASB Staff Position FAS No. 157-2(“FSP No. 157-2”), “EffectiveDate of FASB Statement No. 157”, which delays the Company’s January 1,2008, effective date of FSP No. 157-2 for all nonfinancial assets andnonfinancial liabilities, except those recognized or disclosed at fair value inthe consolidated financial statements on a recurring basis (at least annually)until January 1, 2009. We adopted SFAS No. 157 on January 1,2008, and that adoption did not have a material effect on our consolidatedfinancial statements.

 

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes by prescribinga recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. We adopted FIN 48 effective January 1, 2007.The adoption of FIN 48 did not have a material effect on our consolidatedfinancial statements.

 

In September 2006, the SEC issued StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 provides guidance on how prior yearmisstatements should be considered when quantifying misstatements in thecurrent year financial statements. The SAB requires registrants to quantifymisstatements using both a balance sheet and an income statement approach andevaluate whether either approach results in quantifying a misstatement that,when all relevant quantitative and qualitative factors are considered, ismaterial. SAB 108 does not change the guidance in SAB 99, “Materiality”, whenevaluating the materiality of misstatements. SAB 108 is effective for fiscalyears ending after November 15, 2006. Upon initial application, SAB 108permits a one-time cumulative effect adjustment to beginning retained earnings.The adoption of SAB 108 did not have a material effect on our consolidatedfinancial statements.

 

In February 2007,the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).The fair value option established by this statement permits all entities tochoose to measure eligible items at fair value at specified election dates. Abusiness entity shall report unrealized gains and losses on items for which thefair value option has been elected in earnings (or another performance indicatorif the business entity does not report earnings) at each subsequent reportingdate. Although this statement is voluntary, it is effective as of the beginningof an entity’s first fiscal year that begins after November 15, 2007.Early adoption is permitted as of the beginning of a fiscal year that begins onor before November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, “Fair Value Measurements”. We adopted SFAS No. 159 on January 1,2008, and the adoption of the standard did not have a material effect on ourconsolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFASNo. 141R”), which changes how business combinations are accounted for andwill impact financial statements both on the acquisition date and in subsequentperiods. SFAS No. 141R is effective January 1, 2009, and will beapplied prospectively. The effect of adopting SFAS No. 141R will depend onthe nature and terms of future acquisitions.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements” (“SFAS 160”), which changes the accounting and reportingstandards for the noncontrolling interests in a subsidiary in consolidated financialstatements. SFAS 160 recharacterizes minority interest as noncontrollinginterests and requires noncontrolling interests to be classified as a componentof shareholders’ equity. SFAS 160 is effective January 1, 2009 andrequires retroactive adoption of the presentation and disclosure requirementsfor existing minority 

 

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interest. The Company is currently evaluatingthe impact of SFAS 160 on the Company’s consolidated financial statements.

 

In December 2007,the SEC issued Staff Accounting Bulletin (“SAB”) No. 110. SAB 110expresses the views of the SEC regarding the use of a “simplified” or “shortcut”method, as discussed in SAB No. 107, “Share-Based Payment”, in developingan estimate of expected term of “plain vanilla” share options in accordancewith SFAS No. 123R. The guidance in SAB 110 is effective as of January 1,2008. The adoption of SAB 110 did not have a material effect on the Company’sconsolidated financial statements.

 

## **Item 7A. Quantitative and QualitativeDisclosures about Market Risk**

## ** **

Weconduct business in several countries and intend to continue to expand ourinternational operations. Net sales revenue, operating income, and net incomeare affected by fluctuations in currency exchange rates, interest rates andother uncertainties inherent in doing business and selling product in more thanone currency. In addition, our operations are exposed to risks associated withchanges in social, political, and economic conditions inherent in internationaloperations, including changes in the laws and policies that governinternational investment in countries where we have operations, as well as, toa lesser extent, changes in United States laws and regulations relating tointernational trade and investment.

 

**Foreign Currency Risk**

 

Duringthe year ended December 31, 2006, approximately 56.6 percent of our netsales revenue and approximately 53.1 percent of our operating expenses wererealized outside of the United States. Inventory purchases are transactedprimarily in U.S. dollars from vendors located in the United States. The localcurrency of each international subsidiary is considered the functional currency,and all revenues and expenses are translated at average exchange rates for theperiods reported. Therefore, reported sales and expenses will be positivelyimpacted by a weakening of the U.S. dollar and will be negatively impacted by astrengthening of the U.S. dollar. Given the uncertainty of exchange ratefluctuations, we cannot estimate the effect of these fluctuations on our futurebusiness, product pricing, results of operations, or financial condition.Changes in currency exchange rates affect the relative prices at which we sellour products. We regularly monitor our foreign currency risks and periodicallytake measures to reduce the impact of foreign exchange rate fluctuations on ouroperating results. We do not use derivative instruments for hedging, trading,or speculating on foreign exchange rate fluctuations.

 

Thefollowing table sets forth average currency exchange rates of one U.S. dollarinto local currency for each of the currencies in which sales revenue exceeded$10.0 million during any of the years presented.

 
| **Year ended December 31** | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Canada (Dollar)                           | ** ** | **1.1**     |       | 1.2      |       | 1.3      |       |
| Japan (Yen)                               | ** ** | **116.3**   |       | 109.9    |       | 108.1    |       |
| Mexico (Peso)                             | ** ** | **10.9**    |       | 10.9     |       | 11.3     |       |
| Venezuela  (Bolivar)                      | ** ** | **2,145.9** |       | 2,100.8  |       | 1,879.9  |       |

 

The functional currency in highly inflationaryeconomies is the U.S. dollar and transactions denominated in the local currencyare re-measured as if the functional currency were the U.S. dollar if they areconsidered material to the consolidated financial statements. The re-measurementof local currencies into U.S. dollars creates translation adjustments, whichare included in the consolidated statements of operations. There were nocountries considered to have a highly inflationary economy during 2004, 2005,or 2006.

 

**Interest Rate Risk**

 

Theprimary objectives of our investment activities are to preserve principal whilemaximizing yields without significantly increasing risk. These objectives areaccomplished by purchasing investment grade securities, substantially all of 

 

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whicheither mature within the next 12 months or have characteristics of marketablesecurities. On December 31, 2006, we had investments of $6.1 million ofwhich $5.0 million were municipal obligations, which carry an average fixedinterest rate of 4.9 percent and mature over a 5-year period. A hypothetical 1percent change in interest rates would not have had a material effect on ourliquidity, financial position, or results of operations.

 

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**Item 8. Financial Statements andSupplementary Data**

 

**INDEXTO FINANCIAL STATEMENTS**

 
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM                                                                                                              |   | 39     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                  |   |   |
| CONSOLIDATED BALANCE SHEETS AS OF DECEMBER  31, 2006 AND 2005                                                                                                         |   | 40     |
|                                                                                                                                                                  |   |   |
| CONSOLIDATED STATEMENTS OF OPERATIONS FOR  THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004 (AS RESTATED)                                                            |   | 41     |
|                                                                                                                                                                  |   |   |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND  COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND  2004 (AS RESTATED) |   | 42     |
|                                                                                                                                                                  |   |   |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER  31, 2006, 2005, AND 2004 (AS RESTATED)                                                            |   | 43     |
|                                                                                                                                                                  |   |   |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                           |   | 44     |

** **

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders ofNature’s Sunshine Products, Inc.

 

We have audited the accompanying consolidated balance sheets ofNature’s Sunshine Products, Inc. and subsidiaries (the “Company”) as of December 31,2006 and 2005, and the related consolidated statements of operations, changesin shareholders’ equity and comprehensive income (loss), and cash flows foreach of the three years in the period ended December 31, 2006. Our auditsalso included the financial statement schedule listed in the Index at Item 15.These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the financial statements and financial statement schedule based onour audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Nature’s Sunshine Products, Inc.and subsidiaries as of December 31, 2006 and 2005, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchfinancial statement schedule (as restated for 2004), when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 2 to the consolidated financial statements,the Company has restated the accompanying 2004 consolidated financialstatements and financial statement schedule.

 

We were engaged to audit, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006, and our report dated October 6, 2008 disclaimed an opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting because of a scope limitation and expressed an adverseopinion on the effectiveness of the Company’s internal control over financialreporting because of material weaknesses and the effects of a scope limitation.

 

/s/ Deloitte & Touche LLP

 

Salt Lake City, Utah

October 6, 2008

 

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**NATURE’S SUNSHINE PRODUCTS, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

***(Amounts in thousands)***

** **
| **As of December 31**                                                                                                                     | ** ** | **2006**    | ** **  | **2005**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| **Assets**                                                                                                                                               |       |        |        |       |       |
| Current Assets:                                                                                                                                          |       |        |        |       |       |
| Cash and cash equivalents                                                                                                                                | ** ** | **$**       | **39,061**  | ** ** | $          | 37,875 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,129 and $1,984, respectively                                                          | ** ** | **6,409**   | ** **  | 8,313      |       |
| Investments available for sale                                                                                                                           | ** ** | **6,054**   | ** **  | 5,577      |       |
| Inventories                                                                                                                                              | ** ** | **38,639**  | ** **  | 34,988     |       |
| Deferred income tax assets                                                                                                                               | ** ** | **5,727**   | ** **  | 5,297      |       |
| Prepaid expenses and other current assets                                                                                                                | ** ** | **6,049**   | ** **  | 5,473      |       |
| Total current assets                                                                                                                                     | ** ** | **101,939** | ** **  | 97,523     |       |
| Property, plant and equipment, net                                                                                                                       | ** ** | **30,581**  | ** **  | 34,075     |       |
| Investment securities                                                                                                                                    | ** ** | **1,594**   | ** **  | 1,867      |       |
| Intangible assets                                                                                                                                        | ** ** | **755**     | ** **  | —     |       |
| Deferred income tax assets                                                                                                                               | ** ** | **5,732**   | ** **  | 5,417      |       |
| Other assets                                                                                                                                             | ** ** | **7,746**   | ** **  | 8,404      |       |
| ** **                                                                                                                                               |       | **$**       | **148,347** | ** ** | $          | 147,286 |   |
| **Liabilities and Shareholders’ Equity**                                                                                                            |       |        | ** **  |       |       |
| Current Liabilities:                                                                                                                                     |       |        | ** **  |       |       |
| Line of credit                                                                                                                                           | ** ** | **$**       | **—**  | ** ** | $          | 7,000 |   |
| Accounts payable                                                                                                                                         | ** ** | **6,529**   | ** **  | 6,271      |       |
| Accrued volume incentives                                                                                                                                | ** ** | **15,247**  | ** **  | 15,382     |       |
| Accrued liabilities                                                                                                                                      | ** ** | **43,816**  | ** **  | 33,076     |       |
| Deferred revenue                                                                                                                                         | ** ** | **4,814**   | ** **  | 4,677      |       |
| Income taxes payable                                                                                                                                     | ** ** | **7,565**   | ** **  | 3,189      |       |
| Total current liabilities                                                                                                                                | ** ** | **77,971**  | ** **  | 69,595     |       |
| Deferred compensation payable                                                                                                                            | ** ** | **1,594**   | ** **  | 1,867      |       |
| Other  liabilities                                                                                                                                       | ** ** | **596**     | ** **  | 417        |       |
| Total long-term liabilities                                                                                                                              | ** ** | **2,190**   | ** **  | 2,284      |       |
|                                                                                                                                                     |       |        | ** **  |       |       |
| Commitments and Contingencies (Notes. 7,  10, and 13)                                                                                                    |       |        | ** **  |       |       |
|                                                                                                                                                     |       |        | ** **  |       |       |
| Shareholders’ Equity:                                                                                                                               |       |        | ** **  |       |       |
| Common stock, no par value; 20,000 shares  authorized, 15,348 and 15,282 shares issued and outstanding at  December 31, 2006 and 2005, respectively | ** ** | **64,795**  | ** **  | 64,029     |       |
| Retained earnings                                                                                                                                        | ** ** | **20,451**  | ** **  | 27,085     |       |
| Accumulated other comprehensive loss                                                                                                                     | ** ** | **(17,060** | **)**       | (15,707    | )          |
| Total shareholders’ equity                                                                                                                          | ** ** | **68,186**  | ** **  | 75,407     |       |
| ** **                                                                                                                                               |       | **$**       | **148,347** | ** ** | $          | 147,286 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

***(Amounts in thousands, except per share information)***

** **
| **Year Ended December 31**                                                                          | ** ** | **2006**    | ** **  | **2005**   | ** ** | **2004**               | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|------------------------|------------|
| ** **                                                                                                         | ** ** | ** **  | ** **  | ** ** | ** ** | **(As Restated)** | ** ** |
| Net Sales Revenue (net of the rebate  portion of volume incentives of $41,344, $39,453, and $37,099, respectively) | ** ** | **$**       | **362,222** | ** ** | $          | 351,684                |       | $ | 325,324 |   |
| Costs and Expenses:                                                                                                |       |        | ** **  |       |       |                   |       |
| Cost of goods sold                                                                                                 | ** ** | **68,745**  | ** **  | 67,593     |       | 61,263                 |       |
| Volume incentives                                                                                                  | ** ** | **145,827** | ** **  | 144,125    |       | 129,752                |       |
| Selling, general and administrative                                                                                | ** ** | **139,645** | ** **  | 128,381    |       | 115,299                |       |
| ** **                                                                                                         |       | **354,217** | ** **  | 340,099    |       | 306,314                |       |
| Operating Income                                                                                                   | ** ** | **8,005**   | ** **  | 11,585     |       | 19,010                 |       |
| Other Income (Expense):                                                                                            |       |        | ** **  |       |       |                   |       |
| Interest and other income, net                                                                                     | ** ** | **1,319**   | ** **  | 821        |       | 1,056                  |       |
| Interest expense                                                                                                   | ** ** | **(609**    | **)**       | (730       | )          | (156                   | )          |
| Foreign exchange (losses) gains, net                                                                               | ** ** | **(86**     | **)**       | (253       | )          | 792                    |       |
| ** **                                                                                                         |       | **624**     | ** **  | (162       | )          | 1,692                  |       |
| Income Before Provision for Income Taxes                                                                           | ** ** | **8,629**   | ** **  | 11,423     |       | 20,702                 |       |
| Provision for Income Taxes                                                                                         | ** ** | **12,194**  | ** **  | 7,919      |       | 8,930                  |       |
| Net (Loss) Income                                                                                                  | ** ** | **$**       | **(3,565**  | **)**      | $          | 3,504                  |       | $ | 11,772 |   |
|                                                                                                               |       |        | ** **  |       |       |                   |       |
| Basic Net (Loss) Income Per Common Share                                                                           | ** ** | **$**       | **(0.23**   | **)**      | $          | 0.23                   |       | $ | 0.79 |   |
| Diluted Net (Loss) Income Per Common Share                                                                         | ** ** | **$**       | **(0.23**   | **)**      | $          | 0.23                   |       | $ | 0.76 |   |
| Basic Common Shares Outstanding                                                                                    | ** ** | **15,344**  | ** **  | 15,211     |       | 14,917                 |       |
| Diluted Common Shares Outstanding                                                                                  | ** ** | **15,344**  | ** **  | 15,515     |       | 15,478                 |       |

 

See accompanying notes to consolidatedfinancial statements.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITYAND COMPREHENSIVE INCOME (LOSS)**

***(Amounts in thousands)***

*** ***
| ** **                                                                                                                | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                                                | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                                                                                | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | ** **             | ** ** |
| ** **                                                                                                                | ** ** | **Shares**            | ** ** | **Value**    | ** ** | **Earnings** | ** ** | **Stock**         | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| Balance at  January 1, 2004 (As previously reported)                                                                 |       | 19,446                |       | $            | 25,437     |         | $          | 124,997           |       | $                      | (54,833    | )          | $          | (18,259 | ) | $ | 77,342 |   |
| Effects of  restatement (Note 2)                                                                                          |       | (5,267                | )          | 16,952       |       | (84,981      | )          | 54,833            |       | 3,824                  |       | (9,372     | )          |
| Balance at  January 1, 2004 (As restated)                                                                            |       | 14,179                |       | 42,389       |       | 40,016       |       | —            |       | (14,435                | )          | 67,970     |       |
| Common stock  repurchased and retired (as restated)                                                                       |       | (1,002                | )          | (3,985       | )          | (13,014      | )          | —            |       | —                 |       | (16,999    | )          |
| Common stock  issued under stock option plan (as restated)                                                                |       | 1,698                 |       | 13,426       |       | —       |       | —            |       | —                 |       | 13,426     |       |
| Tax benefit  related to exercise of stock options                                                                         |       | —                |       | 3,337        |       | —       |       | —            |       | —                 |       | 3,337      |       |
| Cash  dividends                                                                                                           |       | —                |       | —       |       | (3,001       | )          | —            |       | —                 |       | (3,001     | )          |
| Components  of comprehensive income (loss):                                                                               |       |                  |       |         |       |         |       |              |       |                   |       |       |       |
| Foreign  currency translation (net of tax of $326) (as restated)                                                          |       | —                |       | —       |       | —       |       | —            |       | (606                   | )          |       |       |
| Net  unrealized losses on investment securities (net of tax of $11)                                                       |       | —                |       | —       |       | —       |       | —            |       | (18                    | )          |       |       |
| Reclassification  adjustment for net realized gains on investment securities included in net  income (net of tax of $18)  |       | —                |       | —       |       | —       |       | —            |       | (27                    | )          |       |       |
| Net income  (as restated)                                                                                                 |       | —                |       | —       |       | 11,772       |       | —            |       | —                 |       |       |       |
| Total  comprehensive income (as restated)                                                                                 |       |                  |       |         |       |         |       |              |       |                   |       | 11,121     |       |
| Balance at  December 31, 2004 (As restated)                                                                          |       | 14,875                |       | 55,167       |       | 35,773       |       | —            |       | (15,086                | )          | 75,854     |       |
| Common stock  repurchased and retired                                                                                     |       | (513                  | )          | (2,224       | )          | (9,139       | )          | —            |       | —                 |       | (11,363    | )          |
| Common stock  issued under stock option plan                                                                              |       | 920                   |       | 7,660        |       | —       |       | —            |       | —                 |       | 7,660      |       |
| Tax benefit  related to exercise of stock options                                                                         |       | —                |       | 3,426        |       | —       |       | —            |       | —                 |       | 3,426      |       |
| Cash  dividends                                                                                                           |       | —                |       | —       |       | (3,053       | )          | —            |       | —                 |       | (3,053     | )          |
| Components  of comprehensive income (loss):                                                                               |       | —                |       |         |       |         |       |              |       |                   |       |       |       |
| Foreign  currency translation (net of tax of $308)                                                                        |       | —                |       | —       |       | —       |       | —            |       | (573                   | )          |       |       |
| Net  unrealized losses on investment securities (net of tax of $17)                                                       |       | —                |       | —       |       | —       |       | —            |       | (28                    | )          |       |       |
| Reclassification  adjustment for net realized gains on investment securities included in net  income (net of tax of $12)  |       | —                |       | —       |       | —       |       | —            |       | (20                    | )          |       |       |
| Net income                                                                                                                |       | —                |       | —       |       | 3,504        |       | —            |       | —                 |       |       |       |
| Total comprehensive  income                                                                                               |       |                  |       |         |       |         |       |              |       |                   |       | 2,883      |       |
| **Balance  at December 31, 2005**                                                                                    | ** ** | **15,282**            | ** ** | **64,029**   | ** ** | **27,085**   | ** ** | **—**        | ** ** | **(15,707**            | **)**      | **75,407** | ** ** |
| **Common  stock issued under stock option plan**                                                                          | ** ** | **66**                | ** ** | **551**      | ** ** | **—**   | ** ** | **—**        | ** ** | **—**             | ** ** | **551**    | ** ** |
| **Tax  benefit related to exercise of stock options**                                                                     | ** ** | **—**            | ** ** | **215**      | ** ** | **—**   | ** ** | **—**        | ** ** | **—**             | ** ** | **215**    | ** ** |
| **Cash  dividends**                                                                                                       | ** ** | **—**            | ** ** | **—**   | ** ** | **(3,069**   | **)**      | **—**        | ** ** | **—**             | ** ** | **(3,069** | **)**      |
| **Components  of comprehensive income (loss):**                                                                           | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Foreign  currency translation (net of tax of $738)**                                                                    | ** ** | **—**            | ** ** | **—**   | ** ** | **—**   | ** ** | **—**        | ** ** | **(1,371**             | **)**      | ** ** | ** ** |
| **Net  unrealized gains on investment securities (net of tax of $18)**                                                    | ** ** | **—**            | ** ** | **—**   | ** ** | **—**   | ** ** | **—**        | ** ** | **27**                 | ** ** | ** ** | ** ** |
| **Reclassification  adjustment for net realized gains on investment securities included in net  loss (net of tax of $6)** | ** ** | **—**            | ** ** | **—**   | ** ** | **—**   | ** ** | **—**        | ** ** | **(9**                 | **)**      | ** ** | ** ** |
| **Net loss**                                                                                                              | ** ** | **—**            | ** ** | **—**   | ** ** | **(3,565**   | **)**      | **—**        | ** ** | **—**             | ** ** | ** ** | ** ** |
| **Total comprehensive loss**                                                                                              | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **(4,918** | **)**      |
| **Balance at December 31, 2006**                                                                                     | ** ** | **15,348**            | ** ** | **$**        | **64,795** | ** **   | **$**      | **20,451**        | ** ** | **$**                  | **—** | ** ** | **$**      | **(17,060** | **)** | **$** | **68,186** | ** ** |

 

See accompanying notes to consolidatedfinancial statements.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

***(Amounts in thousands)***

 
| **Year Ended December 31**                                                 | ** ** | **2006**    | ** ** | **2005**   | ** ** | **2004**               | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** | **(As restated)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |        |       |       |       |                   |       |
| Net (loss) income                                                                         | ** ** | **$**       | **(3,565** | **)**      | $          | 3,504                  |       | $ | 11,772 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |       |        | ** ** |       |       |                   |       |
| Provision for doubtful accounts                                                           | ** ** | **(441**    | **)**      | 460        |       | 149                    |       |
| Depreciation and amortization                                                             | ** ** | **6,224**   | ** ** | 5,959      |       | 5,368                  |       |
| Tax benefit from stock option exercises                                                   | ** ** | **(215**    | **)**      | 3,426      |       | 3,337                  |       |
| Loss (gain) on sale of property, plant and  equipment                                     | ** ** | **50**      | ** ** | (42        | )          | 311                    |       |
| Deferred income taxes                                                                     | ** ** | **(2,685**  | **)**      | 1,108      |       | (2,082                 | )          |
| Amortization of bond discount                                                             | ** ** | **69**      | ** ** | 72         |       | 83                     |       |
| Purchase of trading investment securities                                                 | ** ** | **(167**    | **)**      | (261       | )          | (140                   | )          |
| Proceeds from sale of trading investment  securities                                      | ** ** | **570**     | ** ** | 531        |       | 477                    |       |
| Realized and unrealized (gains) losses on  investments                                    | ** ** | **(157**    | **)**      | 68         |       | (37                    | )          |
| Amortization of prepaid taxes related to  gain on intercompany sales                      | ** ** | **1,280**   | ** ** | **—** | ** ** | **—**             | ** ** |
| Foreign exchange (gains) losses                                                           | ** ** | **497**     | ** ** | 701        |       | (623                   | )          |
| Changes in assets and liabilities:                                                        |       |        | ** ** |       |       |                   |       |
| Accounts receivable                                                                       | ** ** | **2,720**   | ** ** | 1,281      |       | (4,592                 | )          |
| Inventories                                                                               | ** ** | **(3,423**  | **)**      | 84         |       | (10,029                | )          |
| Prepaid expenses and other current assets                                                 | ** ** | **178**     | ** ** | 483        |       | 873                    |       |
| Other assets                                                                              | ** ** | **(951**    | **)**      | (5,876     | )          | 802                    |       |
| Accounts payable                                                                          | ** ** | **(893**    | **)**      | (31        | )     | 2,492                  |       |
| Accrued volume incentives                                                                 | ** ** | **(235**    | **)**      | 2,408      |       | 1,936                  |       |
| Accrued liabilities                                                                       | ** ** | **11,121**  | ** ** | 2,357      |       | 6,663                  |       |
| Deferred revenue                                                                          | ** ** | **137**     | ** ** | (425       | )          | 192                    |       |
| Income taxes payable                                                                      | ** ** | **4,411**   | ** ** | 1,400      |       | 603                    |       |
| Deferred compensation payable                                                             | ** ** | **(273**    | **)**      | (195       | )          | (187                   | )          |
| Net cash provided by operating activities                                                 | ** ** | **14,252**  | ** ** | 17,012     |       | 17,368                 |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |        | ** ** |       |       |                   |       |
| Purchases of property, plant and equipment                                                | ** ** | **(2,718**  | **)**      | (4,284     | )          | (8,320                 | )          |
| Proceeds from sale of investments available  for sale                                     | ** ** | **1,396**   | ** ** | 1,718      |       | 8,153                  |       |
| Purchase of investments available for sale                                                | ** ** | **(1,901**  | **)**      | (1,317     | )          | (5,823                 | )          |
| Purchase of intangible assets                                                             | ** ** | **(763**    | **)**      | —     |       | —                 |       |
| Proceeds from sale of property, plant and  equipment                                      | ** ** | **27**      | ** ** | 204        |       | 242                    |       |
| Net cash used in investing activities                                                     | ** ** | **(3,959**  | **)**      | (3,679     | )          | (5,748                 | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |        | ** ** |       |       |                   |       |
| Advances on line of credit                                                                | ** ** | **4,643**   | ** ** | 27,000     |       | 11,000                 |       |
| Payments on line of credit                                                                | ** ** | **(11,643** | **)**      | (27,500    | )          | (8,500                 | )          |
| Repurchase and retirement of common stock                                                 | ** ** | **—**  | ** ** | (11,363    | )          | (16,999                | )          |
| Payments of cash dividends                                                                | ** ** | **(3,069**  | **)**      | (3,053     | )          | (3,001                 | )          |
| Proceeds from exercise of stock options                                                   | ** ** | **551**     | ** ** | 7,660      |       | 13,426                 |       |
| Tax benefit from stock option exercises                                                   | ** ** | **215**     | ** ** | **—** | ** ** | **—**             | ** ** |
| Net cash used in financing activities                                                     | ** ** | **(9,303**  | **)**      | (7,256     | )          | (4,074                 | )          |
| Effect of exchange rates on cash and cash  equivalents                                    | ** ** | **196**     | ** ** | (895       | )          | (153                   | )          |
| Net increase in cash and cash equivalents                                                 | ** ** | **1,186**   | ** ** | 5,182      |       | 7,393                  |       |
| Cash and cash equivalents at beginning of  the year                                       | ** ** | **37,875**  | ** ** | 32,693     |       | 25,300                 |       |
| Cash and cash equivalents at end of the  year                                             | ** ** | **$**       | **39,061** | ** ** | $          | 37,875                 |       | $ | 32,693 |   |
|                                                                                      | ** ** | ** **  | ** ** |       |       |                   |       |
| Supplemental disclosure of cash flow  information:                                        |       |        | ** ** |       |       |                   |       |
| Cash paid for income taxes                                                                | ** ** | **$**       | **6,015**  | ** ** | $          | 2,867                  |       | $ | 5,294 |   |
| Cash paid for interest                                                                    | ** ** | **297**     | ** ** | 388        |       | 113                    |       |
| Supplemental disclosure of noncash  investing and financing activities:                   |       |        | ** ** |       |       |                   |       |
| Purchases of property, plant and equipment  included in accounts payable                  | ** ** | **$**       | **138**    | ** ** | $          | 133                    |       | $ | 44 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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** **

**NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

***(Amounts in thousands, except pershare information)***

 

**NOTE 1:NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES**

 

**Nature ofOperations**

 

Nature’s SunshineProducts, Inc. and its subsidiaries (hereinafter referred to collectivelyas the “Company”) are primarily engaged in the manufacturing and marketing ofherbal products, vitamin and mineral supplements, personal care, andmiscellaneous products. Nature’s Sunshine Products, Inc. is a Utahcorporation with its principal place of business in Provo, Utah. The Companysells its products to a sales force of independent Distributors and Managerswho use the products themselves or resell them to other Distributors orconsumers. The formulation, manufacturing, packaging, labeling, advertising,distribution and sale of each of the Company’s major product groups are subjectto regulation by one or more governmental agencies.

 

The Companymarkets its products in the United States, South Korea, Mexico, Venezuela,Japan, Brazil, Canada, Central America, Colombia, the Dominican Republic,Ecuador, Peru, the United Kingdom, Austria, Germany, the Netherlands, Israel,Taiwan, Thailand, Singapore, Indonesia, Malaysia, the Philippines, Australia,Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia, and Belarus. TheCompany also exports its products to several other countries, including Argentina,Australia, Chile, New Zealand, and Norway.

 

**Principlesof Consolidation**

 

The accompanyingconsolidated financial statements include the accounts and transactions ofNature’s Sunshine Products, Inc. and its subsidiaries. At December 31,2006, 2005 and 2004, all of the Company’s subsidiaries were wholly owned.Intercompany balances and transactions have been eliminated in consolidation.

 

**Use ofEstimates**

 

The preparation ofconsolidated financial statements in accordance with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues and expenses, and related disclosure of contingent assets andliabilities, in these financial statements and accompanying notes. Actualresults could differ from these estimates and those differences could have amaterial effect on the Company’s financial position and results of operations.

 

The significantaccounting estimates inherent in the preparation of the Company’s financialstatements include estimates associated with its evaluation of impairment oflong-lived assets, the determination of liabilities related to Distributor andManager incentives, the determination of income tax assets and liabilities,certain other non-income tax and value-added tax contingencies, legalcontingencies, share-based compensation, and the valuation of investments. Inaddition, significant estimates form the basis for allowances with respect tothe collection of accounts receivable, inventory valuations and self-insuranceliabilities associated with product liability and medical claims. Variousassumptions and other factors enter into the determination of these significantestimates. The process of determining significant estimates takes into accounthistorical experience and current and expected economic conditions.

 

**Cash andCash Equivalents**

 

The Companyconsiders all highly liquid short-term investments with original maturities ofthree months or less to be cash equivalents. Substantially all of the Company’scash deposits either exceed the United States federally insured limit or arelocated in countries that do not have government insured accounts or aresubject to tax withholdings when repatriating earnings.

 

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**NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amounts in thousands, except pershare information)***

 

**AccountsReceivable Allowances**

 

Accountsreceivable have been reduced by an allowance for amounts that may beuncollectible in the future. This estimated allowance is based primarily on theaging category, historical trends and management’s evaluation of the financialcondition of the customer. This reserve is adjusted periodically as informationabout specific accounts becomes available.

 

**InvestmentSecurities**

 

The Company’sinvestment securities, which are generally categorized as available-for-salesecurities, are reported at fair value, with unrealized gains and losses, netof tax, recorded in accumulated other comprehensive income (loss) inshareholders’ equity. Unrealized losses on available-for-sale securities thatare determined to be other than temporary are included in the determination ofnet income in the period in which that determination is made. The cost of thesecurities sold is based on the specific identification method. Realized gainsand losses on sales of available-for-sale securities are included in interestand other income.

 

The Company alsohas certain investment securities classified as trading securities. The Companymaintains its trading securities portfolio to generate returns that are offsetby corresponding changes in certain liabilities related to the Company’sdeferred compensation plans (see Note 12). The trading securities portfolioconsists of marketable securities, which are recorded at fair value and areincluded in long-term investment securities on the consolidated balance sheetsbecause they remain assets of the Company until they are actually paid out tothe participants. The Company has established a rabbi trust to financeobligations under the plan. Both realized and unrealized gains and losses ontrading securities are included in interest and other income.

 

**FairValue of Financial Instruments**

 

The Company’sfinancial instruments consist primarily of cash, cash equivalents, accountsreceivable, investments, accounts payable and line of credit. The carryingvalues of these financial instruments approximate their fair values. Theestimated fair values have been determined using appropriate market informationand valuation methodologies.

 

**Inventories**

 

Inventories arestated at the lower-of-cost-or-market, using the first-in, first-out method.The components of inventory cost include raw materials, labor and overhead. Toestimate any necessary lower-of-cost-or-market adjustments, various assumptionsare made in regard to excess or slow-moving inventories, non-conforminginventories, expiration dates, current and future product demand, productionplanning, and market conditions.

 

**Property,Plant and Equipment**

 

Property, plantand equipment are recorded at cost less accumulated depreciation andamortization. Depreciation is computed using the straight-line method over theestimated useful lives of the related assets. Estimated useful lives forbuildings range from 20 to 50 years, building improvements range from 7 to 10years, machinery and equipment range from 2 to 10 years, and furniture andfixtures range from 2 to 5 years. Leasehold improvements are amortized over theshorter of the lease term or the estimated useful lives of the related assets.Maintenance and repairs are expensed as incurred, and major improvements arecapitalized.

 

**IntangibleAssets**

 

Intangible assetsconsist of purchased product formulations. Such intangible assets are amortizedusing the straight-line method over the estimated economic lives of the assetsof 15 years. Intangible assets, net of accumulated amortization, totaled $755at December 31, 2006. The Company had no intangible assets at December 31,2005.

 

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**NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)**

***(Amounts in thousands, except pershare information)***

 

**Impairmentof Long-Lived Assets**

 

The Companyreviews its long-lived assets, such as property, plant and equipment andintangible assets for impairment when events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable. TheCompany uses an estimate of future undiscounted net cash flows of the relatedassets or groups of assets over their remaining lives in measuring whether theassets are recoverable. An impairment loss is calculated by determining thedifference between the carrying values and the fair values of these assets. At December 31,2006 and 2005, the Company did not consider any of its long-lived assets to beimpaired.

 

**ForeignCurrency Translation**

 

The local currencyof the foreign subsidiaries is used as the functional currency, except for subsidiariesoperating in highly inflationary economies. The financial statements of foreignsubsidiaries, where the local currency is the functional currency, aretranslated into U.S. dollars using exchange rates in effect at year end forassets and liabilities and average exchange rates during each year for theresults of operations. Adjustments resulting from translation of financialstatements are reflected in accumulated other comprehensive income (loss), netof income taxes. Foreign currency transaction gains and losses are included ininterest and other income (expense) in the consolidated statements ofoperations.

 

The functionalcurrency in highly inflationary economies is the U.S. dollar and transactionsdenominated in the local currency are remeasured as if the functional currencywere the U.S. dollar. The remeasurement of local currencies into U.S. dollarscreates translation adjustments, which are included in the consolidatedstatements of operations. There were no countries considered to have a highlyinflationary economy during 2004, 2005, or 2006.

 

**RevenueRecognition**

 

Net sales revenueand related volume incentive expenses are recorded when persuasive evidence ofan arrangement exists, collectability is reasonably assured, the amount isfixed and determinable, and title and risk of loss have passed, generally whenthe merchandise has been delivered. Amounts received for undeliveredmerchandise are recorded as deferred revenue. Sales revenue is recorded net ofthe rebate portion of volume incentives. A reserve for product returns, whichreduces revenue, is accrued based on historical experience. From time to time,the Company’s United States operation extends short-term credit associated withproduct promotions. In addition, for certain of the Company’s internationaloperations, the Company offers credit terms consistent with industry standardswithin the country of operation. Payments to Distributors and Managers forsales incentives or rebates are recorded as a reduction of revenue. Membershipfees are deferred and amortized as revenue over the life of the membership,which is primarily one year. Prepaid event registration fees are deferred andrecognized as revenues when the related event is held.

 

Amounts billed tocustomers for shipping and handling are reported as a component of net salesrevenue. Shipping and handling revenues of approximately $10,131, $9,110, and$15,006 were reported as net sales revenue for the years ended December 31,2006, 2005, and 2004, respectively. The corresponding shipping and handlingexpenses are reported in selling, general and administrative expenses andapproximated the amounts reported as net sales revenue.

 

Taxes that havebeen assessed by governmental authorities and that are directly imposed onrevenue-producing transactions between the Company and its customers, includingsales, use, value-added, and some excise taxes, are presented on a net basis(excluded from net sales) as permitted by Emerging Issues Task Force (EITF)06-3, “How Taxes Collected from Customers and Remitted to GovernmentalAuthorities should be Presented in the Income Statement (that is, Gross versusNet Presentation)”.

 

**AdvertisingCosts**

 

Advertising costsare expensed as incurred. Advertising expense incurred for the years ended December 31,2006, 2005, and 2004 totaled approximately $1,453, $1,665, and $2,036,respectively.

 

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**NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)**

***(Amounts in thousands, except pershare information)***

** **

**Researchand Development**

 

All research anddevelopment costs are expensed as incurred and classified in selling, generaland administrative expense. Total research and development expenses wereapproximately $1,920, $1,754, and $1,656 in 2006, 2005 and 2004, respectively.

 

**IncomeTaxes**

 

Income taxes arerecorded using the asset and liability method. This method recognizes aliability or asset for the deferred income tax consequences of temporarydifferences between the tax basis of assets or liabilities and their reportedamounts in the consolidated financial statements. These temporary differenceswill result in taxable or deductible amounts in future years when the reportedamounts of the assets or liabilities are recovered or settled. Net deferred taxassets are reduced by a valuation allowance if it is more likely than not thatsome or all of the deferred tax assets will not be realized. In evaluating therealization of its deferred tax assets, the Company considers all availablepositive and negative evidence, including past operating results and forecastsof future taxable income, including tax planning strategies. These forecastsrequire significant judgment and assumptions to estimate future taxable incomeand are based on the plans and estimates that the Company uses to manage itsbusiness. The Company has established a valuation allowance against itsdeferred tax assets in each jurisdiction where it cannot conclude that it ismore likely than not that such assets will be realized. In the event thatactual results differ from the forecasts or the Company adjusts the forecastsor assumptions in the future, the resulting change in the valuation allowancecould have a significant impact on future income tax expense (see Note 10).

 

The Company issubject to income taxes in the United States and numerous foreignjurisdictions. In the ordinary course of the Company’s business there arecalculations and transactions, including transfer pricing, where the ultimatetax determination is uncertain. In addition, changes in tax laws andregulations as well as adverse judicial rulings could adversely affect theincome tax provision. The Company believes that it has adequately provided forincome tax issues not yet resolved with federal, state, local and foreign taxauthorities. However, if these provided amounts prove to be more than what isnecessary, the reversal of the reserves would result in tax benefits beingrecognized in the period in which the Company determines that provision for theliabilities is no longer necessary. If an ultimate tax assessment exceeds theCompany’s estimate of tax liabilities, an additional charge to expense would berequired.

 

**NetIncome Per Common Share**

 

Basicnet income (loss) per common share (“Basic EPS”) excludes dilution and iscomputed by dividing net income by the weighted-average number of common sharesoutstanding during the year. Diluted net income per common share (“Diluted EPS”)reflects the potential dilution that could occur if stock options or othercontracts to issue common stock were exercised or converted into common stock.The computation of Diluted EPS does not assume exercise or conversion ofsecurities that would have an anti-dilutive effect on net income (loss) percommon share.

 

Followingis a reconciliation of the numerator and denominator of Basic EPS to thenumerator and denominator of Diluted EPS for all years:

 
| ** **                         | ** ** | **Net Income (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Net Income  (Loss) Per  Share Amount** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|---------------------------|------------|---------------------------------------------------------|------------|
| Year Ended  December 31, 2006 |       |                                         |       |                      |       |                                                    |       |
| Basic EPS                          |       | $                                            | (3,565     | )                         | 15,344     |                                                    | $          | (0.23 | ) |
| Effect of  options                 | ** ** | **—**                                   | ** ** | **—**                | ** ** | **—**                                              | ** ** |
| Diluted EPS                        |       | $                                            | (3,565     | )                         | 15,344     |                                                    | $          | (0.23 | ) |
|                               |       |                                         |       |                      |       |                                                    |       |
| Year Ended  December 31, 2005 |       |                                         |       |                      |       |                                                    |       |
| Basic EPS                          |       | $                                            | 3,504      |                      | 15,211     |                                                    | $          | 0.23 |   |
| Effect of  options                 | ** ** | **—**                                   |       | 304                       | ** ** | **—**                                              | ** ** |
| Diluted EPS                        |       | $                                            | 3,504      |                      | 15,515     |                                                    | $          | 0.23 |   |
|                               |       |                                         |       |                      |       |                                                    |       |
| Year Ended  December 31, 2004 |       |                                         |       |                      |       |                                                    |       |
| Basic EPS                          |       | $                                            | 11,772     |                      | 14,917     |                                                    | $          | 0.79 |   |
| Effect of options                  | ** ** | **—**                                   |       | 561                       |       | (0.03                                                   | )          |
| Diluted EPS                        |       | $                                            | 11,772     |                      | 15,478     |                                                    | $          | 0.76 |   |

 

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**NATURE’S SUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)**

***(Amounts in thousands, except pershare information)***

** **

Because of netloss in the year ended December 31, 2006, common stock options were notincluded in the computation of diluted earnings per share because the effect onnet loss per share would be antidilutive. For the year ended December 31,2005 and 2004, there were outstanding options to purchase 15 and 35 shares ofcommon stock, respectively, that were not included in the computation of DilutedEPS because the options’ exercise prices were greater than the average marketprice of the common shares during the year.

 

**Share-BasedCompensation**

 

EffectiveJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards (SFAS) No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”),which requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the statement of operations basedon their fair values. This accounting utilizes a “modified grant-date” approachin which the fair value of an equity award is estimated on the grant datewithout regard to service or performance vesting conditions. The Companyadopted SFAS No. 123(R) using the “modified prospective” transitionmethod. Under this transition method, compensation expense was recognizedbeginning January 1, 2006 based on the requirements of SFAS No. 123(R) forall stock options vesting after December 31, 2005. Upon adoption, therewere no unvested stock options, and therefore the impact of adopting SFAS No. 123(R) wasnot significant. Under SFAS No. 123(R), the Company records compensationexpense over the vesting period of the stock options based on the fair value ofthe stock options on the date of grant.

 

Priorto January 1, 2006, the Company accounted for stock option compensationunder the recognition and measurement provisions of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), andrelated Interpretations, as permitted by SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS No. 123”). Accordingly, the Company didnot record any compensation expense for stock options, as the exercise price ofthe option was equal to or greater than the quoted market price of thestock on the date of grant. Had compensation expense been determined consistentwith SFAS No. 123(R), the Company’s net income and net income per commonshare would have been reduced to the following pro forma amounts for the yearsended December 31, 2005 and 2004:

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)**

***(Amountsin thousands, except per share information)***

 
| **Year Ended December 31** | ** **                        | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|-----------------------------------|----------|------------|----------|------------|
| Net Income                                | As reported                       |     | $          | 3,504    |       | $ | 11,772 |   |
|                                      | Stock option  expense, net of tax |     | (199       | )        | (347       | ) |
|                                      | Pro forma                         |     | 3,305      |     | 11,425     |   |
|                                      |                              |     |       |     |       |   |
| Basic Earnings  Per Share                 | As reported                       |     | $          | 0.23     |       | $ | 0.79 |   |
|                                      | Stock option  expense, net of tax |     | (0.01      | )        | (0.02      | ) |
|                                      | Pro forma                         |     | 0.22       |     | 0.77       |   |
|                                      |                              |     |       |     |       |   |
| Diluted Earnings  Per Share               | As reported                       |     | $          | 0.23     |       | $ | 0.76 |   |
|                                      | Stock option  expense, net of tax |     | (0.01      | )        | (0.02      | ) |
|                                      | Pro forma                         |     | 0.22       |     | 0.74       |   |

 

Theweighted-average fair value of options granted in 2004 was $6.08. The fairvalue of each option granted in 2004 was estimated on the date of grant usingthe Black-Scholes option-pricing model with the following weighted-averageassumptions used for grants: risk-free interest rate of 2.7 percent; expectedlife of 5 years; expected dividend yield of 1.6 percent; and expectedvolatility of 65 percent. The estimated fair value of options granted issubject to the assumptions made, and if the assumptions were to change, theestimated fair value amounts could be significantly different.

 

**ComprehensiveIncome (Loss)**

 

Comprehensiveincome (loss) includes all changes in shareholders’ equity except thoseresulting from investments by, and distributions to, shareholders. Accordingly,the Company’s comprehensive income (loss) includes net income (loss), netunrealized gains (losses) on investment securities, reclassifications ofrealized gains, and foreign currency adjustments that arise from thetranslation of the financial statements of the Company’s foreign subsidiaries.

 

**RecentAccounting Pronouncements**

 

On January 1, 2006,the Company adopted SFAS No. 154, “AccountingChanges and Error Corrections”**(“SFASNo. 154”). SFAS No. 154 is a replacement of Accounting PrinciplesOpinion (“APB”) No. 20, “AccountingChanges”, and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements”. SFAS No. 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. It establishes retrospective application as the requiredmethod for reporting a change in accounting principle. SFAS No. 154provides guidance for determining whether retrospective application of a changein accounting principle is impracticable and how to report a change in suchcircumstances. SFAS No. 154 also provides that a change in method ofdepreciating or amortizing a long-lived non-financial asset be accounted for asa change in estimate effected by a change in accounting principle, and alsoprovides that correction of errors in previously issued financial statementsshould be termed a “restatement.”  SFAS No. 154became effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The restatement discussed inNote 2 of the consolidated financial statements was accounted for and reportedin accordance with SFAS No. 154. The impact of adopting SFAS No. 154was immaterial to the net loss and net loss per share for the year ended December 31,2006.

 

On January 1, 2006,the Company adopted SFAS No. 151, “Inventory Costs, an amendment of APB No. 43,Chapter 4”, which requires certain inventory related costs including abnormalamounts of idle facility expense, freight, handling costs, and wasted materials(spoilage) to be expensed as incurred. In addition, the statement also requiresthat the allocation of fixed production costs to conversion costs be based onthe normal capacity of the production facilities. The adoption of this standarddid not have a material effect on the Company’s consolidated financialstatements.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)**

***(Amountsin thousands, except per share information)***

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements”, (“SFAS No. 157”)which will become effective for the Company on January 1, 2008. Thisstatement defines fair value, establishes a framework for measuring fair valueand expands disclosures about fair value measurements. SFAS No. 157 doesnot require any new fair value measurements, but applies to assets andliabilities that are required to be recorded at fair value under otheraccounting standards. In February 2008, the FASB issued FASB StaffPosition FAS No. 157-2, “EffectiveDate of FASB Statement No. 157” (“FSP No. 157-2”) which delaysthe Company’s January 1, 2008, effective date of FSP No. 157-2 forall nonfinancial assets and nonfinancial liabilities, except those recognizedor disclosed at fair value in the consolidated financial statements on arecurring basis (at least annually) until January 1, 2009. The Companyadopted SFAS No. 157 on January 1, 2008, and that adoption did nothave a material effect on the Company’s consolidated financial statements.

 

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statement in accordance with SFAS No. 109. Thisinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return, and provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The cumulative effect of adopting FIN 48 will berecorded in retained earnings (and other accounts as applicable). The Company adoptedFIN 48 effective January 1, 2007. The adoption of FIN 48 did not have amaterial effect on the Company’s consolidated financial statements.

 

In September 2006, theSecurities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”)No. 108, “Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 provides guidance on how prior year misstatements should be consideredwhen quantifying misstatements in the current year financial statements. TheSAB requires registrants to quantify misstatements using both a balance sheetand an income statement approach and evaluate whether either approach resultsin quantifying a misstatement that, when all relevant quantitative andqualitative factors are considered, is material. SAB 108 does not change theguidance in SAB 99, “Materiality”, when evaluating the materiality ofmisstatements. SAB 108 is effective for fiscal years ending after November 15,2006. Upon initial application, SAB 108 permits a one-time cumulative effectadjustment to beginning retained earnings. The adoption of SAB 108 did not havea material effect on the Company’s consolidated financial statements.

 

In February 2007, theFASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).The fair value option established by this statement permits all entities tochoose to measure eligible items at fair value at specified election dates. Abusiness entity shall report unrealized gains and losses on items for which thefair value option has been elected in earnings (or another performanceindicator if the business entity does not report earnings) at each subsequentreporting date. Although this statement is voluntary, it is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007. The Company adopted SFAS No. 159 on January 1, 2008. Theadoption of this standard did not have a material effect on the Company’s consolidatedfinancial statements.

 

In December 2007, theFASB issued SFAS No. 141 (revised 2007), “Business Combinations”, (“SFAS No. 141R”),which changes how business combinations are accounted for and will impactfinancial statements both on the acquisition date and in subsequent periods.SFAS No. 141R is effective January 1, 2009, and will be appliedprospectively. The effect of adopting SFAS No. 141R will depend on thenature and terms of future acquisitions.

 

In December 2007, theFASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements” (“SFAS 160”), which changes the accounting and reportingstandards for the noncontrolling interests in a subsidiary in consolidatedfinancial statements. SFAS 160 recharacterizes minority interest asnoncontrolling interests and requires noncontrolling interests to be classifiedas a component of shareholders’ equity. SFAS 160 is effective January 1,2009 and requires retroactive adoption of the presentation and disclosurerequirements for existing minority 

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)**

***(Amounts in thousands, except pershare information)***

 

interest. The Company is currently evaluating the impact ofSFAS 160 on the Company’s consolidated financial statements.

 

In December 2007, theSEC issued SAB No. 110. SAB No. 110 expresses the views of the SECregarding the use of a “simplified” or “shortcut” method, as discussed in SAB No. 107,“Share-Based Payment”, in developing an estimate of expected term of “plainvanilla” share options in accordance with SFAS No. 123(R). The guidance inSAB 110 is effective as of January 1, 2008. The impact of adopting SAB No. 110did not have a material effect on the Company’s consolidated financialstatements.

 

**NOTE 2: RESTATEMENTOF 2004 FINANCIAL STATEMENTS**

 

**Overview**

 

Subsequent to the issuance of the Company’s 2004financial statements, the Audit Committee of the Company’s Board of Directors (“AuditCommittee”) commenced an independent investigation regarding certain sales andcommission activities involving certain of the Company’s foreign operations.The investigation was subsequently expanded to include other matters related tothe Company’s consolidated financial statements.

 

As a result, the Companyrestated its previously filed consolidated financial statements for the yearended December 31, 2004. The Company also restated its previously reportedDecember 31, 2003 consolidated common stock, treasury stock, retainedearnings, and accumulated other comprehensive income (loss) to correct itemsthat relate to periods prior to January 1, 2004. Beginning retainedearnings as of January 1, 2004 was reduced by $84,981, of which $71,785was related to a correction in the Company’s accounting for the repurchase andretirement of treasury stock resulting in no net change in shareholders’equity. For the year ended December 31, 2004, the restatement adjustmentsreduced previously reported net sales revenue, pre-tax income, net income, andnet income per diluted share by $5,739, $2,259, and $5,306 and $0.34 perdiluted share, respectively.

 

The following tablepresents the impact of the restatement adjustments on the Company’sconsolidated statement of operations for the year ended December 31, 2004:

 
| ** **                                | ** ** | **As Previously  Reported (1)** | ** ** | **Rebate and  Fee and Other  Classification** | ** ** | **Revenue  Recognition** | ** ** | **Foreign  Consolidation** | ** ** | **Other** | ** ** | **Income  Tax** | ** ** | **As  Restated** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|-----------|------------|-----------------|------------|------------------|------------|
| Net sales  revenue                        |       | $                                         | 331,063    |                                                         | $          | (1,645                   | )          | $                          | (977       | )         | $          | (2,678          | )          | $                | (439       | ) | $ | — |   | $ | 325,324 |   |
| Costs and  Expenses                       |       |                                      |       |                                                         |       |                     |       |                       |       |      |       |            |       |             |       |
| Cost of goods  sold                       |       | 62,693                                    |       | (9                                                           | )     | 52                       |       | (733                       | )          | (740      | )          | —          |       | 61,263           |       |
| Volume incentives                         |       | 127,985                                   |       | 1,848                                                        |       | (131                     | )          | (240                       | )          | 290       |       | —          |       | 129,752          |       |
| Selling,  general, and administrative     |       | 118,731                                   |       | (3,265                                                       | )          |                     |       | (837                       | )          | 670       |       | —          |       | 115,299          |       |
|                                      |       | 309,409                                   |       | (1,426                                                       | )          | (79                      | )          | (1,810                     | )          | 220       |       | —          |       | 306,314          |       |
| Operating income  (loss)                  |       | 21,654                                    |       | (219                                                         | )          | (898                     | )          | (868                       | )          | (659      | )          | —          |       | 19,010           |       |
| Other Income  (Expense):                  |       |                                      |       |                                                         |       |                     |       |                       |       |      |       |            |       |             |       |
| Interest and  other income (expense), net |       | 568                                       |       | 219                                                          |       | —                   |       | (17                        | )          | 286       |       | —          |       | 1,056            |       |
| Interest expense                          |       | (104                                      | )          | —                                                       |       | —                   |       | —                     |       | (52       | )          | —          |       | (156             | )          |
| Foreign exchange  gains (losses), net     |       | 843                                       |       | —                                                       |       | —                   |       | (51                        | )          | —    |       | —          |       | 792              |       |
|                                      |       | 1,307                                     |       | 219                                                          |       | —                   |       | (68                        | )          | 234       |       | —          |       | 1,692            |       |
| Income before  provision for income taxes |       | 22,961                                    |       | —                                                       |       | (898                     | )          | (936                       | )          | (425      | )          | —          |       | 20,702           |       |
| Provision for  income taxes               |       | 5,883                                     |       | —                                                       |       | —                   |       | —                     |       | —    |       | 3,047           |       | 8,930            |       |
| Net Income  (Loss)                        |       | $                                         | 17,078     | ** **                                                   | $          | **—**               |       | $                          | (898       | )         | $          | (936            | )          | $                | (425       | ) | $ | (3,047 | ) | $ | 11,772 |   |
| Basic Net Income  per Share               |       | $                                         | 1.14       |                                                         |       |                     |       |                       |       |      |       |            |       |             | $          | 0.79 |   |
| Diluted Net  Income per Share             |       | $                                         | 1.10       |                                                         |       |                     |       |                       |       |      |       |            |       |             | $          | 0.76 |   |

 

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(1) As previouslyreported in the Form 10-K for the year ended December 31, 2004, filedon March 16, 2005.

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)**

***(Amountsin thousands, except per share information)***

 

The following tabledisplays the cumulative impact of the restatement on consolidated shareholders’equity as of December 31, 2003.

*** ***
| ** **                                                  | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                  | ** ** | ** **            | ** ** | ** **   | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                                                  | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | **Shareholders’** | ** ** |
| ** **                                                  | ** ** | **Shares**            | ** ** | **Value**    | ** ** | **Earnings** | ** ** | **Stock**         | ** ** | **Income (Loss)** | ** ** | **Equity** | ** ** |
| December 31,  2003 balance, as previously reported (1) |       | 19,446                |       | $            | 25,437     |         | $          | 124,997           |       | $                      | (54,833    | )          | $          | (18,259 | ) | $ | 77,342 |   |
| Restatement  adjustments for:                               |       |                  |       |         |       |         |       |              |       |                   |       |       |       |
| Treasury stock                                              |       | (5,267                | )     | 16,952       |       | (71,785      | )          | 54,833            |       | —                 |       | —     |       |
| Revenue  recognition                                        |       | —                |       | —       |       | (1,513       | )          | —            |       | —                 |       | (1,513     | )          |
| Foreign  consolidation                                      |       | —                |       | —       |       | (1,032       | )          | —            |       | —                 |       | (1,032     | )          |
| Intangible  impairment                                      |       | —                |       | —       |       | (2,093       | )          | —            |       | —                 |       | (2,093     | )          |
| Inventory  valuation                                        |       | —                |       | —       |       | (2,008       | )          | —            |       | —                 |       | (2,008     | )          |
| Accrued  liabilities                                        |       | —                |       | —       |       | (891         | )          | —            |       | —                 |       | (891       | )          |
| Non-income tax  contingencies                               |       | —                |       | —       |       | (3,816       | )          | —            |       | —                 |       | (3,816     | )          |
| Inventory costs                                             |       | —                |       | —       |       | 111          |       | —            |       | —                 |       | 111        |       |
| Other  adjustments                                          |       | —                |       | —       |       | 139          |       | —            |       | (389                   | )          | (250       | )          |
| Pre-tax total  impact of restatement adjustments            |       | (5,267                | )          | 16,952       |       | (82,888      | )          | 54,833            |       | (389                   | )          | (11,492    | )          |
| Tax impact of  restatement adjustments                      |       | —                |       | —       |       | 4,386        |       | —            |       | —                 |       | 4,386      |       |
| Other tax  restatement adjustments                          |       | —                |       | —       |       | (6,479       | )          | —            |       | 4,213                  |       | (2,266     | )          |
| Total impact of  restatement adjustments                    |       | (5,267                | )     | 16,952       |       | (84,981      | )          | 54,833            |       | 3,824                  |       | (9,372     | )          |
| December 31,  2003 balance, as restated                |       | 14,179                |       | $            | 42,389     |         | $          | 40,016            |       | $                      | —     |       | $          | (14,435 | ) | $ | 67,970 |   |

 

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(1) As previouslyreported in the Form 10-K for the year ended December 31, 2004, filedon March 16, 2005.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

The following tablepresents the impact of the restatement adjustments on the Company’sconsolidated statement of cash flows for the year ended December 31, 2004:

 
| ** **                                                                                                                                             | ** ** | **As Previously  Reported****(1)** | ** ** | **As  Restated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                                                                 |       |                                    |       |             |       |
| Net income                                                                                                                                             |       | $                                       | 17,078     |             | $          | 11,772 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                                                     |       |                                    |       |             |       |
| Provision for  doubtful accounts                                                                                                                       |       | (276                                    | )          | 149              |       |
| Depreciation and  amortization                                                                                                                         |       | 5,728                                   |       | 5,368            |       |
| Tax benefit from  stock option exercises                                                                                                               |       | 3,337                                   |       | 3,337            |       |
| Loss on sale of  property, plant and equipment                                                                                                         |       | 311                                     |       | 311              |       |
| Deferred income  taxes                                                                                                                                 |       | (1,252                                  | )          | (2,082           | )          |
| Amortization of  bond discount                                                                                                                         |       | —                                  |       | 83               |       |
| Purchase of  trading securities                                                                                                                        |       | —                                  |       | (140             | )          |
| Proceeds from  sale of trading securities                                                                                                              |       | —                                  |       | 477              |       |
| Realized and  unrealized gains on investments                                                                                                          |       | —                                  |       | (37              | )          |
| Foreign exchange  gains                                                                                                                                |       | —                                  |       | (623             | )          |
| Changes in  assets and liabilities:                                                                                                                    |       |                                    |       |             |       |
| Accounts  receivable                                                                                                                                   |       | (599                                    | )          | (4,592           | )          |
| Inventories                                                                                                                                            |       | (9,798                                  | )          | (10,029          | )          |
| Prepaid expenses  and other current assets                                                                                                             |       | 1,541                                   |       | 873              |       |
| Other assets                                                                                                                                           |       | —                                  |       | 802              |       |
| Accounts payable                                                                                                                                       |       | 457                                     |       | 2,492            |       |
| Accrued volume  incentives                                                                                                                             |       | 2,312                                   |       | 1,936            |       |
| Accrued  liabilities                                                                                                                                   |       | 2,405                                   |       | 6,663            |       |
| Deferred  revenues                                                                                                                                     |       | —                                  |       | 192              |       |
| Income taxes  payable                                                                                                                                  |       | (2,978                                  | )          | 603              |       |
| Deferred  compensation payable                                                                                                                         |       | (187                                    | )          | (187             | )          |
| Net cash  provided by operating activities                                                                                                             |       | 18,079                                  |       | 17,368           |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                                                                 |       |                                    |       |             |       |
| Purchases of  property, plant and equipment                                                                                                            |       | (8,124                                  | )          | (8,320           | )          |
| Proceeds from  sale of investment securities available for sale                                                                                        |       | 4,753                                   |       | 8,153            |       |
| Purchase of  investment securities available for sale                                                                                                  |       | (6,128                                  | )          | (5,823           | )          |
| Sale of other  assets                                                                                                                                  |       | 829                                     |       | —           |       |
| Payments  received on long-term receivables, net                                                                                                       |       | 624                                     |       | —           |       |
| Proceeds from  sale of property, plant and equipment                                                                                                   |       | 126                                     |       | 242              |       |
| Net cash used in  investing activities                                                                                                                 |       | (7,920                                  | )          | (5,748           | )          |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                                                                 |       |                                    |       |             |       |
| Advances on line  of credit                                                                                                                            |       | 2,500                                   |       | 11,000           |       |
| Payments on line  of credit                                                                                                                            |       | —                                  |       | (8,500           | )          |
| Repurchase and  retirement of common stock                                                                                                             |       | (16,999                                 | )          | (16,999          | )          |
| Payments of cash  dividends                                                                                                                            |       | (3,001                                  | )          | (3,001           | )          |
| Proceeds from  exercise of stock options                                                                                                               |       | 13,422                                  |       | 13,426           |       |
| Net cash used in  financing activities                                                                                                                 |       | (4,078                                  | )          | (4,074           | )          |
| Effect of  exchange rates on cash and cash equivalents                                                                                                 |       | (540                                    | )          | (153             | )          |
| Net increase in  cash and cash equivalents                                                                                                             |       | 5,541                                   |       | 7,393            |       |
| Cash and cash  equivalents at beginning of the year                                                                                                    |       | 30,665                                  |       | 25,300           |       |
| Cash and cash  equivalents at end of the year                                                                                                          |       | $                                       | 36,206     |             | $          | 32,693 |   |
|                                                                                                                                                   |       |                                    |       |             |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                                                                     |       |                                    |       |             |       |
| Cash paid for  taxes                                                                                                                                   |       | $                                       | 4,706      |             | $          | 5,294 |   |
| Cash paid for  interest                                                                                                                                |       | 75                                      |       | 113              |       |
| SUPPLEMENTAL  DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES — Purchases of  property, plant and equipment included in accounts payable |       | $                                       | —     |             | $          | 44 |   |

 

----

(1) As previouslyreported in the Form 10-K for the year ended December 31, 2004, filedon March 16, 2005.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

Thefollowing table presents the impact of the restatement adjustments discussedbelow on the Company’s consolidated comprehensive income for the year ended December 31,2004:

 
| ** **                                                                                                              | ** ** | **As  Previously  Reported****(1)** | ** ** | **As  Restated** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------|------------|
| Net income                                                                                                              |       | $                                   | 17,078     |             | $          | 11,772 |   |
| Foreign currency  translation adjustments                                                                               |       | 81                                  |       | (606             | )          |
| Net unrealized  losses on investment securities available for sale                                                      |       | (18                                 | )          | (18              | )          |
| Reclassification  adjustment for net realized gains on investment securities available for sale  included in net income |       | (27                                 | )          | (27              | )          |
| Comprehensive  Income                                                                                                   |       | $                                   | 17,114     |             | $          | 11,121 |   |

 

----

(1) As previouslyreported in the Form 10-K, for the year ended December 31, 2004,filed on March 16, 2005.

 

Adjustments to theCompany’s consolidated comprehensive income for the year ended December 31,2004 are primarily attributable to the following:

 

·                  Restated net income decreased from $17,078 to $11,772 as a result ofthe adjustments discussed below, and;

·                  Currency translation adjustments decreased from a gain of $81 to a lossof $606 as a result of the adjustments discussed below.

 

The notes to theconsolidated financial statements for the year ended December 31, 2004reflect the impact of all of the restatement adjustments as discussed below.

 

**Summary of RestatementAdjustments**

 

*Rebate, Fee and OtherClassification Matters*

 

            As noted in the Company’ssignificant accounting policies in Note 1, the Company accounts for payments madeto its Distributors and Managers for sales incentives or rebates as reductionsof revenue. In addition, amounts billed to customers for shipping and handlingare reported as components of net sales revenue, and the corresponding shippingand handling expenses are reported in selling, general, and administrativeexpenses. As a result of procedures performed by the Company, the Companyidentified that it had inconsistently classified certain foreign subsidiaryrebates and shipping and handling revenues as selling, general andadministrative expenses and other income. Sales taxes collected wereinconsistently classified in certain foreign countries as a reduction of netsales revenue and not netted against the corresponding expense included inselling, general, and administrative expense.  In addition, certain incentives to Distributorswere inconsistently classified as selling, general, and administrative expensesrather than volume incentives. Collectively, these adjustments resulted in a$1,645 reduction of net sales revenue and corresponding reduction in operatingexpenses and other income. These classification corrections did not result in achange in 2004 reported net income.

 

*Revenue Recognition Matters*

 

As a result of theadditional procedures performed by the Company, the Company reevaluated thetiming of revenue recognition of customer orders and identified certain errorsrelated to membership fees and customer deposits. Previously, the Companyrecorded revenue once shipment had occurred. Based upon further analysis, theCompany determined that title and risk of loss of merchandise shipped passedfrom the Company to the customer at the point of acceptance by the customer.The related restatement adjustment was to defer revenue for sales in which customeracceptance had not occurred prior to the period end as well as reverse therelated cost of goods sold, and volume incentives. The impact of these entrieswas to decrease retained earnings at December 31, 2003 by $1,239. The 

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

restatement impact to the statement of operations for the year ended December 31,2004 was to increase net sales revenue, cost of goods sold, and volumeincentives by $488, $52, and $277, respectively.

 

The Company in itsSynergy United States operations incorrectly recorded volume incentives relatedto sales of products that had not yet been shipped and recognized as revenue.The impact of the restatement entry decreased volume incentives by $408 for theyear ended December 31, 2004.

 

The Company previouslyrecorded membership fees as revenue when collected from customers andDistributors. The Company should have amortized the membership fees intorevenue over the term of the membership, which is generally one year. Therestatement impact of recognizing net sales revenue over the term of themembership decreased retained earnings at December 31, 2003 by $882 andresulted in an adjustment to decrease net sales revenue by $748 for the yearended December 31, 2004.

 

During the year ended December 31,2004, the Company recognized revenues of $608 related to customer depositspreviously recorded as deferred revenue in its Synergy Worldwide segment. Therelated deposit should have been recognized as revenue in 2003 as the relatedservice had been performed in 2003. The related restatement adjustmentincreased retained earnings at December 31, 2003 by $608 and decreased netsales revenue by $608 for the year ended December 31, 2004.

 

The Company’s review ofvarious foreign subsidiaries resulted in additional restatement adjustmentsbeing recorded related to the timing of revenue recognition. These remainingadjustments in the aggregate, reduced net revenue by approximately $109.

 

*ForeignConsolidation Matters*

 

During the year ended December 31,2004, the Company incorrectly recorded financial information related to threeforeign subsidiaries that did not correspond to the local accounting records ofthe respective foreign subsidiaries. The Company recorded restatement entriesto correlate the financial information to the underlying foreign accountingrecords, which resulted in a decrease to retained earnings at December 31,2003 of $1,032, a $2,678 reduction to 2004 reported net sales revenue, adecrease to cost of goods sold of $733, a decrease to volume incentive expenseof $240, a decrease to selling, general and administrative expense of $837, anda decrease to interest and other income and foreign exchange gains of $68. Thenet effect of these adjustments resulted in a $936 reduction to 2004 reportedpre-tax income.

 

*OtherMatters*

 

The Company did notadequately consider sales forecast, product expiration information, and otherrelevant information in analyzing and establishing inventory obsolescencevaluation reserves. The impact of the restatement adjustments decreasedretained earnings at December 31, 2003 by $2,008 and decreased cost ofgoods sold, and increased pre-tax income by $132 for the year ended December 31,2004.

 

The Company did notevaluate impairment conditions and related amortization lives related to anidentifiable distributor network intangible. The related intangible asset heldno value previous to January 1, 2004 as the related distributor networkceased to exist. The Company recorded restatement adjustments that reduced beginningretained earnings by $2,093 at December 31, 2003 and reversed relatedamortization expense, which was included in selling, general, andadministrative expense, and increased pre-tax income by $336 for the year endedDecember 31, 2004.

 

The Company excludedcertain incentive trip accruals that had been earned at certain period ends. Inaddition, the Company had not reconciled certain accruals on the general ledgerto the underlying supporting detail. As a result, the Company recordedrestatement adjustments that reduced beginning retained earnings by $891 at December 31,2003, increased cost of sales by $151, increased volume incentives by $183, andreduced selling, general, and administrative expenses by $699, reduced otherincome by $53 and increased pre-tax income by $312 for the year ended December 31,2004.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

The Company did notcapitalize an appropriate amount of certain inventory costs in inventory at December 31,2003 and 2004. The impact of the restatement adjustment increased beginningretained earnings by $111 and decreased cost of goods sold and increasedpre-tax income by $415 for the year ended December 31, 2004.

 

The Company did notadequately evaluate its exposure to sales tax and other non-income taxcontingencies at December 31, 2004 and 2003. As a result, the Companyrecorded restatement adjustments that decreased beginning retained earnings of$3,816, increased selling, general, and administrative expense by $711, anddecreased pre-tax income by $779.

 

The Company hadimproperly recorded certain non-income tax transactions in its prepaid incometax or income tax payable accounts. The impact of the restatement adjustmentsincreased selling, general, and administrative expense and decreased pre-taxincome by $648.

 

The Company had variousother individual adjustments that, in the aggregate, increased beginningretained earnings by $139 at December 31, 2003, decreased net salesrevenue by $439, decreased costs of goods sold by $344, increased volumeincentives by $107, increased selling, general and administrative by $346,increased other income (expense) by $287, and decreased pre-tax income by $193.

 

*Tax Matters*

 

The impact of therestatement adjustments discussed above resulted in related tax adjustments of$4,386 as of January 1, 2004. These tax adjustments, with the other pretaxrestatement adjustments, required the Company to review certain aspects of theworldwide provision which was impacted by such adjustments: primarily theforeign tax credits and the book to tax basis differences in the investment inforeign subsidiaries under Accounting Principles Board No. 23 (APB 23).Accordingly, the Company determined that its foreign tax credit deferred taxassets were overstated by approximately $2,100. Also, it was determined thatthe Company had not calculated an APB 23 provision on foreign earnings, as theCompany is not permanently reinvested in its foreign subsidiaries, whichresulted in a decrease of $4,213 to accumulated other comprehensive loss at December 31,2003. Other tax adjustments of approximately $2,565 were recorded that were aresult of certain unsupported deferred tax assets and other tax relatedamounts. In addition, the Company had not performed tax contingency reviews invarious taxable entities, whereby, it was determined upon further detail reviewthat $1,470 in additional tax contingency reserves needed to be recorded. Theincrease in tax contingency reserves related to nondeductible commissionsexpense in certain foreign jurisdictions and transfer pricing reserves. Inaddition, the Company was not collecting and remitting required withholdings oncommissions in one of its foreign subsidiaries, resulting in additional taxpayments of $344 to the local tax authorities. As a result of the aboverestatement amounts, the Company recorded a decrease to beginning retainedearnings of $6,479 as of January 1, 2004.

 

Consistent with thematters described in the above paragraph, a tax benefit related to the pretaxrestatement adjustments of approximately $636, an additional $4,537 in taxcontingency expense, an increase in the benefit related to foreign tax creditsof $1,115, and other various tax expense adjustments of $261 were recorded asrestatement adjustments for the year ended December 31, 2004.

 

*Accounting for the Retirement ofTreasury Stock*

 

Previously, the Companyrecorded the repurchase of shares of outstanding common as shares of treasurystock, using the cost method, which resulted in treasury stock being presentedas a separate component of shareholders’ equity. However, the Company isincorporated in the State of Utah, which requires entities incorporated withinthis jurisdiction to treat any purchase of outstanding common shares as aretirement of common stock. As a result, the Company has restated thepresentation of shareholders’ equity and has accounted for any repurchases ofoutstanding common shares as a retirement of the common shares, with the costof common shares acquired being allocated as a reduction of common stock andretained earnings. For any issuance of new shares, the issuance proceeds wererecorded as an increase to common stock as the Company has no par value stock.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

As a result of thisadjustment, previously reported treasury stock of $54,833 at December 31,2003 has been allocated as a reduction in both common stock and retainedearnings. Previously reported common stock of $25,437 increased by $16,952 to$42,389. Previously reported retained earnings of $124,997 decreased by $71,785to $53,212. The previously reported treasury stock repurchased during the yearended December 31, 2004 has been restated to reflect an allocation as areduction in both common stock and retained earnings. The previously reportedtreasury stock issued during the year ended December 31, 2004 has beencorrected to reflect an increase in common stock. As a result of thesecorrections, previously reported common stock of $21,692 increased by $16,523and previously reported retained earnings of $139,074 decreased by $13,014.There is no impact on reported net income for the fiscal year ended December 31,2004 or other years.

 

*2004 Consolidated Statement ofCash Flows*

 

In addition to theeffects of the restatements described above, the Company identified otherrestatements in the consolidated statement of cash flows for the year ended December 31,2004 as follows:

 

·                  The Company corrected all amountsrelated to unrealized gains and losses, sales, purchases and redemptions toreflect the underlying activity of investments during the year.

·                  The Company presented the non-cashforeign exchange gain as an adjustment to reconcile net income to cash providedby operating activities.

·                  The Company presented the advancesand payments on the line of credit as separate line items.

·                  Previously reported cash and cashequivalents of $36,206 at December 31, 2004 decreased to $32,693 as aresult of short-term investments and credit card receivables improperlyincluded as cash and cash equivalents.

 

**NOTE 3: INVENTORIES**

 

The composition ofinventories is as follows:

 
| **As of December 31** | ** ** | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| Raw materials                        | ** ** | **$**      | **8,670**  |     | $          | 9,509 |   |
| Work in process                      | ** ** | **1,224**  |       | 922      |       |
| Finished goods                       | ** ** | **28,745** |       | 24,557   |       |
| ** **                           |       | **$**      | **38,639** |     | $          | 34,988 |   |

 

**NOTE 4: PROPERTY, PLANT AND EQUIPMENT**

 

The composition ofproperty, plant and equipment is as follows:

** **
| **As of December 31**       | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|--------------------------------------------|------------|-------------|------------|------------|------------|
| Land and  improvements                     | ** ** | **$**       | **2,208**  | ** ** | $          | 2,208 |   |
| Buildings and  improvements                | ** ** | **28,624**  | ** ** | 28,516     |       |
| Machinery and  equipment                   | ** ** | **16,724**  | ** ** | 17,107     |       |
| Furniture and  fixtures                    | ** ** | **27,066**  | ** ** | 28,209     |       |
| ** **                                 |       | **74,622**  | ** ** | 76,040     |       |
| Accumulated  depreciation and amortization | ** ** | **(44,041** | **)**      | (41,965    | )          |
| ** **                                 |       | **$**       | **30,581** | ** ** | $          | 34,075 |   |

 

Depreciationexpense was $6,216, $5,959, and $5,368 for the years ended December 31,2006, 2005, and 2004, respectively.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

**NOTE 5: INTANGIBLE ASSETS**

 

The Companyacquired certain product formulations during the year ended December 31,2006. At December 31, 2006, the product formulations had a carrying amountof $763, accumulated amortization of $8 and a net amount of $755. The estimateduseful life of the product formulations is estimated to be 15 years.Amortization expense for intangible assets for the year ended December 31,2006 was $8.

 

Estimated amortizationexpense for the five succeeding fiscal years and thereafter is as follows:

 

| **Year Ending December 31:** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| 2007                                        |       | $                                    | 51         |   |
| 2008                                        |       | 51                                   |       |
| 2009                                        |       | 51                                   |       |
| 2010                                        |       | 51                                   |       |
| 2011                                        |       | 51                                   |       |
| Thereafter                                  |       | 500                                  |       |
| Total                                       |       | $                                    | 755        |   |

 

**NOTE 6: INVESTMENT SECURITIES**

 

Theamortized cost and estimated fair values of available-for-sale securities bybalance sheet classification are as follows:

 
| **As of December 31, 2006** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Municipal  obligations                          |       | $                   | 5,034      |                         | $          | 14                            |       | $               | (31        | ) | $ | 5,017 |   |
| U.S. Government  Securities Funds               |       | 646                 |       | —                       |       | —                        |       | 646             |       |
| Equity  securities                              |       | 212                 |       | 179                          |       | —                        |       | 391             |       |
| Total investment  securities                    |       | $                   | 5,892      |                         | $          | 193                           |       | $               | (31        | ) | $ | 6,054 |   |

 
| **As of December 31, 2005** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Municipal  obligations                          |       | $                   | 4,609      |                         | $          | 24                            |       | $               | (46        | ) | $ | 4,587 |   |
| U.S. Government  Securities Funds               |       | 619                 |       | —                       |       | —                        |       | 619             |       |
| Equity  securities                              |       | 212                 |       | 159                          |       | —                        |       | 371             |       |
| Total investment  securities                    |       | $                   | 5,440      |                         | $          | 183                           |       | $               | (46        | ) | $ | 5,577 |   |

 

Contractual maturitiesof municipal obligations fair value at December 31, 2006, are as follows:

 
| Mature after one  year through five years |   |   |   |   |   |   |   | $     | 1,609  |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|--------|-------|--------|--------|
| Mature after  five years                  |   |   |   |   |   |   |   | 3,408 |   |
| Total                                     |   |   |   |   |   |   |   | $     | 5,017  |   |

 

During 2006, 2005 and2004, the proceeds from the sales of available-for-sale securities were $1,396,$1,718, and $8,153, respectively. The gross realized gains on sales ofavailable-for-sale securities (net of tax) were $14, $23, and $27 for the yearsended December 31, 2006, 2005 and 2004, respectively. The gross realizedlosses on the sales of available-for-sale securities were $5, $3, and $0 forthe years ended December 31, 2006, 2005 and 2004, respectively.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

The Company’s tradingsecurities portfolio totaled $1,594 and $1,867 at December 31, 2006 and2005, respectively, and generated gains of $148 and $10, for the years ended December 31,2006, and 2004, respectively and a loss $88 for the year ended December, 31,2005.

 

As of December 31,2006 and 2005, the Company had unrealized losses of $31 and $46, respectively,in its municipal obligations investments. These losses are due to the interestrate sensitivity of these investments.

 

**NOTE 7: LINE OF CREDIT**

 

The Company had anoperating line of credit at December 31, 2005, which provided forborrowings up to $15 million, with an interest rate equal to LIBOR (4.75percent as of December 31, 2005) plus 1.5 percent. Borrowings under thisline of credit were used for working capital, capital expenditures, and otherrelated costs. The borrowing outstanding on this line of credit as of December 31,2005 was $7.0 million. The weighted average interest rate for 2005 was 4.76percent. The line of credit contained other terms and conditions as well asaffirmative and negative financial covenants. The Company paid off the line ofcredit on March 31, 2006 and the line of credit was terminated on July 1,2006.

 

**NOTE8:  ACCRUED LIABILITIES**

 

The composition ofaccrued liabilities is as follows:

** **
| **As of December 31** | ** ** | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| Tax  contingencies                   | ** ** | **$**      | **16,826** |     | $          | 10,522 |   |
| Sales, use, and  property tax        | ** ** | **5,568**  |       | 3,301    |       |
| Salaries and  employee benefits      | ** ** | **4,750**  |       | 5,752    |       |
| Convention costs                     | ** ** | **3,839**  |       | 3,779    |       |
| Other                                | ** ** | **12,833** |       | 9,722    |       |
| Total                                | ** ** | **$**      | **43,816** |     | $          | 33,076 |   |

 

**NOTE 9: ACCUMULATED OTHER COMPREHENSIVE LOSS**

 

The components ofaccumulated other comprehensive loss, net of tax, are as follows:

 
| ** **                            | ** ** | **Foreign Currency  Translation  Adjustments** | ** ** | **Net Unrealized  Gains (Losses) On  Available-For-Sale  Securities** | ** ** | **Total  Accumulated Other  Comprehensive Loss** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Balance as of  January 1, 2004   |       | $                                                   | (14,604    | )                                                                                    | $          | 169                                                        |       | $ | (14,435 | ) |
| Activity, net of  tax                 |       | (606                                                | )          | (45                                                                                  | )          | (651                                                       | )          |
| Balance as of  December 31, 2004 |       | (15,210                                             | )          | 124                                                                                  |       | (15,086                                                    | )          |
| Activity, net of  tax                 |       | (573                                                | )          | (48                                                                                  | )          | (621                                                       | )          |
| Balance as of  December 31, 2005 |       | (15,783                                             | )          | 76                                                                                   |       | (15,707                                                    | )          |
| Activity, net of  tax                 |       | (1,371                                              | )          | 18                                                                                   |       | (1,353                                                     | )          |
| Balance as of  December 31, 2006 |       | $                                                   | (17,154    | )                                                                                    | $          | 94                                                         |       | $ | (17,060 | ) |

 

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** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

**NOTE10:  INCOME TAXES**

 

Income (loss) fromoperations before provision (benefit) for income taxes are taxed under thefollowing jurisdictions:

 
| **Year Ended December 31** | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Domestic                                  | ** ** | **$**     | **1,138**  |     | $          | (1,345   | )          | $ | 13,616 |   |
| Foreign                                   | ** ** | **7,491** |       | 12,768   |       | 7,086    |       |
| Total                                     | ** ** | **$**     | **8,629**  |     | $          | 11,423   |       | $ | 20,702 |   |

 

Components of theprovision (benefit) for income taxes for each of the three years in the periodended at December 31, 2006 are as follows:

 
| **Year Ended December 31** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Current:                                  |       |       | ** ** |       |       |     |       |
| Federal                                   | ** ** | **$**      | **3,848**  | ** ** | $          | (782     | )          | $ | 5,514 |   |
| State                                     | ** ** | **388**    | ** ** | (280       | )          | 874      |       |
| Foreign                                   | ** ** | **10,643** | ** ** | 7,873      |       | 4,624    |       |
| Subtotal                                  | ** ** | **14,879** | ** ** | 6,811      |       | 11,012   |       |
| Deferred:                                 |       |       | ** ** |       |       |     |       |
| Federal                                   | ** ** | **$**      | **(2,173** | **)**      | 1,163      |     | (1,844     | ) |
| State                                     | ** ** | **237**    | ** ** | (163       | )          | (128     | )          |
| Foreign                                   | ** ** | **(749**   | **)**      | 108        |       | (110     | )          |
| Subtotal                                  | ** ** | **(2,685** | **)**      | 1,108      |       | (2,082   | )          |
| Total provision  for income taxes         | ** ** | **$**      | **12,194** | ** ** | $          | 7,919    |       | $ | 8,930 |   |

 

The income taxbenefits associated with employee exercises of options under the nonqualifiedstock option plan decreased the income taxes payable by $215, $3,426, and$3,337 in 2006, 2005 and 2004, respectively. These benefits were recorded as anincrease to common stock.

 

Theprovision for income taxes, as a percentage of income before provision forincome taxes, differs from the statutory U.S. federal income tax rate due tothe following:

 
| **Year Ended December 31**                   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Statutory U.S.  federal income tax rate                     | ** ** | **35.0**   | **%**      | **35.0**   | **%**      | 35.0     | %          |
| State income  taxes, net of U.S. federal income tax benefit | ** ** | **4.8**    | ** ** | **(3.5**   | **)**      | 2.3      |       |
| Foreign taxes                                               | ** ** | **(3.1**   | **)**      | **0.8**    | ** ** | (7.2     | )          |
| Valuation  allowance change                                 | ** ** | **29.3**   | ** ** | **(2.3**   | **)**      | 0.2      |       |
| Tax  contingencies                                          | ** ** | **54.0**   | ** ** | **38.6**   | ** ** | 11.0     |       |
| Foreign exchange  gains                                     | ** ** | **9.9**    | ** ** | **—** | ** ** | —   |       |
| Gain on sale of  intercompany assets                        | ** ** | **12.9**   | ** ** | **—** | ** ** | —   |       |
| Charitable  contributions                                   | ** ** | **(2.5**   | **)**      | **(0.6**   | **)**      | (0.5     | )          |
| Extra  territorial income                                   | ** ** | **(2.6**   | **)**      | **(2.9**   | **)**      | —   |       |
| Foreign tax rate  differential                              | ** ** | **—** | ** ** | **(5.6**   | **)**      | 0.7      |       |
| Nondeductible  foreign expenses                             | ** ** | **2.1**    | ** ** | **2.3**    | ** ** | 1.2      |       |
| Other                                                       | ** ** | **1.5**    | ** ** | **7.5**    | ** ** | 0.4      |       |
| Effective income  tax rate                                  | ** ** | **141.3**  | **%**      | **69.3**   | **%**      | 43.1     | %          |

 

Pretax earnings ofa foreign subsidiary or affiliate are subject to U.S. taxation when effectivelyrepatriated. The Company does not intend to reinvest undistributed earningsindefinitely in the Company’s foreign subsidiaries.

 

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** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

The significantcomponents of the deferred tax assets (liabilities) are as follows:

 
| **As of December 31**                    | ** ** | **2006**   | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|
| Inventory                                               | ** ** | **$**      | **2,087**  |     | $          | 2,841 |   |
| Accrued  liabilities                                    | ** ** | **3,264**  |       | 3,329    |       |
| Impaired  investments                                   | ** ** | **750**    |       | 776      |       |
| Deferred  compensation                                  | ** ** | **613**    |       | 759      |       |
| Amortization of  intangibles                            | ** ** | **1,129**  |       | 1,299    |       |
| Bad debts                                               | ** ** | **492**    |       | 619      |       |
| Net operating  losses                                   | ** ** | **2,346**  |       | 1,892    |       |
| Capital losses                                          | ** ** | **785**    |       | 812      |       |
| Foreign tax and  withholding credits                    | ** ** | **3,953**  |       | 3,953    |       |
| Non-income tax  accruals                                | ** ** | **1,918**  |       | 879      |       |
| Health insurance  accruals                              | ** ** | **596**    |       | 398      |       |
| Cumulative  translation adjustment — outside basis | ** ** | **1,050**  |       | 47       |       |
| Other deferred  tax assets                              | ** ** | **2,319**  |       | 698      |       |
| Valuation  allowance                                    | ** ** | **(7,822** | **)**      | (5,297   | )          |
| Total deferred  tax assets                              | ** ** | **13,480** | ** ** | 13,005   |       |
| Accelerated  depreciation                               | ** ** | **(489**   | **)**      | (1,345   | )          |
| Other deferred  tax liabilities                         | ** ** | **(2,324** | **)**      | (2,110   | )          |
| Total deferred  tax liabilities                         | ** ** | **(2,813** | **)**      | (3,455   | )          |
| Total deferred  taxes, net                              | ** ** | **$**      | **10,667** |     | $          | 9,550 |   |

 

Thecomponents of deferred tax assets (liabilities), net are as follows:

 
| **Year Ended December 31** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Net current  deferred tax assets          | ** ** | **$**      | **5,727**  | ** ** | $          | 5,297 |   |
| Net non-current  deferred tax assets      | ** ** | **5,732**  | ** ** | 5,417      |       |
| Total net  deferred tax assets            | ** ** | **11,459** | ** ** | 10,714     |       |
|                                      |       |       | ** ** |       |       |
| Net current  deferred tax liabilities     | ** ** | **(338**   | **)**      | (891       | )          |
| Net non-current  deferred tax liabilities | ** ** | **(454**   | **)**      | (273       | )          |
| Total net deferred  tax liabilities       | ** ** | **(792**   | **)**      | (1,164     | )          |
|                                      |       |       | ** ** |       |       |
| Total deferred  tax assets, net           | ** ** | **$**      | **10,667** | ** ** | $          | 9,550 |   |

 

Net current deferred tax liabilities are included inaccrued liabilities and net non-current deferred tax liabilities are includedin other liabilities in the consolidated balance sheets.

 

Management has provided avaluation allowance of $7,822 and $5,297 as of December 31, 2006 and 2005,respectively, for certain deferred tax assets, including foreign net operatinglosses and foreign tax credits, for which management cannot conclude it is morelikely than not that they will be realized. The Company reviewed its foreigntax positions and increased its valuation allowance by approximately $2,525 and$45 for 2006 and 2004, respectively, and decreased its valuation allowance by$259 for 2005.

 

At December 31,2006, foreign subsidiaries had unused operating loss carryovers ofapproximately $7,092. Generally, the tax net operating losses will expire atvarious dates from 2007 through 2011. For financial reporting purposes, therelease of these valuation allowances would reduce income tax expenses. TheCompany has approximately $3,348 of foreign tax credits which begin to expireat various times starting in 2012.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

The Company is subject toregular audits by federal, state and foreign tax authorities. These audits mayresult in additional tax liabilities. The Company believes it has appropriatelyprovided for income taxes for all years. Several factors drive the calculationof its tax reserves. Some of these factors include: (i) the expiration ofvarious statutes of limitations; (ii) changes in tax law and regulations; (iii) issuanceof tax rulings; and (iv) settlements with tax authorities. Changes in anyof these factors may result in adjustments to the Company’s reserves, whichwould impact its reported financial results.

 

The Company’s federalincome tax returns for 2002 through 2006 are open to examination for federaltax purposes. The Company has several foreign tax jurisdictions which have opentax years from 2000 through 2006. The IRS is currently conducting an audit ofthe Company’s U.S. federal income tax returns for the 2003 through 2005 taxyears. The Company believes the outcome of these matters will not have amaterial adverse effect on the consolidated results of operations orconsolidated financial position.

 

**NOTE11:  CAPITAL TRANSACTIONS**

 

**Common Stock**

 

During 2006, the Company did not repurchase any sharesof common stock. During 2005 and 2004, the Company repurchased 513 and 1,002shares of common stock for a total of $11,363 and $16,999, respectively. Of theshares repurchased during 2005 and 2004, the Company repurchased 513 and 1,000shares, respectively, of common stock upon the completion of Dutch Auctiontender offers. The Dutch Auction tender offers were open to all shareholders ofthe Company including employees. Employees were required to tender outstandingshares and be at risk consistent with all shareholders. The repurchased shareshave been accounted for as retired shares.

 

**Share-Based Compensation**

 

The Company maintained a stock option plan, whichexpired in 2005 (“the Plan”). The Plan provided for the granting or awarding ofcertain nonqualified stock options to officers, directors and other employees.The term, not to exceed 10 years, and the vesting and exercise period of eachstock option awarded under the Plan were determined by the Company’s Board ofDirectors. All grants were made at the quoted fair market value of the stock atthe date of grant.

 

Stock option activity for 2006, 2005 and 2004consisted of the following:

 
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Weighted Average Exercise  Price Per Share** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------------|------------|
| Options  outstanding at January 1, 2004   |       | 3,111                      |       | $                                                                  | 8.28       |   |
| Granted                                        |       | 95                         |       | 12.29                                                              |       |
| Forfeited or  canceled                         |       | (45                        | )          | 8.96                                                               |       |
| Exercised                                      |       | (1,698                     | )          | 7.91                                                               |       |
| Options  outstanding at December 31, 2004 |       | 1,463                      |       | 8.94                                                               |       |
| Granted                                        |       | —                     |       | —                                                             |       |
| Forfeited or  canceled                         |       | (40                        | )          | 11.28                                                              |       |
| Exercised                                      |       | (920                       | )          | 8.32                                                               |       |
| Options  outstanding at December 31, 2005 |       | 503                        |       | 9.89                                                               |       |
| Granted                                        |       | —                     |       | —                                                             |       |
| Forfeited or  canceled                         |       | (5                         | )          | 9.25                                                               |       |
| Exercised                                      |       | (66                        | )          | 8.37                                                               |       |
| Options  outstanding at December 31, 2006 |       | 432                        |       | 10.13                                                              |       |
|                                                |            |                            |            |                                                                    |            |  |

 

The aggregate intrinsic values on the dates ofexercise of options exercised during the years ended December 31, 2006,2005, and 2004 were $567, $9,981, and $9,344, respectively. Intrinsic value isdefined as the difference between the current market value of the underlyingcommon stock and the grant price for options with exercise prices less than themarket values on such dates.

 

The Company has paid cash dividends totaling $3,069,$3,053, and $3,001 for the years ended December 31, 2006, 2005 and 2004,respectively.

 

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

** **

The following table summarizes information aboutoptions outstanding and exercisable at December 31, 2006.

 
| ** **                                                    | ** ** | **Options Outstanding and Exercisable** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Range of Option Prices Per Share** | ** ** | **Options  Outstanding**                               | ** ** | **Weighted-Avg.  Remaining  Contractual Life** | ** ** | **Weighted-Avg.  Exercise Price  Per Share** | ** ** |
| $6.88 to $7.94                                                |       | 219                                                    |       | 0.2 years |   | $ | 7.68 |   |
| $8.10 to $11.75                                               |       | 62                                                     |       | 4.7 years |   | 9.74 |   |
| $12.00 to $13.81                                              |       | 99                                                     |       | 2.0 years |   | 12.44 |   |
| $14.90 to $19.71                                              |       | 52                                                     |       | 3.4 years |   | 16.54 |   |
| $6.88 to $19.71                                               |       | 432                                                    |       | 1.6 years |   | $ | 10.13 |   |

 

The aggregate intrinsic value of options outstandingand exercisable at December 31, 2006 was $962.

 

**NOTE12:  EMPLOYEE BENEFIT PLANS**

 

**Deferred Compensation Plans**

 

The Company sponsors a qualified deferred compensationplan, which qualifies under Section 401(k) of the Internal RevenueCode. The Company makes matching contributions of 100 percent of employeecontributions up to a maximum of five percent of the employee’s compensation.The Company’s contributions to the plan vest after a period of three years.During 2006, 2005 and 2004, the Company contributed to the plan approximately$887, $970, and $863, respectively.

 

The Company provides a nonqualified deferredcompensation plan for its officers and certain key employees. Under this plan,participants may defer up to 100 percent of their annual salary and bonus.Although participants direct the investment of these funds, they are classifiedas trading securities and are included in long-term investment securities onthe consolidated balance sheets because they remain assets of the Company untilthey are actually paid out to the participants. The Company has established atrust to finance obligations under the Plan. At the end of each year and atother times provided under the plan, the Company adjusts its obligation to aparticipant by the investment return or loss on the funds selected by theparticipant under rules established in the plan. Upon separation ofemployment of the participant with the Company, the obligation owed to theparticipant under the plan will be paid as a lump sum or over a period ofeither three or five years (and will continue to be adjusted by the applicableinvestment return or loss during the period of pay-out). The Company haddeferred compensation plan assets of approximately $1,594 and $1,867 as of December 31,2006 and December 31, 2005, respectively. The change in the liabilityassociated with the deferred compensation plan is recorded in the deferredcompensation payable.

 

**Management and Employee Bonus Plan**

 

The Company has a discretionary bonus plan thatprovides for participants to receive payments based upon the achievement ofspecified annual increases in net sales revenue and operating income, as wellas individual objectives. The expense related to the bonus plan wasapproximately $2,325, $2,449, and $6,241 for the years ended December 31,2006, 2005 and 2004, respectively. These amounts were accrued as liabilities inthe respective year-end consolidated balance sheets. All United Statesemployees as well as key international employees participate in the bonus plan.

 

**NOTE13:  COMMITMENTS AND CONTINGENCIES**

 

**Contractual Obligations**

 

The Company leases certain facilities and equipmentused in its operations and accounts for leases with escalating payments usingthe straight-line method. The Company incurred expenses of approximately$5,496, $3,863, and $4,766 in connection with operating leases during 2006,2005 and 2004, respectively. The approximate aggregate commitments undernon-cancelable operating leases in effect at December 31, 2006, were asfollows:

 

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** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 
| **Year Ending December 31** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2007                                       |       | $          | 4,625      |   |
| 2008                                       |       | 3,306      |       |
| 2009                                       |       | 1,942      |       |
| 2010                                       |       | 600        |       |
| 2011                                       |       | 121        |       |
| Thereafter                                 |       | 300        |       |
|                                       |       | $          | 10,894     |   |

 

The Company enters into contracts with suppliers toensure the availability of both botanical and non-botanical raw materials, aswell as packing materials, in advance of its annual requirements. As of December 31,2006, the Company has entered into non-cancelable purchase agreements for$8,301 related to fiscal year 2007 production needs.

 

**Letter of Credit**

 

AtDecember 31, 2006, the Company had an outstanding standby letter of credit witha financial institution of $2,864 that secured the payment of the costs of anincentive trip that occurred in 2007. The letter of credit was secured by theCompany’s investments.

 

**Legal Proceedings**

 

Currently, the Company is a party to various legalproceedings, including those noted below. Management cannot predict theultimate outcome of these proceedings, individually or in the aggregate, ortheir resulting effect on the Company’s business, financial position, resultsof operations or prospects as litigation and related matters are subject toinherent uncertainties, and unfavorable rulings could occur. Were anunfavorable outcome to occur, there exists the possibility of a material adverseimpact on the business, financial position, results of operations or prospectsfor the period in which the ruling occurs or future periods. The Companymaintains directors and officers liability, product liability, generalliability and excess liability insurance coverage. However, no assurances canbe given that such insurance will continue to be available at an acceptablecost to the Company, that such coverage will be sufficient to cover one or morelarge claims, or that the insurers will not successfully disclaim coverage asto a pending or future claim.

 

**Class ActionLitigation**

 

Between April 3,2006 and June 2, 2006, five separate shareholder class action lawsuitswere filed against the Company and certain of its present and former officersand directors in the United States District Court for the District of Utah.These matters were consolidated and on November 3, 2006, the plaintiffsfiled a Consolidated Complaint against the Company, the Company’s ChiefExecutive Officer and former director, Douglas Faggioli, the Company’s formerChief Financial Officer, Craig D. Huff, and a former director and former Chairof the Company’s Audit Committee, Franz L. Cristiani. The ConsolidatedComplaint asserts three separate claims on behalf of purchasers of the Company’scommon stock: (1) a claim against Mr. Faggioli and the Company forviolation of Section 10(b) of the Exchange Act and Rule 10b-5promulgated thereunder, alleging that Mr. Faggioli made a series ofalleged material misrepresentations to the investing public; (2) a claimagainst Mr. Faggioli and the Company for violation of Section 10(b) andRule 10b-5, alleging that Mr. Faggioli made a series ofmisrepresentations to the Company’s then independent auditor, KPMG, LLP (“KPMG”),for the purpose of obtaining unqualified or “clean” audit opinions and reviewopinions from KPMG concerning certain of the Company’s annual and quarterlyfinancial statements; and (3) a claim against Messrs. Faggioli, Huffand Cristiani for violation of Section 20(a) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), alleging that theindividual defendants have “control person” liability for thepreviously-alleged violations by the Company. The Consolidated Complaint seeksan unspecified amount of compensatory damages, together with interest thereon,litigation costs and expenses, including attorneys’ fees and expert fees, andany such other and further relief as may be allowed by law.

 

On January 5, 2007,the Company and Messrs. Faggioli, Huff and Cristiani moved to dismiss theConsolidated Complaint in its entirety. On May 21, 2007, the court issuedits decision denying the motion in large part, but shortening the proposedclass period on one of the plaintiffs’ claims. On June 6, 2007, theCompany and the other defendants answered the Consolidated Complaint, whereinthey denied all allegations of wrongdoing and raised a number of affirmativedefenses. On November 1, 2007, the plaintiffs filed their motion for classcertification, which the Company 

 

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

opposed. On September 25, 2008, the court granted the plaintiffs’motion for class certification in part, establishing the class as all personswho purchased or otherwise acquired the Company’s common stock, and weredamaged thereby, from March 16, 2005 to March 20, 2006. On May 9,2008, at the invitation of the Court based upon recent case law developments,the Company filed a motion to dismiss the Plaintiffs’ second cause of action (a10b-5 claim based on non-public representations to KPMG).  The Plaintiffsopposed this motion.  On September 23, 2008, the Court granted theCompany’s motion and dismissed the Plaintiffs’ second cause of action.

 

The case is currently in the early stages ofdiscovery. The trial is not scheduled to commence until April 19, 2010.Although the Company and the other defendants are vigorously defending againstthe allegations in the lawsuit, and the Company intends to continue doing so,the Company is not able at this time to predict the outcome of this litigationor whether the Company will incur any liability associated to the litigation,or to estimate the effect such outcome would have on the financial condition ofthe Company.

 

The Company maintains insurance that may providecoverage for the potential consequences of a negative outcome of the litigationdescribed above. The Company has given notice to its insurers of the claims andthe insurers have responded by requesting additional information and byreserving their rights under the policies, including the rights to denycoverage under various policy exclusions or to rescind the policies in questionas a result of the Company’s restatement of its financial statements. There canbe no assurance that the insurers will not seek to deny coverage or rescind thepolicies; that some or all of the claims will not be covered by such policies;or that, even if covered, the Company’s ultimate liability will exceed theavailable insurance.

 

**ThreatenedDerivative Lawsuits**

 

By letter dated October 4,2007, a shareholder of the Company alleged that a number of the current andformer officers and directors of the Company breached their fiduciary duties tothe Company by supposedly engaging in the same alleged wrongdoing that is thesubject of the class action lawsuit. The shareholder demanded that the Companytake action to recover from the specified officers and directors all damagessustained by the Company as a result of the alleged misconduct, and threatenedto commence a derivative action if the Company failed to act on the shareholder’sdemand within a reasonable period of time.

 

On December 26,2007, before the expiration of the Company’s allotted 90-day period forresponding to the demand, the shareholder presented a second but substantivelyidentical demand on the Company, thereby triggering a new 90-day responseperiod. The Company’s Board of Directors responded to this demand on March 20,2008, rejecting the shareholder’s demands.

 

On May 21, 2008,this same shareholder filed a summons and complaint in the Fourth JudicialDistrict Court for the State of Utah seeking an order compelling the Company toproduce certain books and records to the shareholder. The Company filed itsanswer to the complaint on June 12, 2008.

 

Although the Company and the other defendants arevigorously defending against the allegations in the threatened derivativelawsuit above, management believes that it is not possible at this time topredict the outcome of this litigation or whether the Company will incur anyliability associated to the litigation, or to estimate the effect such outcomewould have on the financial condition of the Company.

 

**SEC andDOJ Investigations**

 

In March 2006, the Company voluntarily disclosedto the SEC certain information related to the independent investigation by theCompany’s Audit Committee. Since that time, the SEC has subpoenaed certaindocuments and voluntarily requested other information in connection with itssubsequent investigation related to these events. The Company is cooperating fullywith this investigation. The Company cannot predict what impact, if any, andthe materiality of such impact, if any, the conclusion of this matter may haveon our financial statements.

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

In March 2006, the Company voluntarily disclosedto the United States Department of Justice (“DOJ”) certain information relatedto the independent investigation by the Company’s Audit Committee. Since thattime, the DOJ has requested that the Company voluntarily provide documents andother information in connection with its subsequent investigation related tothese events. The Company is cooperating fully with this investigation. TheCompany cannot predict what impact, if any, and the materiality of such impact,if any, the conclusion of this matter may have on the Company’s financialstatements.

 

**SEC Section 12(j) Proceeding**

 

On July 12, 2007, the Company announced that theSEC had instituted administrative proceedings pursuant to Section 12(j).On November 8, 2007, an administrative law judge in the administrativeproceeding issued an Initial Decision to revoke the registration of the Company’scommon stock. Shortly thereafter, the Company filed a petition for review withthe SEC. On December 5, 2007, the SEC granted our petition for review. TheSEC had scheduled oral argument regarding the Company’s petition onOctober 1, 2008. The SEC has now rescheduled the oral argument for anunspecified future date.  The Companycannot predict the outcome of such review at this time. The Initial Decision ofthe administrative law judge will not become effective pending the review. TheCompany cannot presently predict what, if any, impact the SEC’s ultimatedetermination may have on our financial statements or the materiality of such impact,if any. If a final order is issued by the SEC revoking the registration of ourcommon stock, broker-dealers would not be permitted to effect transactions inshares of our common stock until the Company files a new registration with theSEC under the Exchange Act and that registration is made effective.

 

**Self-InsuranceLiabilities**

 

Similar to other manufacturers and distributors ofproducts that are ingested, the Company faces an inherent risk of exposure toproduct liability claims in the event that, among other things, the use of itsproducts results in injury. Effective April 12, 2004, the Company compliedwith the FDA’s ban on the ingredient ephedra. The Company carries insurance inthe types and amounts it considers reasonably adequate to cover the risksassociated with its business. On June 1, 2003, the Company established awholly owned captive insurance company to provide it with product liabilityinsurance coverage. The Company has accrued an amount that it believes issufficient to cover probable and reasonably estimable liabilities related toproduct liability claims based on the Company’s history of such claims.However, there can be no assurance that these estimates will prove to besufficient nor can there be any assurance that the ultimate outcome of anylitigation for product liability will not have a material negative impact onthe Company’s business prospects, financial position, results of operations, orliquidity.

 

The Company self-insures for certain employee medicalbenefits. The recorded liabilities for self-insured risks are calculated usingactuarial methods and are not discounted. The liabilities include amounts foractual claims and claims incurred but not reported. Actual experience,including claim frequency and severity as well as health care inflation, couldresult in actual liabilities being more or less than the amounts currentlyrecorded.

 

The Company has accrued $1,503 and $1,068 for productliability and employee medical claims at December 31, 2006 and 2005,respectively, and such amounts are included in accrued liabilities on theCompany’s consolidated balance sheets.

 

**Employee-RelatedLitigation**

 

One of the Company’s foreign subsidiaries is adefendant in litigation regarding primarily employee-related matters. The Companyhas recorded accruals of approximately $836 related to this litigation, whichis included in accrued liabilities.

 

**Tax Contingencies**

 

The Company has reservedfor certain income tax and state sales tax and use tax contingencies based onthe likelihood of an obligation in accordance with SFAS No. 5, “Accountingfor Contingencies”. Under SFAS No. 5, loss 

 

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**NATURE’SSUNSHINE PRODUCTS, INC. AND SUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

contingency provisionsare recorded for probable losses at management’s best estimate of a loss, orwhen a best estimate cannot be made, a minimum loss contingency amount isrecorded. The Company provides provisions for potential payments of income andother tax to various tax authorities for contingencies related to uncertain taxpositions and other issues. The Company also provides provisions for statesales taxes in each of the states where the Company has potential nexus. At December 31,2006 and 2005, the Company accrued $21,093 and $11,708, respectively,(including estimated interest and penalties) in accrued liabilities in theaccompanying consolidated balance sheets. While management believes that theassumptions and estimates used to determine this liability are reasonable, theultimate outcome of those matters cannot presently be determined. The Companyis not able at this time to predict the ultimate outcome of these matters or toestimate the effect the ultimate outcomes, if greater than the amounts accrued,would have on the financial condition of the Company.

 

**Government Regulations**

 

The Company is subject togovernmental regulations pertaining to product formulation, labeling andpackaging, product claims and advertising, and to the Company’s direct sellingsystem. The Company is also subject to the jurisdiction of numerous foreign taxand customs authorities. Any assertions or determination that either theCompany or the Company’s Distributors are not in compliance with existingstatutes, laws, rules or regulations could potentially have a materialadverse effect on the Company’s operations. In addition, in any country orjurisdiction, the adoption of new statutes, laws, rules or regulations, orchanges in the interpretation of existing statutes, laws, rules orregulations could have a material adverse effect on the Company and itsoperations. Although management believes that the Company is in compliance, inall material respects, with the statutes, laws, rules and regulations ofevery jurisdiction in which it operates, no assurance can be given that theCompany’s compliance with applicable statutes, laws, rules and regulationswill not be challenged by foreign authorities or that such challenges will nothave a material adverse effect on the Company’s financial position or resultsof operations or cash flows.

 

**NOTE 14: OPERATING BUSINESS SEGMENT AND INTERNATIONAL OPERATION INFORMATION**

 

The Company has three operating business segments.These operating segments are components of the Company for which separateinformation is available that is evaluated regularly by the chief operatingdecision maker in deciding how to allocate resources and in assessingperformance.

 

The Company has two operating business segments basedon geographic operations that include a United States segment and aninternational segment that operate under the Nature’s Sunshine Products name.The Company’s third operating business segment is Synergy Worldwide, whichoffers products with formulations different from those of the Nature’s SunshineProducts offerings. In addition, Synergy Worldwide’s marketing and Distributorcompensation plans are sufficiently different from those of Nature’s SunshineProducts. The accounting policies of the segments are the same as thosedescribed in the summary of significant accounting policies in Note 1. Salesrevenues for each segment have been reduced by any intercompany sales as theyare not included in the measure of segment profit or loss reviewed by the chiefoperating decision maker. The Company evaluates performance based on operatingincome (loss) by segment before consideration of certain inter-segmenttransfers and expenses.

 

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**NATURE’S SUNSHINE PRODUCTS, INC.AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 

Operating businesssegment information for the years ended December 31, 2006, 2005 and 2004is as follows:

 
| **Year Ended December 31** | ** ** | **2006**    | ** **  | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Sales Revenue:                            |       |        |        |     |       |     |       |
| Nature’s  Sunshine Products:         |       |        |        |     |       |     |       |
| United States                             | ** ** | **$**       | **148,374** |     | $          | 148,325  |       | $ | 141,551 |   |
| International                             | ** ** | **130,596** |        | 119,988  |       | 102,898  |       |
| ** **                                |       | **278,970** |        | 268,313  |       | 244,449  |       |
| Synergy  Worldwide                        | ** ** | **83,252**  |        | 83,371   |       | 80,875   |       |
| Total sales revenue                       | ** ** | **362,222** |        | 351,684  |       | 325,324  |       |
| Operating  Expenses:                      |       |        |        |     |       |     |       |
| Nature’s  Sunshine Products:         |       |        |        |     |       |     |       |
| United States                             | ** ** | **152,446** |        | 149,265  |       | 141,958  |       |
| International                             | ** ** | **118,976** |        | 104,262  |       | 89,600   |       |
| ** **                                |       | **271,422** |        | 253,527  |       | 231,558  |       |
| Synergy  Worldwide                        | ** ** | **82,795**  |        | 86,572   |       | 74,756   |       |
| Total operating expenses                  | ** ** | **354,217** |        | 340,099  |       | 306,314  |       |
| Operating Income  (Loss):                 |       |        |        |     |       |     |       |
| Nature’s  Sunshine Products:         |       |        |        |     |       |     |       |
| United States                             | ** ** | **(4,072**  | **)**       | (940     | )          | (407     | )          |
| International                             | ** ** | **11,620**  |        | 15,726   |       | 13,298   |       |
| ** **                                |       | **7,548**   |        | 14,786   |       | 12,891   |       |
| Synergy  Worldwide                        | ** ** | **457**     |        | (3,201   | )          | 6,119    |       |
| Total operating income                    | ** ** | **8,005**   |        | 11,585   |       | 19,010   |       |
|                                      |       |        |        |     |       |     |       |
| Other Income  (Expense), net              | ** ** | **624**     |        | (162     | )          | 1,692    |       |
| Income Before  Provision for Income Taxes | ** ** | **$**       | **8,629**   |     | $          | 11,423   |       | $ | 20,702 |   |

 
| **Year Ended December 31** | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Capital  Expenditures:                    |       |      |       |     |       |     |       |
| Nature’s  Sunshine Products:         |       |      |       |     |       |     |       |
| United States                             | ** ** | **$**     | **1,488**  |     | $          | 2,896    |       | $ | 3,500 |   |
| International                             | ** ** | **630**   |       | 609      |       | 1,096    |       |
| ** **                                |       | **2,118** |       | 3,505    |       | 4,596    |       |
| Synergy  Worldwide                        | ** ** | **605**   |       | 868      |       | 3,553    |       |
| Total capital expenditures                | ** ** | **$**     | **2,723**  |     | $          | 4,373    |       | $ | 8,149 |   |
| Depreciation and  Amortization:           |       |      |       |     |       |     |       |
| Nature’s Sunshine  Products:         |       |      |       |     |       |     |       |
| United States                             | ** ** | **$**     | **4,074**  |     | $          | 3,834    |       | $ | 3,676 |   |
| International                             | ** ** | **854**   |       | 1,175    |       | 1,205    |       |
| ** **                                |       | **4,928** |       | 5,009    |       | 4,881    |       |
| Synergy  Worldwide                        | ** ** | **1,296** |       | 950      |       | 487      |       |
| Total depreciation and amortization       | ** ** | **$**     | **6,224**  |     | $          | 5,959    |       | $ | 5,368 |   |

 

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**NATURE’S SUNSHINE PRODUCTS, INC.AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

***(Amountsin thousands, except per share information)***

 
| **As of December 31** | ** ** | **2006**    | ** **  | **2005** | ** ** |
|--------------------------------------|------------|-------------|-------------|----------|------------|
| Assets:                              |       |        |        |     |       |
| Nature’s  Sunshine Products     |       |        |        |     |       |
| United States                        | ** ** | **$**       | **86,045**  |     | $          | 82,752 |   |
| International                        | ** ** | **39,420**  |        | 43,360   |       |
| ** **                           |       | **125,465** |        | 126,112  |       |
| Synergy  Worldwide                   | ** ** | **22,882**  |        | 21,174   |       |
| Total Assets                         | ** ** | **$**       | **148,347** |     | $          | 147,286 |   |

 

Froman individual country perspective, only the United States, Japan, and Russiacomprise approximately 10 percent or more of consolidated net sales revenue forany of the years ended December 31, 2006, 2005 and 2004 as follows:

 
| **Year Ended December 31** | ** ** | **2006**    | ** **  | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Sales Revenue:                            |       |        |        |     |       |     |       |
| United  States                            | ** ** | **$**       | **157,132** |     | $          | 158,052  |       | $ | 192,605 |   |
| Japan                                     | ** ** | **52,301**  |        | 55,540   |       | 15,544   |       |
| Russia                                    | ** ** | **28,394**  |        | 23,710   |       | 19,222   |       |
| Other                                     | ** ** | **124,395** |        | 114,382  |       | 97,953   |       |
| Total Sales  Revenue                      | ** ** | **$**       | **362,222** |     | $          | 351,684  |       | $ | 325,324 |   |

 

Froman individual country perspective, only the United States comprise 10 percentor more of consolidated long-lived assets, consisting of property, plant andequipment and intangible assets as follows:

 
| **As of December 31** | ** ** | **2006**  | ** ** | **2005** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|
| Long-Lived  Assets                   |       |      |       |     |       |
| United  States                       | ** ** | **$**     | **25,601** |     | $          | 27,997 |   |
| Other                                | ** ** | **5,735** |       | 6,078    |       |
| Total Long-Lived  Assets             | ** ** | **$**     | **31,336** |     | $          | 34,075 |   |

 

**NOTE15:  RELATED PARTY TRANSACTIONS**

 

Inearly 2005, two Japanese Managers made donations of approximately $170 toLegacy for the Future (“Legacy”). Legacy was a charitable entity organized andcontrolled by a then officer and director of the Company. The donation was paidto the Company in Japan and was then wired to Legacy. Legacy subsequentlypurchased two products from the Company at the Company’s cost. The productswere near their expiration date and were provided to under-nourished childrenin a third world country.

 

TheCompany maintains split-dollar life insurance policies on certain executives.The cash surrender value of $313 and $321 related to such policies is recordedin other assets as of December 31, 2006 and 2005, respectively.

 

**NOTE16:  SUBSEQUENT EVENTS**

 

InJanuary 2008, the Company purchased a warehouse in Venezuela for approximately$4,000. The warehouse was purchased with cash from cash balances maintained inVenezuela. 

 

SinceDecember 31, 2006, the Company has declared quarterly cash dividends offive cents per common share.

 

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**NATURE’S SUNSHINE PRODUCTS, INC.AND SUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (continued)**

***(Amounts in thousands, except per share information)***

 

**NOTE17:  SUMMARY OF QUARTERLY OPERATIONS (SEENOTE 1) – UNAUDITED**

 

Thefollowing table displays the unaudited interim consolidated statements ofoperations for the quarters ended March 31, 2006, June 30, 2006, September 30,2006, and December 31, 2006.

 
| ** **                           | ** ** | **For the Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **March 31,  2006**                 | ** ** | **June 30,  2006** | ** ** | **September 30,  2006** | ** ** | **December 31,  2006** | ** ** |
| Net sales  revenue                   |       | $                                        | 87,989     |   | $ | 89,506 |   | $ | 92,458 |   | $ | 92,269 |   |
| Cost of goods  sold                  |       | 17,841                                   |       | 16,526 |   | 18,233 |   | 16,145 |   |
| Volume  incentives                   |       | 35,788                                   |       | 36,858 |   | 36,027 |   | 37,154 |   |
| Selling, general  and administrative |       | 36,983                                   |       | 35,391 |   | 32,438 |   | 34,833 |   |
| Operating income  (loss)             |       | (2,623                                   | )          | 731 |   | 5,760 |   | 4,137 |   |
| Other income  (expense)              |       | 522                                      |       | 845 |   | 282 |   | (1,025 | ) |
| Income (loss)  before income taxes   |       | (2,101                                   | )          | 1,576 |   | 6,042 |   | 3,112 |   |
| Taxes                                |       | 1,366                                    |       | 2,819 |   | 4,583 |   | 3,426 |   |
| Net income  (loss)                   |       | (3,467                                   | )          | (1,243 | ) | 1,459 |   | (314 | ) |
| Basic net income  (loss) per share   |       | (0.23                                    | )          | (0.08 | ) | 0.09 |   | (0.02 | ) |
| Diluted net  income (loss) per share |       | (0.23                                    | )          | (0.08 | ) | 0.09 |   | (0.02 | ) |
|                                      |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table displays the unaudited interim consolidated statements ofoperations for the quarters ended March 31, 2005, June 30, 2005, September 30,2005, and December 31, 2005. As noted in the table, the consolidatedstatements of operations and earnings per share for the quarters ended March 31,2005, June 30, 2005, and September 30, 2005 have been restated frompreviously filed unaudited consolidated financial statements. Restatementadjustments are described in Note 2.

 
| ** **                           | ** ** | **For the Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **March 31, 2005**             | ** ** | **June 30, 2005** | ** ** | **September 30, 2005** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **As  Previously  Reported**             | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** | **December 31,  2005** | ** ** |
| Net sales  revenue                   |       | $                                        | 86,401     |   | $ | 83,433 |   | $ | 87,040 |   | $ | 84,873 |   | $ | 87,706 |   | $ | 86,483 |   | $ | 96,895 |   |
| Cost of goods  sold                  |       | 14,698                                   |       | 14,564 |   | 14,825 |   | 14,934 |   | 16,521 |   | 16,634 |   | 21,461 |   |
| Volume  incentives                   |       | 33,508                                   |       | 33,667 |   | 35,161 |   | 37,424 |   | 34,572 |   | 35,907 |   | 37,127 |   |
| Selling, general  and administrative |       | 32,644                                   |       | 31,799 |   | 32,287 |   | 29,636 |   | 31,972 |   | 30,405 |   | 36,541 |   |
| Operating income                     |       | 5,551                                    |       | 3,403 |   | 4,767 |   | 2,879 |   | 4,641 |   | 3,537 |   | 1,766 |   |
| Other income  (expense)              |       | 74                                       |       | 6 |   | (116 | ) | 28 |   | (244 | ) | 86 |   | (282 | ) |
| Income before  income taxes          |       | 5,625                                    |       | 3,409 |   | 4,651 |   | 2,907 |   | 4,397 |   | 3,623 |   | 1,484 |   |
| Taxes                                |       | 1,658                                    |       | 2,198 |   | 584 |   | 2,000 |   | 72 |   | 2,283 |   | 1,438 |   |
| Net income                           |       | 3,967                                    |       | 1,211 |   | 4,067 |   | 907 |   | 4,325 |   | 1,340 |   | 46 |   |
| Basic net income  per share          |       | 0.27                                     |       | 0.08 |   | 0.27 |   | 0.06 |   | 0.28 |   | 0.09 |   | 0.00 |   |
| Diluted net  income per share        |       | 0.26                                     |       | 0.08 |   | 0.26 |   | 0.06 |   | 0.28 |   | 0.09 |   | 0.00 |   |
|                                      |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Basicand diluted net income (loss) per share are computed independently for each ofthe quarters presented. Therefore, the sum of the quarterly earnings per sharemay not equal the total computed for the year.

 

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## **Item 9. Change In andDisagreements with Accountants on Accounting and Financial Disclosure**

## ** **

Aspreviously disclosed and as described above, the Audit Committee engaged anindependent, nationally recognized law firm to assist in the investigation in November 2005and the law firm, in turn, engaged a nationally recognized independent,registered public accounting firm to provide further assistance. Oneindependent member of the Audit Committee and an outside independentconsultant, who later became a director and independent member of the AuditCommittee (the “Special Committee”), oversaw the work of the independentlaw firm and independent accounting firm assisting in the investigation (the “InvestigativeTeam”). On March 15, 2006, the Audit Committee received an oralpreliminary report (the “Preliminary Report”) from the InvestigativeTeam on the preliminary findings of the investigation to that date. ThePreliminary Report noted certain weaknesses in the Company’s internal controlsand recommended certain remedial measures be taken by the Company in connectionwith the findings of the investigation. Representatives of KPMG LLP (“KPMG”)were present for the presentation of the Preliminary Report by theInvestigative Team. Based on the Preliminary Report, the Audit Committee, inconsultation with KPMG, determined that certain of the Company’s previouslyissued financial statements should no longer be relied upon and reported suchdetermination in a Current Report on Form 8-K filed on March 20,2006. While the Company has consistently believed and disclosed that the amountof any errors and the periods to which they related had not been determined andfinalized as of March 20, 2006 (stated in the Current Report on Form 8-Kfiled on March 20, 2006), KPMG stated in a letter to the Company dated April 14,2006 (filed as Exhibit 99.1 to Current Report on Form 8-K filed April 18,2006) that it disagreed with that statement because the Investigative Team hadidentified both the proposed amount of the errors and the period in which theyoccurred.

 

On March 24,2006, KPMG requested a meeting with the members of the Audit Committee otherthan Franz Cristiani, the then-Chairman of the Audit Committee. At thismeeting, held telephonically on March 26, 2006, KPMG informed the membersof the Company’s Board who were present that, based on its interpretation ofthe findings presented in the Preliminary Report on March 15, 2006 andsubsequent meetings with the Audit Committee and the Investigative Team, KMPGrequired that (i) all of the recommended remedial measures in thePreliminary Report be implemented and, on or before April 10, 2006, theCompany provide KPMG with a plan of remediation covering the implementation ofsuch measures; (ii) the Board be enhanced to add additional independentmembers; (iii) Franz Cristiani be removed from the Board by the end of theday on March 28, 2006; and (iv) Douglas Faggioli, the Company’s ChiefExecutive Officer, be terminated. The Board members requested that they begiven until April 10, 2006 (the day on which the remediation plan was dueto KPMG) to make a determination with regard to the removal of Mr. Cristianiand termination of Mr. Faggioli, given that the Board believed that theInvestigative Team had only recommended that Mr. Cristiani be replaced asthe Chairman of the Audit Committee, not that he be removed from the AuditCommittee or the Board, and given that the Investigative Team had not completedits investigation. In a letter to the Company dated March 27, 2006 (filedas Exhibit 99.2 to Current Report on Form 8-K filed April 3,2006), KPMG stated that the removal of Mr. Cristiani and termination of Mr. Faggioliwere necessary by the close of business on Wednesday, March 29, 2006.

 

In a letterto KPMG on March 29, 2006 (filed as Exhibit 99.3 to Current Report onForm 8-K filed on April 3, 2006), the Board reiterated its commitmentto taking prompt actions to address the issues raised in the ongoingindependent investigation being overseen by the Special Committee, includingimplementing the remedial measures recommended by the Investigative Team. TheBoard also stated, among other things, that it had replaced Mr. Cristianiwith Larry Deppe to serve as the Chairman of the Audit Committee and that,pending the conclusion of the independent investigation, it had relieved Mr. Faggioliof his executive duties and appointed an executive committee overseen by theChairman of the Board to serve in Mr. Faggioli’s place. Mr. Faggioliwould continue as an employee of the Company, but would not be a member of theBoard. The Board noted that the Investigative Team had agreed that theseinterim steps were appropriate and consistent with their recommendations.

 

On March 30,2006, during further discussion with KPMG, KPMG reiterated its insistence that Mr. Cristianibe removed from the Board and Mr. Faggioli be terminated. The Board ofDirectors met and, in the interest of resolving the matter with KPMG, Mr. Cristianioffered to resign from all positions on the Board. On the afternoon of March 30,the Board presented to KPMG the proposed resignation of Mr. Cristiani andreiterated its commitment to relieve Mr. Faggioli of his executive dutieswhile retaining his services as an employee pending the conclusion of theinvestigation. On the evening of March 30, KPMG indicated that Mr. Faggioli’scontinuing as an employee was not acceptable and 

 

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that, in addition to Mr. Cristiani’sresigning, Mr. Faggioli would need to be terminated as an employee by 5:00 p.m.Mountain Standard Time on March 31, 2006 or KPMG would resign as theCompany’s independent, registered public accounting firm. The Company’s Boardmet on March 31, 2006 to discuss KPMG’s position and the Boardsubsequently asked for an extension until Monday, April 3, 2006, toprovide KPMG with its decision. KPMG tendered its letter of resignation on theevening of March 31, 2006, which was filed as Exhibit 99.1 to theCurrent Report on Form 8-K filed on April 3, 2006.

 

On April 3,2006, the Company reported the resignation of KPMG consistent with theforegoing summary, under Item 4.01 of its Current Report on Form 8-K. On April 14,2008, KPMG submitted a letter to the SEC, identifying four disagreements withthe Company’s filing on April 3, 2006, which letter was filed as Exhibit 99.1to the Current Report on Form 8-K filed on April 18, 2006. First,KPMG asserted, with respect to certain errors, the Investigative Team hadcompleted its investigation and identified both the proposed amount of theerrors and the period in which they occurred. The Company had stated that theexact amount of any errors and the periods to which they relate had not beendetermined and finalized. Second, KPMG disagreed with the Company’s statementthat KPMG had required certain remedial measures based on its interpretation ofthe findings in the Preliminary Report. Rather, KPMG asserted, theInvestigative Team found and reported on March 15, 2006 that theirinvestigation was complete as to certain matters and that they had reached theconclusion, and were recommending, that the employment of Mr. Faggioli beterminated and that Mr. Cristiani be removed from his position as chair ofthe Audit Committee. KPMG also asserted that the Special Committee concurredwith the recommendation while the other members of the Board of Directorsstated that they would not terminate Mr. Faggioli. Third, KPMG disagreedwith the Company’s statement that the interim steps regarding Mr. Faggioli(continuing his employment in a limited, non-executive role) were appropriateand consistent with the Investigative Team’s recommendations, asserting that onMarch 30, 2006, a member of the Special Committee communicated to KPMGthat the conclusion and recommendation as to the termination of Mr. Faggiolihad not changed and that nothing supported holding off on that recommendationany longer. Fourth, KPMG laid out three separate reportable events within themeaning of Item 304(a)(1)(v) of Regulation S-K, as required to be reportedunder Item 4.01 of Form 8-K:

 

1.                                      KPMGadvised the Company’s Audit Committee that, because of issues outlined andconclusions reached in the Preliminary Report of the Investigative Team, KPMGcould no longer rely on management’s representations.

 

2.                                      KPMGadvised the Company’s Audit Committee that as a result of information broughtto its attention by the findings and conclusions reached in the PreliminaryReport, previously issued financial statements could no longer be relied uponand it would be necessary to expand significantly the scope of its audit withrespect to the Company’s 2005 and previously issued financial statements. Dueto KPMG’s resignation, KPMG has not expanded the scope of its audit orperformed further investigations.

 

3.                                      KPMGadvised the Company’s Audit Committee that the Company had failed to taketimely and appropriate remedial actions.

 

Following the resignation ofKPMG, the Audit Committee continued to pursue its investigation of the findingsof Preliminary Report.

 

On February 2, 2007, theAudit Committee of the Board of Directors of the Company engaged Deloitte &Touche LLP (“Deloitte”) to serve as the Company’s independent,registered public accounting firm. On February 8, 2007, the Company fileda Current Report on Form 8-K, with its press release announcing itsengagement of Deloitte.

 

During the two-yearperiod ended December 31, 2006, and through February 2, 2007, neitherthe Company, nor anyone on its behalf, consulted with Deloitte with respect toeither (i) the application of accounting principles to a specifiedtransaction, either completed or proposed, or the type of audit opinion thatmight be rendered on the Company’s consolidated financial statements, and nowritten report or oral advice was provided by Deloitte to the Company thatDeloitte concluded was an important factor considered by the Company inreaching a decision as to the accounting, auditing, or financial reportingissue or (ii) any matter that was the subject of either a disagreement asdefined in Item 304(a)(1)(iv) of Regulation S-K or a reportable event asdescribed in Item 304 (a) (1) (v) of Regulation S-K.

 

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**Item 9A.Controls and Procedures**

 

ThisReport includes the certifications of our Chief Executive Officer and ChiefFinancial Officer required by Rule 13a-14 of the Securities Exchange Actof 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 9Aincludes information concerning the controls and control evaluations referred toin those certifications.

 

**Evaluationof Disclosure Controls and Procedures**

 

Disclosurecontrols and procedures (as defined in Rule 13a-15(e) under theExchange Act) are designed to ensure that information required to be disclosedin reports filed or submitted under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in rules andforms adopted by the Securities and Exchange Commission (SEC), and that suchinformation is accumulated and communicated to management, including the chiefexecutive officer and the chief financial officer, to allow timely decisionsregarding required disclosures.

 

Inconnection with the preparation of this report, the Company’s management, underthe supervision and with the participation of the Chief Executive Officer andChief Financial Officer, assessed the effectiveness of the design and operationof our disclosure controls and procedures. Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures were not effective as of December 31,2006, as a result of the existence of material weaknesses in our internalcontrol over financial reporting.

 

Since December 31,2006, we have made significant progress in improving our disclosure controlsand procedures. We have taken, and are taking, the actions described belowunder “Management’s Plan to Remediate Material Weaknesses” to remediate thematerial weaknesses in our internal control over financial reporting.

 

Wecontinue to strive to improve our processes to enable us to provide completeand accurate public disclosure on a timely basis. Management believes that wewill not be able to conclude that our disclosure controls and procedures areeffective until the material weaknesses have been fully remediated and we areable to file required reports with the SEC on a timely basis.

 

Nevertheless,based on the completion of the Audit Committee’s investigation, management’sinternal review of our processes and procedures, efforts to remediate thematerial weaknesses in internal control over financial reporting describedbelow, and the performance of additional procedures by management designed toensure the reliability of our financial reporting, we believe that the consolidatedfinancial statements included in this Annual Report on Form 10-K fairlypresent, in all material respects, our financial position, results ofoperations and cash flows as of the dates, and for the periods, presented.

 

**Management’sReport on Internal Control over Financial Reporting**

 

*Overview*

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Internal control over financial reporting isdefined in Rule 13a-15(f) under the Exchange Act as a processdesigned by, or under the supervision of, our principal executive and principalfinancial officers and effected by our board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with accounting principles generally accepted in the United Statesof America, and includes those policies and procedures that:

 

•                 Pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets;

 

•                 Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with accounting principlesgenerally accepted in the United States of America, and that our receipts andexpenditures are being made only in accordance with authorization of managementand directors; and

 

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•                 Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis. Also, projections of any evaluation ofeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

*Definitionof Material Weakness*

 

A “materialweakness” is defined under SEC rules as a deficiency, or a combination ofdeficiencies, in internal control over financial reporting such that there is areasonable possibility that a material misstatement of a company’s annual orinterim financial statements will not be prevented or detected on a timelybasis by the company’s internal controls.

 

*Management’sAssessment of Internal Control over Financial Reporting*

 

Managementwas unable to complete a comprehensive, formal assessment of internal controlover financial reporting for the year ended December 31, 2006. Managementdedicated a substantial amount of the Company’s resources to the review andassessment of information we received in the course of the previously disclosedinternal investigation. In addition, we experienced turnover of key senior andother management personnel through resignation, which led to the hiring of asignificant number of replacement personnel into key positions throughout 2006.As part of the training of these new personnel on the operations of the Companyand as part of their integration, job responsibilities and our internal controlstructure were reevaluated, which led to changes or enhancements to certaininternal control procedures throughout the year. Certain controls were nottested or were not able to be tested because of our resource constraints andthe ongoing changes to our procedures and controls. Additionally, as thematerial weaknesses described below were identified, we determined that it wasmore appropriate to focus our attention and resources on remediating theidentified deficiencies.

 

Althoughmanagement was unable to complete its assessment of internal control overfinancial reporting as of December 31, 2006, management did identifymaterial weaknesses relating to our control environment, application ofgenerally accepted accounting principles (“GAAP”), accounting for income taxes,our financial reporting process, the monitoring of a service provider, andinformation technology systems as of December 31, 2006. Because of thesematerial weaknesses, management has concluded that we did not maintaineffective internal control over financial reporting as of December 31,2006, based on the criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Certain of these material weaknesseshave resulted in restatements to the previously issued consolidated financialstatements as described in Note 2 to the consolidated financial statements, andadjustments to the Company’s consolidated financial statements for the yearsended December 31, 2006 and 2005. A description of the material weaknessesrelating to each of these areas as of December 31, 2006 is included below.

 

ControlEnvironment**—**The Companydid not maintain an effective control environment for internal control overfinancial reporting. Specifically, we concluded that we did not haveappropriate controls in the following areas:

 

•                 *Accounting Policies* – As a result of the turnover of keyfinancial and accounting personnel during 2006, we did not maintain acomprehensive and formalized process for monitoring the application of ourpolicies, and for updating and consistently communicating our accountingpolicies and procedures within the organization.

 

•                 *Maintenance of Risk Assessment Programs* – We did notmaintain an adequate risk oversight function to evaluate and report on risks tofinancial reporting throughout the organization, including completion of acomprehensive, worldwide risk assessment to identify all potential risk areasand evaluate the adequacy of controls to mitigate identified risks.

 

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Application of GAAP*—*****The Company did notmaintain effective internal controls relating to the application of generallyaccepted accounting principles, including revenue recognition for certainitems, the proper recording of certain accruals and contingencies, use ofappropriate models to evaluate potential impairment of intangible assets, andthe proper classification of certain balance sheet and income statementaccounts.

 

Accounting for IncomeTaxes*—*****TheCompany’s processes, procedures and controls related to the preparation andreview of the annual tax provision were not effective to ensure that amountsrelated to the tax provision and related current or deferred income tax assetand liability accounts were accurate, recorded in the proper period, anddetermined in accordance with generally accepted accounting principles.Specifically, we did not (i) analyze and reconcile certain deferred incomeand tax payable accounts, (ii) appropriately consider the need to recordand/or disclose contingencies for certain income tax positions in accordancewith generally accepted accounting principles*,*and (iii) file tax returns in certain foreign jurisdictions. Additionally,we had insufficient personnel with appropriate qualifications and training inaccounting for income taxes.

 

FinancialReporting Process*—*****TheCompany did not maintain an effective financial reporting process to prepare financialstatements in accordance with generally accepted accounting principles.Specifically, our process lacked timely and complete financial statementreviews, effective journal entry controls, and appropriate reconciliationprocesses. Further, we were unable to complete regulatory filings as requiredby the rules of the SEC.

 

Monitoringof a Service Provider*—*****TheCompany did not effectively monitor a service provider responsible for managingthe entire operations for one of our foreign locations in terms of anout-sourced arrangement. Transactions are recorded in the Company’s systembased on monthly reporting from the service provider. The Company hadestablished a monitoring process including a recalculation of commissionsexpense based on sales reported by the service provider, and certain additionalcash and inventory shipment reconciliation procedures. These monitoringprocesses and procedures were not performed on a regular basis, and were notadequately documented or reviewed, which increased the likelihood of materialmisstatements in our financial statements.

 

InformationTechnology Systems —**The Companydid not maintain effective internal control over financial reporting related tocertain information technology applications and general computer controls whichare considered to have an impact on financial reporting and which resulted in amore than reasonable possibility that material misstatements in our financialstatements would not be prevented or detected. Specifically, we lacked effectivecontrols in the following areas:

 

•                 *Access Control –*The Company did not maintain effectivelydesigned controls to prevent unauthorized access to certain programs and data,and provide for periodic review and monitoring of access including reviews ofsecurity logs and analysis of segregation of duties conflicts.

 

•                 *Change Management –*The Company did not maintain effectivelydesigned controls to ensure that all information technology program and datachanges were authorized, developer access to the production environment waslimited, and that all program and data changes were adequately tested foraccuracy and appropriate implementation.

 

•                 *Spreadsheets –*The Company did not maintain effectivelydesigned controls to ensure that critical spreadsheets were identified, accessto these spreadsheets was restricted to appropriate personnel, changes to dataor formulas were authorized and appropriate, or that the spreadsheets wereadequately reviewed by someone other than the preparer.

 

As wewere unable to complete our assessment of internal control over financialreporting as of December 31, 2006, more material weaknesses might exist inother areas that were not fully evaluated or tested as of December 31,2006. To the extent additional material weaknesses are discovered, they will bedisclosed in subsequent 10Q and 10K filings.

 

Deloitte &Touche LLP, the Company’s independent registered public accounting firm, issuedits attestation report on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting, which 

 

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disclaimed an opinion onmanagement’s assessment of the effectiveness of the Company’s internal controlover financial reporting because of a scope limitation, and expressed anadverse opinion on the effectiveness of our internal control over financialreporting because of material weaknesses identified and the effects of additionalmaterial weaknesses that might have been identified had they been able toperform sufficient auditing procedures relating to management’s assessment.

 

**Changesin Internal Control Over Financial Reporting**

 

Management has evaluatedwhether any changes in our internal control over financial reporting thatoccurred through the date of this filing have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting. We anticipate that these changes and other ongoing enhancements andremediation activities, which are described in “Remediation Activities Relatedto Material Weaknesses” section below, will continue to have a material impacton our internal control over financial reporting in future periods.

 

•                 Hired experiencedsenior management personnel including a new CFO, Corporate Controller, andInternational Controllers in 2006.

 

•                 Hired a ChiefCompliance Officer and in-house General Counsel in 2007.

 

•                 The CFO and thePresident of International and International Controllers traveled to variousforeign locations to observe the respective operations and to reinforce theimportance of internal controls and accurate financial reporting in 2006.Additional visits and training at international locations will be conducted ona go forward basis.

 

•                 Established anoutsourced agreement in 2006 with a third-party internal audit service providerto assist with specific internal audit procedures, including the documentation,and evaluation of design and operating effectiveness of internal control overfinancial reporting to support management’s 2007 assessment of internal controlover financial reporting. This included visits during 2007 to certain materialforeign locations.

 

•                 Performed acomplete management assessment of internal control over financial reportingbeginning in 2007, which included documentation of business processes andentity level controls and the creation of risk matrixes to facilitate theevaluation and testing of the Company’s key business processes and internalcontrol activities.

 

**RemediationActivities Related to Material Weaknesses**

 

Inaddition, the Company has taken, or anticipates taking, the followingadditional actions to remediate the specific material weaknesses describedabove.

 

*ControlEnvironment* — Remediation activities related to ourcontrol environment include the following:

 

*AccountingPolicies –* We have formalized our accounting policies in 2007in conjunction with our enhancement of our documentation of internal controlprocesses and procedures, and have established procedures to standardize ouraccounting policies throughout the organization. We have also increased thefrequency of training for the general managers and international subsidiarycontrollers to provide for consistent communication of our policies forfinancial reporting and related internal controls.

 

*Maintenanceof Risk Assessment Programs –*****Managementhas, in conjunction with the assessment of internal controls in 2007,identified key financial reporting risks and has evaluated the adequacy of theinternal control procedures to address the identified risks. This included thecompletion of comprehensive, worldwide entity level control questionnaires andfraud risk assessments in 2007 by senior management, the Company’s GeneralCounsel and the Manager of Internal Audit. In addition, the Company enhancedthe in-house internal audit function in 2007 by hiring a Manager of InternalAudit who is a Certified Internal Auditor with direct reporting to the AuditCommittee. This has provided enhanced assistance to the Audit Committee inmonitoring identified risks and in establishing more robust internal auditplans.  In addition, management willcontinue to provide compliance training throughout the worldwide organization.

 

 

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*Applicationof GAAP —*We have implemented procedures to addressrevenue recognition issues and impairment models for intangible assets. Withrespect to other non-income tax accruals and contingencies, in 2007 and 2008our management performed an analysis with the assistance of outside legalcounsel to assess and estimate the exposure related to such positions. To addressincome statement and balance sheet classification issues, we have enhanced ourclose processes and procedures as described in the financial reporting processremediation activities below.

 

*Accountingfor Income Taxes —*In 2007, we hired a new Tax Directorand Tax Accountant and have utilized various out-sourced service providers fortax consulting services to assist in our accounting for income taxes. Wecontinue to evaluate our tax process and tax resource requirements. In 2007 we performeda comprehensive review of our foreign statutory tax filings, and have assessedthe impact of the delinquent filings and the process that we need to completethese filings. In addition, in 2007 and 2008 our management performed ananalysis with the assistance of outside legal counsel to assess, estimate, andrecord the exposure related to our uncertain tax positions in accordance withgenerally accepted accounting principles. We continue to evaluate the adequacyof our tax resources.

 

*FinancialReporting Process —*During 2007, we redesigned andimplemented improved procedures to provide for enhanced retention ofdocumentation to support sub-ledger and account reconciliations. We arecontinuing to evaluate the reconciliation process related to clearing accountsand controls over journal entries. During 2007 and 2008, we enhanced monthlyclose procedures to include completion of a formal monthly close checklist,recurring journal entry checklist, variance analysis of financial statementfluctuations, enhanced budget to actual reviews, and review and approval of allaccrued liability accounts. In 2008, we hired a Financial Reporting Manager,who brings additional knowledge of GAAP and financial reporting practices. Inaddition, the Company has added a disclosure committee in 2007 and enhanced ourprocedures to provide for additional management review of financial statementsand disclosures.

 

Webelieve that we will not have fully remediated this material weakness until weare able to file required reports with the SEC on a timely basis.

 

*Monitoringof a Service Provider —*We are in the process ofredesigning our procedures to more effectively monitor the service providerresponsible for the management of the operations of one of our foreign locations.In particular, we are improving our monitoring process to ensure that thecommissions expense recalculations and other reconciliation processes (based oninformation reported by the outside service provider) are performed on aregular basis, documented and reviewed. In addition, in conjunction with our2007 assessment of internal controls, our out-sourced internal auditorperformed a site visit to the foreign location to observe the facility,interview on site employees of the service provider, and evaluate the internalcontrol procedures of the service provider. Additional visits to the location willbe conducted as part of internal audit’s overall plan.

 

*InformationTechnology Systems —*During 2007, we implemented thefollowing procedures to enhance our information technology processes andcontrols:

 

*AccessControls***—** In 2007,management performed a broad and detailed analysis of user access for theapplications we have determined to have a material impact on our financialreporting for our domestic locations. We are continuing to remediatesegregation of duties conflicts. Our management is evaluating the level of riskat material international locations, and will perform additional access reviewsat additional international locations as considered necessary. The Company isin the process of redesigning user security within our financial reportingsystems.

 

During2007, we improved physical access controls including limiting access to certaincheck printers and our main data center. In addition, management performed anevaluation of the password requirements for certain key financial reportingapplications, and implemented strengthened passwords in 2007 to improve length,aging, and complexity for our passwords in certain key systems. We arecurrently evaluating enhancements to password requirements for our remainingapplications.

 

*ChangeManagement***–** During 2007,our management implemented enhanced procedures to control changes to theproduction environment, and we continue to evaluate additional measures toensure that adequate documentation is retained. In addition, during 2007 ourmanagement redesigned job descriptions within the change control process ofcertain of the Company’s application systems to improve segregation of duties,including removing the ability of the Information Technology Director toperform code changes and increasing his responsibilities to conduct codereview. In 

 

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addition, an additionaldeveloper’s job responsibilities were changed to assist in reviewing codebefore it is placed into production, including code changes regarding financialreports.

 

*Spreadsheets***–** During 2007, management has designed and implementedprocedures to inventory, assess the risk of, and rank our critical financialreporting spreadsheets for locations that have a material impact on ourfinancial reporting. In conjunction with the assessment of internal controlsfor 2007, management performed detailed testing at locations that have amaterial impact on our financial reporting around security and changemanagement for spreadsheets. Management intends to further enhance the designof our controls over spreadsheets by establishing procedures for benchmarkingcritical spreadsheets to ensure that formulas are appropriate and protected,and that the logic and design of the spreadsheets is appropriate andconsistent. Management is also implementing enhanced review procedures and wewill extend any or all of our enhanced procedures to additional internationallocations as considered necessary.

 

Managementis also in the process of implementing an application package that willfacilitate a worldwide consolidation and reduce our reliance on spreadsheets.In addition, our information technology management has selected an applicationto provide for a world-wide standardization of the general ledger system.Management has developed a timeline for implementation of this application.

 

***Conclusion***

 

Webelieve the measures described above will facilitate remediation of thematerial weaknesses we have identified and will continue to strengthen ourinternal control over financial reporting. We are committed to continuallyimproving our internal control processes and will diligently and vigorouslyreview our financial reporting controls and procedures. As we continue toevaluate and work to improve our internal control over financial reporting, wemay decide that additional measures are necessary to address control deficiencies.Moreover, we may determine to modify, or in appropriate circumstances not tocomplete, certain of the remediation measures described above.

 

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directorsand Shareholders of Nature’s Sunshine Products, Inc.:

 

We were engaged to auditmanagement’s assessment regarding the effectiveness of internal control overfinancial reporting of Nature’s Sunshine Products, Inc. and subsidiaries(the “Company”) as of December 31, 2006. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.

 

As described in theaccompanying Management’s Report on Internal Control over Financial Reporting,the Company was unable to complete its assessment of the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we wereunable to perform sufficient auditing procedures necessary to form an opinionon management’s assessment.

 

A company’s internal controlover financial reporting is a process designed by, or under the supervision of,the company’s principal executive and principal financial officers, or personsperforming similar functions, and effected by the company’s board of directors,management, and other personnel to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherentlimitations of internal control over financial reporting, including thepossibility of collusion or improper management override of controls, materialmisstatements due to error or fraud may not be prevented or detected on atimely basis. Also, projections of any evaluation of effectiveness of theinternal control over financial reporting to future periods are subject to therisk that the controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Amaterial weakness is a deficiency, or combination of deficiencies, in internalcontrol over financial reporting, such that there is a reasonable possibilitythat a material misstatement of the Company’s annual or interim financialstatements will not be prevented or detected on a timely basis. The followingmaterial weaknesses have been identified and included in management’sassessment:

 

·                  *Control Environment –*The Companydid not maintain an effective control environment for internal control overfinancial reporting. Specifically, the Company concluded that they did not haveappropriate controls in the following areas:

 

·                  *Accounting**Policies* – As aresult of the turnover of key financial and accounting personnel during 2006,the Company did not maintain a comprehensive and formalized process formonitoring the application of its policies, and for updating and consistentlycommunicating its accounting policies and procedures within the organization.

 

·                  *Maintenance of Risk Assessment Programs* – The Company didnot maintain an adequate risk oversight function to evaluate and report onrisks to financial reporting throughout the organization, including completionof a comprehensive, worldwide risk assessment to identify all potential riskareas and evaluate the adequacy of controls to mitigate identified risks.

 

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·                  *Application of GAAP* – The Companydid not maintain effective internal controls relating to the application ofgenerally accepted accounting principles, including revenue recognition forcertain items, the proper recording of certain accruals and contingencies, useof appropriate models to evaluate potential impairment of intangible assets,and the proper classification of certain balance sheet and income statementaccounts.

 

·                  *Accounting for Income Taxes* – TheCompany’s processes, procedures and controls related to the preparation andreview of the annual tax provision were not effective to ensure that amountsrelated to the tax provision and related current or deferred income tax assetand liability accounts were accurate, recorded in the proper period, anddetermined in accordance with generally accepted accounting principles.Specifically, the Company did not (i) analyze and reconcile certaindeferred income and tax payable accounts, (ii) appropriately consider theneed to record or disclose contingencies for certain income tax positions inaccordance with generally accepted accounting principles, and (iii) filetax returns in certain foreign jurisdictions. Additionally, the Company hadinsufficient personnel with appropriate qualifications and training inaccounting for income taxes.

 

·                  *Financial Reporting Process –*TheCompany did not maintain an effective financial reporting process to preparefinancial statements in accordance with generally accepted accountingprinciples. Specifically, the Company’s process lacked timely and completefinancial statement reviews, effective journal entry controls, and appropriatereconciliation processes. Further, the Company was unable to completeregulatory filings as required by the rules of the SEC.

 

·                  *Monitoring of a Service Provider –*TheCompany did not effectively monitor a service provider responsible for managingthe entire operations for one of their foreign locations in terms of anout-sourced arrangement. Transactions are recorded in the Company’s systembased on monthly reporting from the service provider. The Company hadestablished a monitoring process including a recalculation of commissionsexpense based on sales reported by the service provider, and certain additionalcash and inventory reconciliation procedures. These monitoring processes andprocedures were not performed on a regular basis, and were not adequatelydocumented or reviewed, which increased the likelihood of material mistatementsin their financial statements.

 

·                  *Information Technology Systems* – The Company did not maintain effectiveinternal control over financial reporting related to certain informationtechnology applications and general computer controls which are considered tohave an impact on financial reporting and which resulted in a more thanreasonable possibility that material misstatements in their financialstatements would not be prevented or detected. Specifically, the Company lackedeffective controls in the following areas:

 

·                  *Access Control* – The Company did not maintain effectivelydesigned controls to prevent unauthorized access to certain programs and data,and provide for periodic review and monitoring of access including reviews ofsecurity logs and analysis of segregation of duties conflicts.

 

·                  *Change Management* – The Company did not maintain effectivelydesigned controls to ensure that all information technology program and datachanges were authorized, developer access to the production environment waslimited, and that all program and data changes were adequately tested foraccuracy and appropriate implementation.

 

·                  *Spreadsheets* – The Company did not maintain effectivelydesigned controls to ensure that critical spreadsheets were identified, accessto these spreadsheets was restricted to appropriate personnel, changes to dataor formulas were authorized and appropriate, or that the spreadsheets wereadequately reviewed by someone other than the preparer.

 

Thesematerial weaknesses were considered in determining the nature, timing, andextent of audit tests applied in our audit of the consolidated financialstatements and financial statement schedule as of and for the year ended December 31,2006, of the Company and this report does not affect our report on suchfinancial statements and financial statement schedule.

 

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Because of the limitationon the scope of our audit described in the second paragraph of this report, thescope of our work was not sufficient to enable us to express, and we do notexpress, an opinion on management’s assertion referred to above. In ouropinion, because of the effect of the material weaknesses described above onthe achievement of the objectives of the control criteria and the effects ofany other material weaknesses, if any, that we might have identified if we hadbeen able to perform sufficient auditing procedures, the Company has notmaintained effective internal control over financial reporting as of December 31,2006, based on the criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Wehave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements andfinancial statement schedule as of and for the year ended December 31,2006, of the Company and have issued our report dated October 6, 2008 thatexpressed an unqualified opinion on those 2006 financial statements andfinancial statement schedule.

 

 

/s/Deloitte & Touche LLP

 

SaltLake City, Utah

October 6,2008

 

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## **Item 9B. Other Events**

## ** **

None.

 

**PART III**

** **

## **Item 10. Directors,Executive Officers and Corporate Governance**

## ** **

TheCompany’s directors and executive officers, as of June 30, 2008, are asfollows:

 
| **Name**                | ** ** | **Age** | ** ** | **Position**                                                                                    | ** ** | **Served in  Position Since** | ** ** | **Class and Year  Term will  Expire** |
|-------------------------|------------|---------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------|
| Kristine F.  Hughes     |       | 69      |       | Chairperson of  the Board                                                                       |       | 1980                          |       | Class III – 2005                 |
| Robert K. Bowen         |       | 59      |       | Director                                                                                        |       | 2006                          |       |                                       |
| Larry A. Deppe          |       | 59      |       | Director                                                                                        |       | 2006                          |       |                                       |
| Eugene L. Hughes        |       | 77      |       | Director                                                                                        |       | 1980                          |       | Class II – 2007                  |
| Pauline Hughes  Francis |       | 67      |       | Director                                                                                        |       | 1988                          |       | Class I – 2006                   |
| Douglas Faggioli        |       | 54      |       | President and  Chief Executive Officer                                                          |       | 1997                          |       | —                                     |
| Stephen M.  Bunker      |       | 50      |       | Vice President –  Finance, Treasurer, Chief Financial Officer and Chief Accounting Officer |       | 2006                          |       | —                                     |
| Jamon Jarvis            |       | 42      |       | General Counsel  and Chief Compliance Officer                                                   |       | 2007                          |       | —                                     |
| Greg Halliday           |       | 44      |       | President – U.S.  Sales, Nature’s Sunshine Products                                   |       | 2006                          |       | —                                     |
| Bryant J. Yates         |       | 35      |       | President –  International, Nature’s Sunshine Products                                |       | 2007                          |       | —                                     |
| John R. DeWyze          |       | 51      |       | Executive Vice  President – Operations, Nature’s Sunshine Products                    |       | 2002                          |       | —                                     |
| William J.  Keller      |       | 65      |       | Vice President –  Health Sciences and Educational Services                                 |       | 2001                          |       | —                                     |
| Lynda Marie  Hammons    |       | 53      |       | Vice President –  Quality and Regulatory Affairs                                           |       | 2001                          |       | —                                     |
| R. Kay Olsen            |       | 53      |       | Vice President –  Information Technology                                                   |       | 2002                          |       | —                                     |

 

Certain informationregarding the business experience of the executive officers and directors isset forth below.

 

KRISTINEF. HUGHES. Mrs. Hughes is the Chairperson of our Board of Directors and amember of our Compensation Committee. She was a co-founder in 1972 of HughesDevelopment Corporation, a predecessor of our Company, and has served as anofficer or director of our company and/or its predecessors since 1980. Mrs. Hughesis the wife of Eugene L. Hughes, one of our founders and directors.

 

ROBERTK. BOWEN. Mr. Bowen is a member of our Board of Directors and a member ofour Audit Committee. A Certified Public Accountant, Mr. Bowen hasbeen a partner at the accounting firm of Hansen, Barnett & Maxwell,P.C. since 1980.

 

LARRYA. DEPPE. Mr. Deppe is an independent member of our Board of Directors anda member of our Audit Committee. Mr. Deppe is a certified publicaccountant with over 35 years experience auditing and teaching accounting. Mr. Deppeis currently an Associate Professor of Accounting in the School of Accountancyat Weber State University, Ogden, Utah. Prior to embarking on an academiccareer, Mr. Deppe for eight years held various accounting posts with IntermountainHealth Care, the Office of the Utah State Auditor, Christensen, Inc. andArthur Young & Co. Active in professional affairs, Mr. Deppeserved two four-year terms as Chair of the Utah State Board of Accountancy.

 

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EUGENEL HUGHES. Mr. Hughes is a founder and member of our Board of Directors. Heco-founded Hughes Development Corporation, a predecessor of our Company, in1972. He has served as an officer or director of our Company and/or itspredecessors since 1972. Mr. Hughes graduated from Brigham YoungUniversity. He is the husband of Kristine F. Hughes, our Chairperson of theBoard.

 

PAULINEHUGHES FRANCIS. Mrs. Francis is a member of our Board of Directors, amember of our Audit Committee, and a member of our Compensation Committee. Shehas served on our Board of Directors since 1988. Mrs. Francis was aco-founder in 1972 of Hughes Development Corporation, a predecessor of theCompany, and has acted as a consultant from time to time to our Company and itspredecessors.

 

DOUGLASFAGGIOLI. Mr. Faggioli is the President and Chief Executive Officer of ourCompany. Prior to his appointment as President and Chief Executive Officer in November 2003,Mr. Faggioli served as Executive Vice President, Chief Operating Officerand a Director of our Company. He began his employment with us in 1983 and hasserved as one of our officers since 1989. He is a Certified Public Accountant.

 

STEPHENM. BUNKER. Mr. Bunker serves as Vice President over Finance and ChiefFinancial Officer since March 27, 2006. Mr. Bunker served as VicePresident of Finance and Treasurer of Geneva Steel Holdings, Corporation from July 2001until March 2006. Previous to July 2001 Mr. Bunker served asCorporate Controller for Geneva Steel Corporation. Mr. Bunker is acertified public accountant, and worked for Arthur Andersen for six years.

 

JAMONJARVIS. Mr. Jarvis is the General Counsel of our Company. He has served inthis position since March 2007. Prior to this appointment, Mr. Jarvisserved as General Counsel and Chief Financial Officer of InterNetwork, Inc.,in San Francisco, California, from January 2004 to November 2006; andas Executive Vice President Finance, General Counsel and Corporate Secretary atSpontaneous Technology, Inc., in Salt Lake City, Utah, September 2001to October 2003. Mr. Jarvis received his B.A. in History in 1990 fromBrigham Young University and his J.D. in 1993 from Cornell Law School.

 

GREGHALLIDAY. Mr. Halliday is the President – U.S. Sales for Nature’s SunshineProducts. He has served in this position since 2006 and previously served asVice President – Nature’s Sunshine Products U.S. Sales. Mr. Hallidayreceived his B.S. in 1989 and M.B.A. with an emphasis in Marketing in 1991 fromthe Marriott School of Management at Brigham Young University.

 

BRYANTJ. YATES. Mr. Yates is the President – International of our Company. Mr. Yates,has served as Executive Director—International of the Company,Director—International—Europe/Middle East and General Manager of Nature’sSunshine Products of Russia, an affiliate of the Company. Mr. Yates hasbeen employed by the Company since 1999. Mr. Yates received a degree ininternational business from Utah Valley State College.

 

JOHNR. DEWYZE. Mr. DeWyze is the Executive Vice President – Operations forNature’s Sunshine Products and has served in this position since 1997. Mr. DeWyzereceived his B.S. in Chemistry in 1981 from Grand Valley State University andhis M.B.A. in 1994 from the University of Southern Indiana.

 

WILLIAMJ. KELLER. Dr. Keller is the Vice President – Health Sciences andEducational Services for Nature’s Sunshine Products. He was appointed to servein this capacity in April 2001. Prior to joining our Company, Dr. Kellerwas the Department Chair/Professor in the School of Pharmacy at StamfordUniversity and Northeast Louisiana University. Dr. Keller received hisB.S. in Pharmacy and M.S. in Pharmaceutical Sciences from Idaho StateUniversity. In 1972, the University of Washington awarded him a Ph.D. inPharmacognosy.

 

LYNDAMARIE HAMMONS. Mrs. Hammons is the Vice President – Quality and RegulatoryAffairs for Nature’s Sunshine Products. She has served in this capacity since June 2001.Mrs. Hammons received her B.S. in Chemistry and Microbiology from BowlingGreen State University and her M.B.A. with an emphasis on Quality Managementfrom the University of Cincinnati. Mrs. Hammons is also a CertifiedQuality Engineer, a Certified Quality Technician and a Certified QualityAuditor–American Society for Quality.

 

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R.KAY OLSEN. Mr. Olsen is the Vice President – Information Technology of ourCompany and has served in this capacity since March 2002. Mr. Olsenreceived his B.S. in Information Management from Brigham Young University andhis M.B.A. from the University of Phoenix.

 

**Board Composition and Election**

 

Directorsare elected at annual meetings of shareholders. Our Bylaws provide for aclassified Board of Directors, consisting of three staggered classes ofdirectors, as nearly equal in number as possible. As a result, shareholderswill elect a portion of our Board of Directors each year. The Class Idirectors’ terms were originally set to expire at our annual meeting held in2006, the Class II directors’ terms were originally set to expire at ourannual meeting held in 2007, and the Class III directors’ terms wereoriginally set to expire at our annual meeting held in 2008. Due to ourinability to file our Quarterly and Annual Reports with the SEC in those years,we were not able to hold annual meetings in 2007, 2006 or 2005. The Class ofeach director is set forth above.

 

**Committees of the Board ofDirectors**

 

The Board of Directorshas formed the following committees:

 

*TheCompensation Committee*. The Compensation Committee reviewscompensation policies applicable to officers and key employees, recommends tothe Board of Directors the compensation to be paid to our Chief ExecutiveOfficer and determines the compensation and benefits of all directors on theBoard. The Compensation Committee has adopted a written charter. The members ofthe Compensation Committee are Kristine F. Hughes and Pauline Hughes Francis; Ms. Francisis an “Independent Director” as discussed in Item 13, “Certain Relationshipsand Related Transactions, and Director Independence.”

 

*TheAudit Committee*. The Audit Committee is a separately-designatedstanding committee of the Board, which oversees our financial statements,preparation process and related compliance matters and performance of theinternal audit function, is responsible for engagement and oversight of ourindependent registered public accounting firm and reviews the adequacy andeffectiveness of our internal control system and procedures.

 

Themembers of the Audit Committee are Larry A. Deppe (Chairman), Robert K. Bowenand Pauline Hughes Francis, each of whom is an Independent Director andindependent for the purposes of the regulations promulgated by the SEC. OurBoard of Directors has determined that Larry A. Deppe and Robert K. Bowen areaudit committee financial experts, as that term is defined in Item 401(h) ofRegulation S-K promulgated by the Securities and Exchange Commission. Webelieve Pauline Hughes Francis falls outside the SEC safe harbor providing thata person will not be deemed an affiliate for purposes of determining auditcommittee member independence if he or she beneficially owns 10 percent or lessof an issuer’s voting stock. As of June 30, 2008, Ms. Francisbeneficially owned approximately 12.4 percent of the Company’s common stock.The Board has determined that Ms. Francis is independent for purposes ofSEC regulations and the NASD Marketplace Rules.

 

*TheNominating Committee*. The Nominating Committee makesrecommendations to the Board of Directors about the size of the Board or anycommittee thereof, identifies and recommends candidates for the Board andcommittee membership, evaluates nominations received from shareholders, anddevelops and recommends to the Board corporate governance principles applicableto our Company. The Nominating Committee has not adopted a written charter.

 

Themembers of the Nominating Committee are Kristine Hughes, Pauline HughesFrancis, Robert K. Bowen. Ms. Francis and Mr. Bowen are both an “IndependentDirector” as discussed in Item 13, “Certain Relationships and RelatedTransactions, and Director Independence.”

 

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**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) ofthe Exchange Act requires the Company’s directors, executive officers andpersons who beneficially own more than 10 percent of a registered class of theCompany’s equity securities, to file initial reports of ownership on Form 3and changes in ownership on Forms 4 or 5 with the SEC. Such officers, directorsand 10 percent shareholders also are required by SEC rules to furnish theCompany with copies of all Section 16(a) reports they file. Basedsolely on its review of the copies of such forms furnished or available to theCompany, the Company believes that its directors, executive officers and 10percent shareholders complied with all Section 16(a) filingrequirements for the fiscal years ended December 31, 2005, December 31,2006 and December 31, 2007 except for the following filings:  the Form 5 filed by Pauline HughesFrancis on September 9, 2008 to report gift transactions dated December 14,2006, January 23, 2007 and December 26, 2007 and the Form 5filed by Eugene L. Hughes on September 9, 2008 to report gift transactionsdated October 31, 2007 and December 31, 2007.

 

**Code of Ethics**

 

Weadopted a revised Code of Conduct on August 29, 2008****thatapplies to all of our employees, including our Chief Executive Officer, ChiefFinancial Officer and senior financial and accounting officers. Among other matters,the Code of Conduct establishes policies to deter wrongdoing and to promoteboth honest and ethical conduct, including ethical handling of actual orapparent conflicts of interest, compliance with applicable laws, rules andregulations, full, fair, accurate, timely and understandable disclosure inpublic communications and prompt internal reporting of violations of the Codeof Conduct and accountability for adherence to the Code. In addition, weprovide an ethics line for reporting any violations of the Code of Conduct on aconfidential basis. Copies of our Code of Conduct are available on our websiteat *www.natr.com* or upon request, withoutcharge, from the Company by sending a written request to the following: Nature’sSunshine Products, Inc., Code of Conduct Request, Attn: Legal Department,75 East 1700 South, P.O. Box 19005, Provo, UT 84605. We will post on ourinternet website all waivers to or amendments of our Code of Conduct that arerequired to be disclosed by applicable law.

 

## **Item 11. ExecutiveCompensation**

## ** **

**Compensation Discussion and Analysis**

 

This Compensation Discussion and Analysis provides disclosureabout the policies and objectives underlying the compensation programs for ourexecutive officers. Accordingly, we will address and analyze each element ofthe compensation provided to our chief executive officer, our chief financialofficer and the other executive officers named in the Summary CompensationTable which follows this discussion. The Compensation Committee of our Board ofDirectors administers the compensation programs for our chief executiveofficer. Our chief executive officer administers the compensation programs forour other executive officers.

 

***Compensation Policy for Executive Officers****.* We have designed the various elements comprising thecompensation packages of our executive officers to achieve the followingobjectives:

 

•                  reflectindividual accomplishments and contributions to the Company as well as overallCompany performance;

•                  align eachexecutive officer’s interests with those of the Company’s shareholders; and

•                  attractand retain qualified executives who will help the Company meets its goals.

 

Eachexecutive officer’s compensation package has historically consisted of threeelements: (i) a base salary, (ii) a cash bonus based uponpre-established financial objectives and the individual officer’s personalperformance, and (iii) participation in long-term, stock-based incentiveawards, in the form of stock options, designed to align and strengthen themutuality of interests between our executive officers and our shareholders. In2005 the Company’s 1995 Stock Plan expired and the Company suspended its optiongrant program; accordingly, the compensation package for our executive officersis now comprised of base salary and cash bonus.

 

Whenestablishing the compensation levels for the executive officers, we take intoaccount the Company’s overall financial performance and its evaluation of eachexecutive officer’s individual performance level and his or her potential contributionto the Company’s future growth. Over the years, the Company has endeavored tofollow a pay-for-performance philosophy of conservative base and competitiveshort-term bonus when Company performance measures have been achieved.

 

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Insetting executive officer compensation, the Compensation Committee and ourchief executive officer review a report (the “Executive Compensation Report”)prepared by our Director of Human Resources in order to assess thecompetitiveness of the Company’s compensation programs in comparison to marketaverages. The Executive Compensation Report examined the data contained inWatson Wyatt’s ECS Top Management Compensation Survey and Mercer’s ExecutiveCompensation Survey for 2005-06. The Executive Compensation Report compared theCompany’s executive compensation practices including base pay, short-termincentives, long-term incentives and other practices to industry and nationalsurvey data as well as the base pay, bonus and total compensation of officerson an individual basis.

 

***Elements of Compensation****.* Each of the major elements comprising thecompensation package for executive officers (salary, bonus and equity) is (i) designedto reflect individual accomplishments and contributions to the Company as wellas overall Company performance, (ii) align the executive’s interests withthose of our shareholders and (iii) attract and retain qualifiedexecutives who will help the Company meet its goals. The manner in which eachelement of compensation has been structured may be explained as follows.

 

*Salary**.* The basesalary level of each executive officer is reviewed in the last quarter of each year,with any salary adjustments for the upcoming year to be effective on or about January 1of that year. The Company targets base salaries to be in the range of 80% to90% of market. However, the Company may also consider the performance of theexecutive, contributions by the executive towards the Company’s mission/goalsand tenure at the Company. The Company believes that this component ofcompensation should provide a level of security and stability from year to yearand not be dependent to any material extent on the Company’s financialperformance. The Compensation Committee approved a salary increase of 6% forour chief executive officer for 2006; however, Mr. Faggioli declined toaccept the approved increase. Accordingly, Mr. Faggioli’s salary remainedconstant from 2005 to 2006. The salary levels for the other named executiveofficers were increased by approximately 3% in 2006 from the levels in effectfor the 2005 fiscal year. After examining the practices of companies withsimilar sales revenue in 2006, the Company found that, on average, our officers’base salaries for 2006 were approximately 24% below the base salaries ofofficers at those companies.

 

*Incentive Compensation**.*The bonusstructure is generally designed to bring the total cash compensation for ourexecutives up to market in a typical year and to exceed market when justifiedby Company performance. In 2005, to compensate for the suspension of our optiongrant program, the Company increased the size of the cash bonus awards to ourexecutive officers. As a result, the cash bonuses paid to our executiveofficers exceeded 2005 market averages by 250%, and our overall officer totalcash compensation in 2005 exceeded market averages by 24%. To prevent placingtoo much emphasis on short-term focus at the expense of long-term results, wesignificantly reduced bonus amounts for 2006. Messrs. Faggioli andHalliday were each eligible to receive bonuses in 2006 pursuant to guidelineswhich provided for a recommended bonus amount equal to a percentage of theirrespective base salaries based on achievement of increases in operating incomeand sales revenue. The Compensation Committee (in the case of Mr. Faggioli’sbonus) and our chief executive officer (in the case of Mr. Halliday’sbonus) had the discretionary authority to determine the actual amount of thebonuses, which could be adjusted to be higher or lower than the guidelineamounts. Because the pre-established operating income and sales revenue goalswere not achieved, Mr. Faggioli did not receive a bonus for 2006; however,our chief executive officer exercised his discretionary authority and awarded Mr. Hallidaya $4,000 bonus based on his personal performance. For Messrs. Bunker,DeWyze and Keller, our chief executive officer had established bonuses of up to75%, 75% and 60% of their respective base salaries for 2006 based on theCompany’s performance. The actual bonuses paid to Messrs. Bunker, DeWyzeand Keller were significantly below these amounts. The reduction was based onthe weighted average bonuses actually paid to the employees in the Company’sU.S. Sales, International and Synergy divisions. In addition, Mr. Bunker’sbonus was further reduced to reflect the fact that he was not employed for theentire year. Accordingly, Messrs. Bunker, DeWyze and Keller receivedbonuses equal to 13.8%, 27.5% and 22%, respectively, of their base salaries.Cash bonuses paid to our officers in 2006 were 81% under the market average forcompanies with similar annual revenues**,** resulting inthe total cash compensation of our officers being 38% below such marketaverages.

 

*Long-Term Incentives**.*In prioryears, we have structured our long-term incentive program for executiveofficers in the form of option grants under our 1995 Stock Option Plan whichwas administered by our Compensation Committee. Each option grant has beendesigned to align the interests of the executive officer with those of theshareholders and to provide him with a significant incentive to manage thecompany from the perspective of an owner with an equity stake in the business.Each option grant allows the officer to acquire shares of our common stock at afixed price per share over a specified period, usually ten years. Optionsgranted in past years have generally vested and become exercisable in a seriesof installments over a period of one to three years measured from the grantdate, contingent upon the officer’s continued employment. All outstandingoptions are fully vested at this time. Our 1995 Stock Option Plan terminated in2005 and no options have been granted under this plan since its termination.

 

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***Executive Officer Perquisites****.* It is not our practice to provide our executiveofficers with any meaningful perquisites. However, in 2006 we paid premiums on$250,000 key person life insurance policies for our named executive officersand provided our named executive officers the opportunity to receive up to$2,500 for tuition assistance; however, none of our executive officers electedto receive tuition assistance. We believe these perquisites are an importantfactor in retaining our executive officers.

 

***Other Programs****.* Our executive officers are eligible to participate inour 401(k) employee savings plan on the same basis as all other regularU.S. employees.

 

***Deferred Compensation Programs.***The Company has adopted a deferredcompensation plan for its executive officers, certain other selected employees andits non-employee directors to enable them to save for retirement by deferringtheir income and the associated tax to a future date following termination ofemployment. Under the Supplemental Elective Deferral Plan (the “SEDP”), thenamed executive officers and other participants have the opportunity to defercompensation to future dates specified by the participant with a return basedon investment alternatives selected by the participant. The Company believesthat the SEDP is comparable to similar plans offered by its competitors. Theamounts deferred under the SEDP for the named executive officers are reportedbelow in the Summary Compensation Table and the Nonqualified DeferredCompensation Table.

 

***Officer Employment Agreements.***We haveentered into employment agreements with each of our named executive officers.We believe that the employment agreements with our executive officers achievetwo important goals crucial to our long-term financial success; namely, thelong-term retention of our senior executives and their commitment to theattainment of our strategic objectives. The agreements will allow ourparticipating executive officers to continue to focus their attention on ourbusiness operations and strategic plans without undue concern over their ownfinancial situations during periods when substantial disruptions anddistractions might otherwise prevail. Each employment agreement provides for aninitial term of twelve months which automatically renews for additional twelvemonth periods provided neither party terminates the employment relationship.Upon the cessation of a named executive officer’s employment due to terminationby the Company without cause, the Company’s non-renewal of the employment term,death or incapacity, the named executive officer will receive severancebenefits in an amount equal to his or her base salary for the year oftermination and continued medical and life insurance coverage for 12 months (3months for Mr. Halliday and Dr. Keller).

 

A summary of the material terms ofthe officer employment agreements, together with a quantification of theseverance benefits payable under those agreements to each of the executiveofficers named in the Summary Compensation Table may be found in the sectionbelow entitled “Executive Compensation and Other Information — EmploymentContracts, Termination of Employment and Change in Control Arrangements.”

 

***Compliance with Internal Revenue Code Section 162(m)****.* Section 162(m) of the Internal Revenue Codedisallows a tax deduction to publicly held companies for compensation paid tocertain of their executive officers to the extent such compensation exceeds$1.0 million per covered officer in any year. The limitation applies only tocompensation that is not considered to be performance-based under the terms of Section 162(m).Non-performance-based compensation paid to our executive officers for 2006 didnot exceed the $1.0 million limit per officer. However, as we continue toincrease salaries and bonuses for our executive officers and if we grant equityawards in the future, it is possible that the non-performance-basedcompensation payable to our executive officers will exceed the $1.0 millionlimit in one or more future years. We believe that in establishing the cash andequity incentive compensation programs for our executive officers, thepotential deductibility of the compensation payable under those programs shouldbe only one of a number of relevant factors taken into consideration, and notthe sole governing factor. For that reason, we may deem it appropriate toprovide one or more executive officers with the opportunity to earn incentivecompensation, whether through cash bonus programs tied to our financialperformance or through equity awards, which together with base salary in theaggregate may be in excess of the amount deductible by reason ofSection 162(m) or other provisions of the Internal Revenue Code. Webelieve it is important to maintain cash and equity incentive compensation atthe levels needed to attract and retain the executive officers essential to oursuccess, even if all or part of that compensation may not be deductible byreason of the Section 162(m) limitation.

 

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TheCompensation Committee has reviewed and discussed the Compensation Discussionand Analysis disclosure with management. Based on this review and discussion,the Compensation Committee recommended to the Board of Directors that theCompensation Discussion and Analysis be included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2006.

 

Submitted by:

Pauline Hughes Francis

Kristine Hughes

 

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**ExecutiveCompensation**

 

The following table setsforth a summary, for the year ended December 31, 2006 of the compensationof the principal executive officer, the principal financial officer, the threemost highly compensated executive officers of the Company (not including theprincipal executive officer and the principal financial officer) whose totalcompensation for the 2006 fiscal year was in excess of $100,000 and who wereserving as executive officers at the end of 2006 and the former principalfinancial officer and one other former executive officer whose employmentterminated during 2006. The listed individuals shall be hereinafter referred toas the “named executive officers.”

 

**Summary Compensation Table**

** **
| **Name & Principal  Position**                             | ** ** | **Year** | ** ** | **Salary ($) (1)** | ** ** | **Bonus ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension Value  and Nonqualified  Deferred  Compensation  Earnings ($)** | ** ** | **All Other  Compensation  ($)(2)** | ** ** | **Total ($)** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|------------------------------|------------|--------------------|------------|------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------|------------|
| **(a)**                                                                  | ** ** | **(b)**  | ** ** | **(c)**                      | ** ** | **(d)**            | ** ** | **(e)**                | ** ** | **(f)**                 | ** ** | **(g)**                                                | ** ** | **(h)**                                                                                                  | ** ** | **(i)**                                  | ** ** | **(j)**            | ** ** |
| Douglas Faggioli   President, CEO & Director                    |       | 2006     |       | 350,000                      |       | —             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 13,860                                   |       | 363,860            |       |
| Stephen Bunker,   CFO                                                    |       | 2006     |       | 131,250                      |       | 18,081             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 7,283                                    |       | 156,614            |       |
| Craig Huff, Former  CFO                                                  |       | 2006     |       | 123,548                      |       | —             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 6,978                                    |       | 130,526            |       |
| John DeWyze, EVP & VP of Operations                             |       | 2006     |       | 187,000                      |       | 51,515             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 12,643                                   |       | 251,158            |       |
| William Keller, VP of Health Sciences & Educational  Services   |       | 2006     |       | 150,360                      |       | 4,336              |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 9,758                                    |       | 164,454            |       |
| Greg Halliday,   President - Nature’s Sunshine Products U.S.        |       | 2006     |       | 163,000                      |       | 4,000              |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 10,771                                   |       | 177,771            |       |
| Bob Shaffer,   President - Nature’s Sunshine Products International |       | 2006     |       | 103,606                      |       | —             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 111,648                                  |       | 215,254            |       |

 

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(1)  Includes amountsthat were deferred into the Company’s Supplemental Elective Deferral Plan (“SEDP”)as follows:  Mr. Faggioli – $52,000;Mr. Bunker – $0; Mr. Huff – $8,557; Mr. DeWyze – $30,920; Dr. Keller– $9,015; Mr. Halliday – $8,146; Mr. Shaffer – $0. The SEDP providesselected employees and non-employee directors with the ability to defercompensation to future dates specified by the participant with a return basedon investment alternatives selected by the participant. The SEDP is more fullydescribed in the section following the Nonqualified Deferred Compensation Planstable below.

 

(2)  “All OtherCompensation” includes the following amounts paid by the Company for the fiscalyear ended December 31, 2006. The amounts disclosed are the actual coststo the Company of providing these benefits.

 
| **Name & Principal  Position** | ** ** | **401(k) Plan  Company  Contribution ($)** | ** ** | **Life Insurance ($)** | ** ** | **Disability Payments  ($)** | ** ** | **Severance  Payments* ($)** | ** ** | **Total ($)** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|--------------------|------------|
|                                         |       |                                                 |       |                             |       |                              |       |                              |       |               |       |
| Douglas Faggioli                             |       | 11,000                                               |       | 2,320                            |       | 540                               |       | —                            |       | 13,860             |       |
| Stephen Bunker                               |       | 6,576                                                |       | 437                              |       | 270                               |       | —                            |       | 7,283              |       |
| Craig Huff                                   |       | 5,917                                                |       | 851                              |       | 210                               |       | —                            |       | 6,978              |       |
| John Dewyze                                  |       | 11,000                                               |       | 1,283                            |       | 360                               |       | —                            |       | 12,643             |       |
| William Keller                               |       | 9,218                                                |       | —                           |       | 540                               |       | —                            |       | 9,758              |       |
| Greg Halliday                                |       | 9,844                                                |       | 567                              |       | 360                               |       | —                            |       | 10,771             |       |
| Bob Shaffer                                  |       | 9,195                                                |       | 1,309                            |       | 360                               |       | 100,784                           |       | 111,648            |       |

 

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*  Includes the following amounts:  (i) salary continuation payments of$64,394 paid between the date of Mr. Shaffer’s death on July 29, 2006and December 31, 2006 and (ii) $36,390 for accrued paid time off.

 

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**Grants ofPlan-Based Awards in Fiscal Year 2006**

 

The Company did not grantany awards to named executive officers in 2006 under non-equity incentive plansor equity incentive plans.

 

**OutstandingEquity Awards at Fiscal Year-End**

 

The following table providescertain summary information concerning outstanding equity awards held by thenamed executive officers as of December 31, 2006:

 
| ** **                                       | ** ** | **Option Awards**                                                                 | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| **Name & Principal Position** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity Incentive Plan  Awards: Number of  Securities Underlying  Unexercised  Unearned Options (#)** | ** ** | **Option Exercise  Price ($)** | ** ** | **Option  Expiration Date** | ** ** |
| **(a)**                                          | ** ** | **(b)**                                                                                | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** | ** ** | **(f)** | ** ** |
|                                             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Douglas Faggioli                                 |       | 2,000                                                                                  |       | — |   | — |   | 8.80 |   | 4/1/2013 |   |
|                                             |       | 25,000                                                                                 |       | — |   | — |   | 12.65 |   | 2/26/2008 |   |
|                                             |       | 95,690                                                                                 |       | — |   | — |   | 7.69 |   | 2/6/2007 |   |
| TOTAL                                            |       | 122,690                                                                                |       | — |   | — |   |   |   |   |   |
|                                             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Stephen Bunker                                   |       | —                                                                                 |       | — |   | — |   | — |   | — |   |
|                                             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Craig Huff                                       |       | —                                                                                 |       | — |   | — |   | — |   | — |   |
|                                             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| John DeWyze                                      |       | 16,300                                                                                 |       | — |   | — |   | 12.25 |   | 2/23/2009 |   |
|                                             |       | 250                                                                                    |       | — |   | — |   | 8.13 |   | 1/3/2010 |   |
| TOTAL                                            |       | 16,550                                                                                 |       | — |   | — |   |   |   |   |   |
|                                             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| William Keller                                   |       | 4,000                                                                                  |       | — |   | — |   | 7.51 |   | 4/16/2007 |   |
|                                             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Greg Halliday                                    |       | 2,560                                                                                  |       | — |   | — |   | 12.25 |   | 2/23/2009 |   |
|                                             |       | 3,000                                                                                  |       | — |   | — |   | 9.95 |   | 5/16/2007 |   |
|                                             |       | 500                                                                                    |       | — |   | — |   | 12.55 |   | 8/1/2011 |   |
|                                             |       | 10,000                                                                                 |       | — |   | — |   | 14.90 |   | 5/28/2010 |   |
| TOTAL                                            |       | 16,060                                                                                 |       | — |   | — |   |   |   |   |   |
|                                             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Bob Shaffer                                      |       | 6,550                                                                                  |       | — |   | — |   | 12.25 |   | 7/29/2007 |   |
|                                             |       | 500                                                                                    |       | — |   | — |   | 8.31 |   | 7/29/2007 |   |
|                                             |       | 10,000                                                                                 |       | — |   | — |   | 12.65 |   | 7/29/2007 |   |
|                                             |       | 10,000                                                                                 |       | — |   | — |   | 19.71 |   | 7/29/2007 |   |
| TOTAL                                            |       | 27,050                                                                                 |       | — |   | — |   |   |   |   |   |

 

**Option Exercisesand Stock Vested**

 

None of thenamed executive officers exercised options in 2006 or held shares of stock thatvested in 2006.

 

**Pension Benefits**

 

The Companydoes not have a pension plan in which the named executive officers canparticipate to receive payments or other benefits at, following, or inconnection with retirement.

 

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**NonqualifiedDeferred Compensation Plans**

 

Informationregarding the named executive officers’ participation in the Company’snonqualified deferred compensation plan is included below.

 

SupplementalElective Deferral Plan. The Company has adopted the Nature’s Sunshine Products, Inc.Supplemental Elective Deferral Plan (the “SEDP”). The following table setsforth information relating to the SEDP for 2006 for the named executiveofficers:

 
| **Name & Principal Position** | ** ** | **Executive  Contributions in  Last FY ($)(1)** | ** ** | **Registrant  Contributions in  Last FY ($)** | ** ** | **Aggregate Earnings  in Last FY ($)(2)** | ** ** | **Aggregate  Withdrawals/  Distributions ($)** | ** ** | **Aggregate Balance at  Last FYE ($)** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(a)**                                          | ** ** | **(b)**                                                        | ** ** | **(c)**                                                      | ** ** | **(d)**                                                       | ** ** | **(e)**                                             | ** ** | **(f)**                                                    | ** ** |
| Douglas Faggioli                                 |       | 52,000                                                         |       | —                                                       |       | 45,276                                                        |       | —                                              |       | 577,992                                                    |       |
| Stephen Bunker                                   |       | —                                                         |       | —                                                       |       | —                                                        |       | —                                              |       | —                                                     |       |
| Craig Huff                                       |       | 8,557                                                          |       | —                                                       |       | 16,514                                                        |       | —                                              |       | 274,742                                                    |       |
| John DeWyze                                      |       | 30,920                                                         |       | —                                                       |       | 16,049                                                        |       | —                                              |       | 187,079                                                    |       |
| William Keller                                   |       | 9,015                                                          |       | —                                                       |       | 507                                                           |       | —                                              |       | 9,522                                                      |       |
| Greg Halliday                                    |       | 8,146                                                          |       | —                                                       |       | 432                                                           |       | —                                              |       | 8,578                                                      |       |
| Bob Shaffer                                      |       | —                                                         |       | —                                                       |       | —                                                        |       | —                                              |       | —                                                     |       |

 

----

(1)  Executivecontributions are included in the “Salary” reported under the SummaryCompensation Table above.

 

(2)  Earnings isdefined to reflect the difference in the account balance between the beginningand end of the year, less any executive or Company contributions and anyamounts withdrawn or distributed. Earnings include realized and unrealizedgains, capital gains and dividends paid.

 

The SEDPpermits the named executive officers, certain other employees and the Company’snon-employee directors with the opportunity to defer specified percentages (upto 75%) of their compensation, including amounts that could not be deferredunder the Company’s Tax Deferred Retirement Plan because of the limitationsunder such plan imposed by the Internal Revenue Code. Participants may electdeferred amounts to be paid in monthly payments over 3 or 5 years or in a lumpsum upon separation from service. Deferrals are credited with gain or lossbased on the performance of one or more investment alternatives selected by theparticipant from among the investment funds offered by the Board. No actualinvestments are held in the participants’ accounts and participants will at alltimes remain general unsecured creditors of the Company with respect to theiraccount balances.

 

**PotentialPayments Upon Termination or Change in Control**

 

Includedbelow is a summary of the material terms and conditions of the employmentagreements the Company has entered into with its named executive officers thatprovide for certain payments and benefits upon termination of employment. Theemployment agreements are the only arrangements the Company has with its namedexecutive officers to provide benefits upon termination of employment. TheCompany does not have any contract, agreement, plan or arrangement with itsnamed executive officers that provides for payments at, following or inconnection with a change in control of the Company.

 

Pursuant tothe terms of the employment agreement each named executive officer has enteredinto with the Company, each named executive officer is eligible to receivecertain termination benefits. The employment agreements provide that in theevent the named executive officer is terminated by the Company without cause ordue to non-renewal of the employment agreement or in the event the namedexecutive officer’s employment ceases due to death or incapacity, he will beentitled to receive a severance payment equal to his annual base salary for theyear of termination and continued medical and life insurance coverage for 12months (3 months for Mr. Halliday and Dr. Keller). Such severancepayment may be distributed in a lump sum or in a series of bi-weekly payments.Pursuant to the terms of their employment agreements, for a period of 1 yearafter the later of (i) the cessation of the named executive officer’semployment and (i) the date on which the final severance payment was paidto the named executive officer, the named executive officer will be subject tocertain non-compete and non-solicitation covenants.

 

Thefollowing table sets forth the estimated payments and benefits that would havebeen payable to the named executive officers under their agreements in thetermination circumstances indicated below had their employment

 

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terminated on December 31,2006. All cash payments are assumed to be made in a lump sum and would be paidby the Company. The amounts set forth in this table represent estimates andforward-looking information that is subject to substantial variation, based onthe timing of the triggering event. The Company cautions the reader to considerthese limitations in reviewing the following table.

 

**ExecutiveBenefits and Payments Upon Termination Due to Termination by the CompanyWithout Cause or Due to Non-Renewal, Death or Incapacity**

 

 
| ** **                                            | ** ** | **Mr. Faggioli** | ** ** | **Mr. Bunker** | ** ** | **Mr. DeWyze** | ** ** | **Dr. Keller** | ** ** | **Mr. Halliday** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|-----------------------|------------|
| Salary severance                                      |       | $                     | 350,000    |                | $          | 200,360             |       | $                   | 217,920    |                  | $          | 37,590 |   | $ | 42,786 |   |
| Continued  Medical & Life Insurance Coverage |       | 8,040                 |       | 7,860               |       | 7,860               |       | 8,040               |       | 7,860                 |       |
| TOTAL                                                 |       | $                     | 358,040    |                | $          | 208,220             |       | $                   | 225,780    |                  | $          | 45,630 |   | $ | 50,646 |   |

 

**Director Compensation**

 

Thefollowing table sets forth certain information regarding the compensation ofeach individual who served as a member of our Board of Directors during the2006 fiscal year. Except with respect to Mr. Eugene Hughes, thecompensation disclosed is for services rendered as a Board member during thatyear. Mr. Eugene Hughes is also our employee, and the compensationdisclosed for him below reflects his compensation he received in his capacityas an employee. He did not receive any additional compensation for his Boardservice.

 
| **Name**                | ** ** | **Fees Earned  or Paid in  Cash ($) (1)** | ** ** | **Stock  Awards ($)** | ** ** | **Option  Awards ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation ($)** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings ($)** | ** ** | **All Other  Compensation ($)(2)** | ** ** | **Total ($)** | ** ** |
|-------------------------|------------|--------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------|------------|
| **(a)**                 | ** ** | **(b)**                                                            | ** ** | **(c)**                    | ** ** | **(d)**                     | ** ** | **(e)**                                                    | ** ** | **(f)**                                                                                              | ** ** | **(g)**                                      | ** ** | **(h)**            | ** ** |
| Kristine F.  Hughes     |       | 137,584                                                            |       | —                     |       | —                      |       | —                                                     |       | —                                                                                               |       | 1,495                                        |       | 139,079            |       |
| Pauline Hughes  Francis |       | 51,712                                                             |       | —                     |       | —                      |       | —                                                     |       | —                                                                                               |       | 12,640                                       |       | 64,352             |       |
| Franz L.  Cristiani     |       | 61,575                                                             |       | —                     |       | —                      |       | —                                                     |       | —                                                                                               |       | 750                                          |       | 62,325             |       |
| Robert Bowen            |       | 41,897                                                             |       | —                     |       | —                      |       | —                                                     |       | —                                                                                               |       | 18,376                                       |       | 60,273             |       |
| Larry Deppe             |       | 60,901                                                             |       | —                     |       | —                      |       | —                                                     |       | —                                                                                               |       | 300                                          |       | 61,201             |       |
| Eugene Hughes           |       | 230,957                                                            |       | —                     |       | —                      |       | —                                                     |       | —                                                                                               |       | 20,424                                       |       | 251,381            |       |

 

----

(1)  Consists ofretainer fees for service as a member of the Board with respect to KristineHughes, Pauline Hughes Francis and Messrs. Cristiani,Bowen and Deppe; Mr. Hughes received salary of $203,000, of which hedeferred $13,000 into the SEDP, and a cash bonus of $27,957 in 2006. Retainerspaid to Kristine Hughes and Pauline Hughes Francis were paid on a monthlybasis; retainers paid to Messrs. Cristiani, Bowen and Deppe were paid on aquarterly basis. The aggregate payments include the following categories ofpayments:

 
| **Name**               | ** ** | **Retainer ($)** | ** ** | **Committee Chairperson  Additional Retainer ($)** | ** ** | **Misc. Retainer* ($)** | ** ** | **Total ($)** | ** ** |
|------------------------|------------|-----------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|
| Kristine F.  Hughes    |       | 137,584               |       | —                                                            |       | —                            |       | 137,584            |       |
| Pauline Hughes Francis |       | 50,712                |       | 1,000                                                             |       | —                            |       | 51,712             |       |
| Franz L.  Cristiani    |       | 33,075                |       | 2,000                                                             |       | 26,500                            |       | 61,575             |       |
| Robert Bowen           |       | 23,625                |       | —                                                            |       | 18,272                            |       | 41,897             |       |
| Larry Deppe            |       | 31,500                |       | 3,000                                                             |       | 26,401                            |       | 60,901             |       |
| Eugene Hughes          |       | —                |       | —                                                            |       | —                            |       | —             |       |

 

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* During 2006,Messrs. Cristiani, Bowen and Deppe received compensation for additionaltime and efforts related to the investigation of the Company performed by aSpecial Committee appointed by the Audit Committee.

 

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(2)  “All OtherCompensation” includes the following amounts paid by the Company for the fiscalyear ended December 31, 2006:

 
| **Name**               | ** ** | **401(k) Plan  Company  Contribution ($)** | ** ** | **Life  Insurance  Premiums ($)** | ** ** | **Disability  Payments ($)** | ** ** | **Health  Insurance ($)** | ** ** | **Product  Credit* ($)** | ** ** | **Consulting  Fees** ($)** | ** ** | **Total ($)** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|-------------------------------|------------|---------------------------------|------------|--------------------|------------|
| Kristine F.  Hughes    |       | —                                               |       | 745                                    |       | —                            |       | —                         |       | 750                           |       | —                          |       | 1,495              |       |
| Pauline Hughes Francis |       | —                                               |       | 1,690                                  |       | —                            |       | 10,200                         |       | 750                           |       | —                          |       | 12,640             |       |
| Franz L.  Cristiani    |       | —                                               |       | —                                 |       | —                            |       | —                         |       | 750                           |       | —                          |       | 750                |       |
| Robert Bowen           |       | —                                               |       | —                                 |       | —                            |       | —                         |       | 750                           |       | 17,626                          |       | 18,376             |       |
| Larry Deppe            |       | —                                               |       | —                                 |       | —                            |       | —                         |       | 300                           |       | —                          |       | 300                |       |
| Eugene Hughes          |       | 9,512                                                |       | 10,552                                 |       | 360                               |       | —                         |       | —                        |       | —                          |       | 20,424             |       |

 

----

* Represents a credit of upto $750 to purchase the Company’s products.

 

** From January 17,2006 through his election to the Board of Directors on March 29, 2006, Mr. Bowenprovided consulting services to the Audit Committee while serving as a memberof the Special Committee overseeing the ongoing internal investigation of theCompany. Upon his election to the Board and appointment to the Audit Committee,Mr. Bowen’s consulting relationship terminated.

 

RetainerFees. Retainers were paid on a monthly basis to Ms. Kristine Hughes and Ms. PaulineHughes Francis and on aquarterly basis to Messrs. Cristiani, Bowen and Deppe. In addition, Mr. Cristianireceived an additional $1,000 retainer for serving as Chair of the AuditCommittee for the first quarter of 2006. Mr. Deppe received an additional$3,000 retainer for serving as Chair of the Audit Committee for the second,third and fourth quarters of 2006. Ms. Pauline Hughes Francis received an additional $1,000retainer for serving as the Chair of the Compensation Committee for 2006.

 

MeetingFees. Our directors do not receive fees for attendance at Board or Committeemeetings; however, Messrs. Cristiani, Bowen and Deppe received $26,500,$18,272 and $26,401, respectively, for time devoted to the ongoing internalinvestigation performed by the Special Committee.

 

Expenses.Board members were reimbursed for travel and other expenses incurred inconnection with their duties as directors to the extent such expenses weresubmitted to the Company for reimbursement.

 

Equity. Nostock options or other equity awards were granted to our directors during 2006.

 

NonqualifiedDeferred Compensation. None of our non-employee directors participated in theSEDP. Mr. Hughes elected to defer under the SEDP $13,000 of thecompensation he received in 2006 in his capacity as an employee. The SEDP ismore fully described above in the section following the Nonqualified DeferredCompensation Plans table.

 

## **Item 12. SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

## ** **

Thefollowing table sets forth information regarding beneficial ownership of ourCommon Stock as of June 30, 2008 by (1) each person who is known byus to beneficially own more than five percent of the outstanding shares of ourCommon Stock, (2) each of our directors, (3) each of our executiveofficers and (4) all directors and executive officers of the Company as agroup. To our knowledge and except as otherwise indicated, the persons named inthe table have sole voting and investment power with respect to all sharesshown as beneficially owned by them, subject to community property laws whereapplicable. Unless we indicate otherwise, each holder’s address is c/o Nature’sSunshine Products, Inc., 75 East 1700 South, Provo, Utah 84606.

 

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| **Name and Address of Beneficial Owner**                                               | ** ** | **Number of  Shares(1)** | ** ** | **Percent of  Class (2)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                      | ** ** | ** **                    | ** ** | ** **                          | ** ** |
| Beneficial  Owners of More than 5%                                                                              | ** ** | ** **                    | ** ** | ** **                          | ** ** |
| ** **                                                                                                      | ** ** | ** **                    | ** ** | ** **                          | ** ** |
| Delta Partners  LLC (3)  One International Place, Suite 2401  Boston, MA 02110                             |       | 1,959,043                     |       | 12.6                                | %          |
|                                                                                                            |       |                          |       |                                |       |
| Prescott Group  Capital Management, LLC (3)  1924 South Utica, Suite 1120  Tulsa, OK 74104                 |       | 1,525,683                     |       | 9.8                                 | %          |
|                                                                                                            |       |                          |       |                                |       |
| Red Mountain  Capital Partners LLC (4)  10100 Santa Monica Blvd, Suite 925  Los Angeles, CA 90067               |       | 1,144,450                     |       | 7.3                                 | %          |
|                                                                                                            |       |                          |       |                                |       |
| Paradigm Capital  Management, Inc. (3)  9 Elk Street  Albany, NY 12207                                     |       | 1,108,600                     |       | 7.2                                 | %          |
|                                                                                                            |       |                          |       |                                |       |
| First Wilshire  Securities Management, Inc.(5)  1224 East Green Street, Suite 200  Pasadena, CA 91106           |       | 1,108,839                     |       | 7.1                                 | %          |
|                                                                                                            |       |                          |       |                                |       |
| **Directors  and Executive Officers**                                                                           |       |                          |       |                                |       |
|                                                                                                            |       |                          |       |                                |       |
| Kristine F.  Hughes, Chair of the Board                                                                         |       | 572,089                       |       | 3.7                                 | %          |
| Eugene L. Hughes,  Director                                                                                     |       | 700,312                       |       | 4.5                                 | %          |
| Pauline Hughes  Francis, Director                                                                               |       | 1,923,546                     |       | 12.4                                | %          |
| Douglas  Faggioli, President and Chief Executive Officer                                                        |       | 36,271                        |       |                                | *          |
| Stephen M.  Bunker, Vice President of Finance, Treasurer, Chief Financial Officer and  Chief Accounting Officer |       | 18                            |       |                                | *          |
| Greg Halliday                                                                                                   |       | 3,338                         |       |                                | *          |
| John DeWyze,  Executive Vice-President — Operations                                                        |       | 4,264                         |       |                                | *          |
| All directors  and executive officers as a group (7 persons)                                                    |       | 3,239,838                     |       | 20.9                                | %          |

 

----

*              Less than one percent.

 

(1)           All entries exclude beneficial ownershipof shares that are issuable pursuant to options that have not vested or thatare not other wise exercisable as of the date hereof and which will not becomevested or exercisable within 60 days of June 30, 2008.

 

(2)           Calculated based on 15,510,159 sharesof our Common Stock outstanding on the June 30, 2008, with percentagesrounded to the nearest one-tenth of one percent. Shares of Common Stock subjectto options that are presently exercisable or exercisable within 60 days aredeemed to be beneficially owned by the person holding the option for thepurpose of computing the percentage ownership of that person but not treated asoutstanding for computing the percentage of any other person.

 

(3)           Reflects the number of shares held atJune 30, 2008 per Schedule 13F filing.

 

(4)           Reflects the number of shares held atDecember 31, 2007 per Schedule 13D/A Filing.

 

(5)           Reflects the number of shares held atFebruary 12, 2007 per Schedule 13G filing.

 

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**EquityCompensation Plans**

 

Thefollowing table contains information regarding the Company’s equitycompensation plans as of June 30, 2008.

 
| **Plan Category**                                      | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options,  warrants and  rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                                              | ** ** | **(b)**                                                                                                 | ** ** | **(c)**                                                                                                                                                                                                      | ** ** |
| Equity  compensation plans approved by security holders     |       | 142,590                                                                                                                              |       | $                                                                                                       | 12.05      |                                                                                                                                                                                                         | —     |   |
| Equity  compensation plans not approved by security holders |       | 140,300                                                                                                                              |       | $                                                                                                       | 11.85      |                                                                                                                                                                                                         | —     |   |
| Total                                                       |       | 282,890                                                                                                                              |       | $                                                                                                       | 11.95      |                                                                                                                                                                                                         | —     |   |

 

## **Item 13. CertainRelationships and Related Transactions, and Director Independence**

## ** **

The Board’s AuditCommittee is responsible for review, approval, or ratification of “related-persontransactions” involving the Company or its subsidiaries and related persons. UnderSEC rules, a related person is a director, officer, nominee for director, or 5%stockholder of the Company since the beginning of the previous fiscal year, andtheir immediate family members. We have adopted written policies and proceduresthat apply to any transaction or series of transactions in which the Company ora subsidiary is a participant, the amount involved exceeds $120,000, and arelated person has a direct or indirect material interest. If the AuditCommittee determines a related person has a material interest in a transaction,the Audit Committee may approve, ratify, rescind, or take other action withrespect to the transaction in its discretion.

 

In early 2005, twoJapanese Managers made donations of approximately $170 to Legacy for the Future(“Legacy”). Legacy was a charitable entity organized and controlled by a thenofficer and director of the Company. The donation was paid to the Company inJapan and was then wired to Legacy. Legacy subsequently purchased two productsfrom the Company at the Company’s cost. The products were near their expirationdate and were provided to under-nourished children in a third world country.

 

**DirectorIndependence**

 

TheBoard of Directors has determined that each of the following directors is an “independentdirector” under applicable NASDAQ standards:

 

Robert K. Bowen

Larry A. Deppe

Pauline Hughes Francis

 

Inthis report, these three directors are referred to individually as an “IndependentDirector” and collectively as the “Independent Directors.”

 

## **Item 14. PrincipalAccountant Fees and Services.**

## ** **

Weengaged Deloitte & Touche LLP as our independent, registered publicaccounting firm on February 2, 2007. For our fiscal year ended December 31,2005 and until its resignation on March 31, 2006, KPMG LLP served as our registeredindependent public accountant. The fees incurred by the Company during thefiscal year ended December 31, 2007 for professional services rendered bythe Company’s principal accountant, Deloitte & Touche LLP, are setforth below. Deloitte & Touche LLP did not perform any services forthe Company during the fiscal year ended December 31, 2006.

 

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**AuditFees**

 

Duringthe fiscal year ended December 31, 2007 and through October 6, 2008,Deloitte & Touche LLP billed the Company approximately $9,608,000 forprofessional services rendered for the audit of the Company’s consolidatedfinancial statements for the fiscal years ended December 31, 2006, 2005,and 2004.

 

**Tax Fees**

 

Theaggregate fees billed for tax services rendered by Deloitte & ToucheLLP for the years ended December 31, 2006 and 2005 were approximately $665,000and $513,000, respectively.

 

**AuditRelated Fees and All Other Fees**

 

Duringthe fiscal year ended December 31, 2007, Deloitte & Touche LLPdid not provide any services to the Company other than those identified above.

 

All ofthe fees above were approved by the Audit Committee. The Audit Committee hasconsidered whether the provision of non-audit services is compatible withmaintaining the principal accountant’s independence and has concluded that itis.

 

**Pre-ApprovalPolicies and Procedures**

 

TheCompany pre-approves a schedule of audit and non-audit services expected to beperformed by the Company’s registered public accountant in a given fiscal year.In addition, the Audit Committee delegates authority to its Chairman topre-approve certain additional audit and non-audit services rendered by Company’sregistered public accountant (other than services that have been generallypre-approved by the Audit Committee) during the period between meetings of theAudit Committee. The Chairman must report any such pre-approval decisions tothe Audit Committee at its next scheduled meeting. During the year ended December 31,2007, 100 percent of the aggregate amounts set forth above under the captions “Audit-RelatedFees,” “Tax Fees,” and “All Other Fees” were pre-approved by the Chairman ofthe Audit Committee and subsequently reported to the Audit Committee inaccordance with the procedures set forth above. Deloitte & Touche LLPdid not perform any services for the Company during the fiscal year ended December 31,2006.

 

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** **

**PART IV**

** **

## **Item 15. FinancialStatement Schedules, Exhibits and Reports on Form 8-K**

## ** **

**(a)(1) List of Financial Statements**

 

Thefollowing are filed as part of this Report:

 

Reportof Independent Registered Public Accounting Firm

 

Consolidatedbalance sheets as of December 31, 2006 and 2005

 

Consolidatedstatements of operations for the years ended December 31, 2006, 2005, and2004 (restated)

 

Consolidatedstatements of changes in shareholders’ equity and comprehensive income (loss)for the years ended December 31, 2006, 2005, and 2004 (restated)

 

Consolidatedstatements of cash flows for the years ended December 31, 2006, 2005, and2004 (restated)

 

Notesto consolidated financial statements

 

**(a)(2) List of Financial Statement Schedules**

 

ScheduleII - Valuation and Qualifying Accounts.

 

Financialstatement schedules other than the one listed are omitted for the reason thatthey are not required or are not applicable, or the required information isshown in the financial statements or notes thereto, or contained in thisReport.

 

**(a)(3) List of Exhibits**

 

Exhibit Indexas seen below

 

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** **

**SIGNATURES**

** **

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

**Nature’s Sunshine Products, Inc.**

(Registrant)

 
| Date: **October 6, 2008** |     By: |  /s/ Douglas Faggioli             |
|---------------------------|-----------------------------|----------------------------------------|
|                      |                        |                                   |
|                      |                        | Douglas  Faggioli,                     |
|                      |                        | President and  Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 
| **Signature**                                         | ** ** | **Title**                                          | ** ** | **Date**        |
|-------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------|
|                                                  |       |                                               |       |            |
| /s/ Kristine F.  Hughes                               |       | Chair of the  Board and Director                   |       | October 6, 2008 |
|      Kristine  F. Hughes     |       |                                               |       |            |
|                                                  |       |                                               |       |            |
| /s/ Douglas  Faggioli                                 |       | President and  Chief Executive Officer             |       | October 6, 2008 |
|      Douglas  Faggioli       |       |                                               |       |            |
|                                                  |       |                                               |       |            |
| /s/ Stephen M.  Bunker                                |       | Vice President  of Finance, Treasurer,             |       | October 6, 2008 |
|      Stephen  M. Bunker      |       | Chief Financial  Officer, Chief Accounting Officer |       |            |
|                                                  |       |                                               |       |            |
| /s/ Robert K.  Bowen                                  |       | Director                                           |       | October 6, 2008 |
|      Robert  K. Bowen        |       |                                               |       |            |
|                                                  |       |                                               |       |            |
| /s/ Larry A.  Deppe                                   |       | Director                                           |       | October 6, 2008 |
|      Larry  A. Deppe         |       |                                               |       |            |
|                                                  |       |                                               |       |            |
| /s/ Eugene L  Hughes                                  |       | Director                                           |       | October 6, 2008 |
|      Eugene  L Hughes        |       |                                               |       |            |
|                                                  |       |                                               |       |            |
| /s/ Pauline  Hughes Francis                           |       | Director                                           |       | October 6, 2008 |
|      Pauline  Hughes Francis |       |                                               |       |            |

 

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** NATURE’S SUNSHINE PRODUCTS, INC.**

**SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS**

**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND2004 (RESTATED)**

*(Amounts in Thousands)*

 
| **Description**                                      | ** ** | **Balance at  Beginning  of Year** | ** ** | **Provisions** | ** ** | **Amounts  Written Off** | ** ** | **Amounts  Recovered** | ** ** | **Effect of  Currency  Translation** | ** ** | **Balance at  End of Year** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------|------------|----------------|------------|-------------------------------|------------|------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year  ended December 31, 2006**               |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for  doubtfulaccounts receivable           |       | $                                            | 1,984      |           | $          | (441                          | )          | $                      | (547       | )                                         | $          | 14                                         |       | $ | 119 |   | $ | 1,129 |   |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for  obsolete inventory                    |       | 4,641                                        |       | 736            |       | (2,052                        | )          | —                 |       | —                                    |       | 3,325                                      |       |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation  allowance                             |       | 5,297                                        |       | 2,525          |       | —                        |       | —                 |       | —                                    |       | 7,822                                      |       |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year  ended December 31, 2005**               |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for  doubtful accounts receivable          |       | $                                            | 1,706      |           | $          | 460                           |       | $                      | (333       | )                                         | $          | 7                                          |       | $ | 144 |   | $ | 1,984 |   |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for  obsolete inventory                    |       | 4,020                                        |       | 1,516          |       | (895                          | )          | —                 |       | —                                    |       | 4,641                                      |       |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation  allowance                             |       | 5,556                                        |       | (259           | )          | —                        |       | —                 |       | —                                    |       | 5,297                                      |       |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year  ended December 31, 2004 (as restated)** |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for  doubtful accounts receivable(1)       |       | $                                            | 1,472      |           | $          | 149                           |       | $                      | (191       | )                                         | $          | 188                                        |       | $ | 88 |   | $ | 1,706 |   |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for  obsolete inventory (1)           |       | 3,945                                        |       | 1,295          |       | (1,220                        | )          | —                 |       | —                                    |       | 4,020                                      |       |
|                                                 |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation  allowance(2)                          |       | 5,511                                        |       | 45             |       | —                        |       | —                 |       | —                                    |       | 5,556                                      |       |

 

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(1) As a result ofthe restatement discussed in Note 2 to the consolidated financial statements, theamounts reported above for the year ended December 31, 2004 were restatedfrom the following previously reported amounts.

 
| Allowance for doubtful accounts receivable |   | 2,138  |   | 190    |   | (166   | )      | (300   | )      | — |   | 1,862  |   |
|--------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for obsolete inventory           |   | 1,926  |   | 1,502  |   | (1,493 | )      | — |   | — |   | 1,935  |   |

 

(2) The valuationallowance amounts were not previously reported for the year ended December 31,2004.

 

99

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Table of Contents

 

**LIST OF EXHIBITS**

 
| ** **   | ** ** | ** ** | ** ** | ** **                                                                                                       | ** ** | **Located  At**    |
|--------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------------|
| ** **   | ** ** | ** ** | ** ** | ** **                                                                                                       | ** ** | **Sequentially**   |
| **Item No.** | ** ** | ** ** | ** ** | **Exhibit**                                                                                                      | ** ** | **Numbered  Page** |
|         |       |       |       |                                                                                                             |       |               |
| 3.1          | -          |       |       | Restated Articles of Incorporation                                                                               |       | 1                  |
| 3.2          | -          |       |       | By-laws, as amended                                                                                              |       | XX                 |
| 10.1*        |       |       |       | Nature’s Sunshine Products, Inc. Tax Deferred  Retirement Plan, restated March 1, 2008                      |       | XX                 |
| 10.2*        |       |       |       | Nature’s Sunshine Products, Inc. Supplemental  Elective Deferral Plan as restated effective January 1, 2008 |       | XX                 |
| 10.3*        |       |       |       | Employment Agreement between the Registrant and  Douglas Faggioli dated November 1, 1994                         |       | XX                 |
| 10.4(1)*     |       |       |       | Employment Agreement between the Registrant and  Stephen M. Bunker dated December 21, 2007                       |       |               |
| 10.5*        | -          |       |       | Employment Agreement between the Registrant and  Robert W. Schaffer dated June 20, 2003                          |       | XX                 |
| 10.6*        |       |       |       | Employment Agreement between the Registrant and  William J. Keller dated April 16, 2001                          |       | XX                 |
| 10.7*        |       |       |       | Employment Agreement between the Registrant and John  DeWyze dated September 20, 1999                            |       | XX                 |
| 10.8*        |       |       |       | Employment Agreement between the Registrant and  Gregory R. Halliday dated June 1, 2001                          |       | XX                 |
| 10.9*        |       |       |       | Employment Agreement between the Registrant and  Craig Huff dated September 20, 1999                             |       | XX                 |
| 10.10*       | -          |       |       | 1995 Stock Option Plan, as amended                                                                               |       | XX                 |
| 10.11*       | -          |       |       | Form of Stock Option Agreement (1995 Stock Option  Plan)                                                         |       | XX                 |
| 14           |       |       |       | Nature’s Sunshine Products, Inc. Code of Conduct                                                            |       | XX                 |
| 21           | -          |       |       | List of Subsidiaries of Registrant                                                                               |       | XX                 |
| 23.1         | -          |       |       | Consent of Independent Registered Public Accounting  Firm                                                        |       | XX                 |
| 31.1         | -          |       |       | Certification Pursuant to Rules 13a-14(a) under the  Securities Exchange Act of 1934 as amended                  |       | XX                 |
| 31.2         | -          |       |       | Certification Pursuant to Rules 13a-14(a) under the  Securities Exchange Act of 1934 as amended                  |       | XX                 |
| 32.1         | -          |       |       | Certification pursuant to 18 U.S.C. § 1350                                                                  |       | XX                 |
| 32.2         | -          |       |       | Certification pursuant to 18 U.S.C. § 1350                                                                  |       | XX                 |

 

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(1)                      Previouslyfiled with the Commission as an exhibit to the Current Report on Form 8-Kdated December 28, 2007 and is incorporated herein by reference.

(*)                     Managementcontract or compensatory plan.

 

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