Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-K/A**

 

**x****Annual report pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934 for the fiscal year ended****December 31, 2007**

 

**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’SSUNSHINE PRODUCTS, INC.**

(Exact name of Registrant as specified 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 principal executive offices and zip code)

 

**(801) 342-4300**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

**None**

 

Securities registered pursuant to Section 12(g) of the Act:

**Common Stock, no par value.**

 

----

 

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 heldby non-affiliates of the registrant on June 30, 2008 was approximately$82,797,216 based on the closing price of $6.75 as quoted by the NationalQuotation Bureau’s Pink Sheets on June 30, 2008.

 

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

 

 

 

----

Tableof Contents

 

**TABLE OF CONTENTS**

 
| PART 1   |                                                                                                               | 5      |
|---------------|--------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                               |   |
| ITEM 1.       | BUSINESS                                                                                                           | 5      |
|          |                                                                                                               |   |
| ITEM 1A.      | RISK FACTORS                                                                                                       | 9      |
|          |                                                                                                               |   |
| ITEM 1B.      | UNRESOLVED STAFF COMMENTS                                                                                          | 15     |
|          |                                                                                                               |   |
| ITEM 2.       | PROPERTIES                                                                                                         | 15     |
|          |                                                                                                               |   |
| ITEM 3.       | LEGAL PROCEEDINGS                                                                                                  | 16     |
|          |                                                                                                               |   |
| ITEM 4.       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                               | 17     |
|          |                                                                                                               |   |
| PART II  |                                                                                                               | 17     |
|          |                                                                                                               |   |
| ITEM 5.       | MARKET FOR REGISTRANT’S COMMON EQUITY,  RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 17     |
|          |                                                                                                               |   |
| ITEM 7.       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | 21     |
|          |                                                                                                               |   |
| ITEM 7A.      | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                        | 31     |
|          |                                                                                                               |   |
| ITEM 8.       | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 35     |
|          |                                                                                                               |   |
| ITEM 9.       | CHANGE IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               | 60     |
|          |                                                                                                               |   |
| ITEM 9A.      | CONTROLS AND PROCEDURES                                                                                            | 60     |
|          |                                                                                                               |   |
| ITEM 9B.      | OTHER INFORMATION                                                                                                  | 68     |
|          |                                                                                                               |   |
| PART III |                                                                                                               | 68     |
|          |                                                                                                               |   |
| ITEM 10.      | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE                                                            | 68     |
|          |                                                                                                               |   |
| ITEM 11.      | EXECUTIVE COMPENSATION                                                                                             | 71     |
|          |                                                                                                               |   |
| ITEM 12.      | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                    | 78     |
|          |                                                                                                               |   |
| ITEM 13.      | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                         | 79     |
|          |                                                                                                               |   |
| ITEM 14.      | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                             | 80     |
|          |                                                                                                               |   |
| PART IV  |                                                                                                               | 80     |
|          |                                                                                                               |   |
| ITEM 15.      | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                         | 80     |
|          |                                                                                                               |   |
| SIGNATURES    |                                                                                                               | 82     |

 

2

----

Table of Contents

 

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certain information included or incorporated by reference in thisreport may be deemed to be “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995. Forward-lookingstatements may include, but are not limited to, statements relating to ourobjectives, plans and strategies. All statements (other than statements of historicalfact) that address activities, events or developments that we intend, expect,project, believe or anticipate will or may occur in the future areforward-looking statements. These statements are often characterized byterminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,”“plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” andsimilar expressions, and are based on assumptions and assessments made bymanagement in light of their experience and their perception of historicaltrends, current conditions, expected future developments and other factors theybelieve to be appropriate. Forward-looking statements are not guarantees offuture performance and are subject to risks and uncertainties. Important factorsthat could 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 its subsidiaries, as “we,” “us,” “our Company” or “the Company.”

 

**EXPLANATORY NOTES**

 

**Filing of Form 10-K/A**

 

This amendment on Form 10-K/A is being filed to provide (a) correctingamendments for errors in the unaudited quarterly results for the fiscal year2007 previously disclosed in our Annual Report on Form 10-K for the yearended December 31, 2007, which can be found in Note 15 of Item 8 – “FinancialStatements and Supplementary Data,” (b) additional disclosures regardingour exchange rate risks, which can be found in Item 7A – “Quantitative andQualitative Disclosures about Market Risk,” (c) additional summaryinformation regarding the findings and recommendations of the PreliminaryReport (as defined below), which can be found in “Explanatory Notes – InternalInvestigation,” and (d) additional information regarding the reasonsstated by KPMG LLP for their resignation as our previous independent registeredpublic accounting firm, which can be found in “Explanatory Notes – Change inCertifying Accountant.”

 

**Internal Investigation**

 

As previously announced, in October 2005, the Audit Committee ofour Board of Directors (our “Audit Committee”) commenced an internalinvestigation regarding certain sales and commission activities involvingcertain of our foreign operations. The investigation was subsequently expandedto include other matters related to our consolidated financial statements. TheAudit Committee engaged a nationally-recognized independent law firm to assistin the investigation and the law firm, in turn, engaged a nationally-recognizedindependent public accounting firm to provide further assistance. The internalinvestigation was overseen by a Special Committee comprised of one independentmember of the Audit Committee and an outside independent consultant, who laterbecame a director and independent member of the Audit Committee. On March 15,2006, the Audit Committee received an oral preliminary report on the findingsof the investigation through that date (the “Preliminary Report”). ThePreliminary Report indicated that the Company had certain internal controlweaknesses and outlined potential violations of law.  The Preliminary Report also included a seriesof recommendations, including the termination of certain employees and seniorofficers.  Based on issues raised in thePreliminary Report, on March 15, 2006, the Audit Committee determined thatthe financial statements****filed with theSEC in connection with the following previously issued reports of the Companyshould not be relied upon:

 

(i) Quarterly Reports on Form 10-Q for each of the firstthree fiscal quarters of 2005;

 

(ii) Annual Report on Form 10-K for the fiscal year ended December 31,2004 (which includes financial statements as of December 31, 2004 and 2003and for the fiscal years ended December 31, 2004, 2003 and 2002); and

 

(iii) Quarterly Reports on Form 10-Q for each of the firstthree fiscal quarters of 2004, 2003 and 2002.

 

**Change in Certifying Accountant**

 

As previously announced, on March 31, 2006, we received a letterfrom KPMG LLP (“KPMG”) pursuant to which KPMG resigned as our independentregistered public accounting firm.  Inits letter, KPMG stated that it had determined that our Board of Directors andAudit Committee had been adequately informed with respect to likely illegalacts that came to the attention of KPMG 

 

3

----

Tableof Contents

 

during the course of its audit of the Company’sfinancial statements and which also were the subject of the internalinvestigation overseen by the Special Committee.  KPMG also concluded that these illegal actsappear to have had a material effect on the financial statements of theCompany.  KPMG further concluded that itsresignation was necessary because the board of directors had not taken timelyand appropriate remedial actions with respect to the illegal acts.  In particular, KPMG objected to the decisionsby the Board of Directors in response to recommendations contained in thePreliminary Report.

 

1.             The failure toterminate its Mr. Faggioli as an employee of the Company (rather thanmerely removing him from his positions as president and chief executive officerand from the board of directors pending completion of the internalinvestigation).  KPMG believed theevidence indicated that he made misrepresentations to KPMG on at least twooccasions in the form of management representation letters that failed todisclose that he was aware of alleged fraud in the international operations ofthe Company, and had approved a payment in violation of the Foreign CorruptPractice Act.

 

2.             The failure toremove Mr. Cristiani from its Audit Committee and the Board of Directors (Mr. Cristianiwas replaced as the Chair of the Audit Committee), even though he was found tohave known of the alleged misrepresentation and understood that they “could beconsidered material from an auditing standpoint and could pose a significantproblem to our company,” yet failed to bring the matter to the attention of theauditors or correct the misrepresentations.

 

KPMG’s statements are set forth in full in Exhibits 99.1 and 99.2 tothe Company’s Form 8-K filed on April 3, 2006 and Exhibit 99.1to the Company’s Form 8-K filed on April 18, 2006.

 

Following KPMG’s resignation, we began the process of engaging a newindependent registered public accounting firm. On February 2, 2007, our Audit Committee engaged Deloitte &Touche LLP (“Deloitte”) to serve as our independent registered publicaccounting firm.

 

In August 2006, following the completion of the Special Committee’sinternal investigation, the Board of Directors reinstated Mr. Faggioli as theCompany’s President and Chief Executive Officer.  In connection with the private class actionsand government investigations discussed below under “Item 3.  Legal Proceedings”, the Board of Directorshas determined to vigorously contest allegations of illegal conduct andmisrepresentations that are or may be based upon the events that led to theresignation of KPMG.

 

**Failure to Report and Delisting**

 

Due primarily to the dedication of a substantial amount of ourresources to the review and assessment of information we received in the courseof the internal investigation described above, we have been unable to prepareand file periodic reports for periods ending on or after December 31, 2005as required by the Exchange Act. As a result of our inability to file suchreports, on April 5, 2006, the Nasdaq Listing Qualifications Paneldetermined to delist our common stock from The Nasdaq National Market.

 

Since April 2006, our common stock hasbeen listed on the Pink Sheets. We intend to seek to be re-listed on asecurities exchange when we become current in our financial reporting. Therecan be no assurance regarding our ability to satisfy the standards for listingon an exchange or that an exchange will approve our listing. Nor can there beany assurance at this time when the re-listing would occur. Continuing to be quotedonly on Pink Sheets could adversely affect the trading market—and potentiallythe market price—of our common stock.

 

Preceding the filing of this report, we filed the Annual Report on Form 10-Kfor the fiscal year ended December 31, 2006.  We are currently preparing and expect to filethe following reports with the SEC subsequent to the filing of thisReport:  Quarterly Reports on Form 10-Qfor the quarterly periods ended March 31, and June 30, 2008.

 

**Legal Proceedings**

 

On July 12, 2007, we announced that the SEC had instituted anadministrative proceeding pursuant to Section 12(j) of the SecuritiesExchange Act of 1934, as amended (“the Exchange Act”), to suspend or revoke theregistration of our common stock under Section 12 of the Exchange Act. On November 8,2007, an administrative law judge in an administrative proceeding issued anInitial Decision to revoke the registration of our common stock because of ourfailure to file required periodic reports. 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 

 

4

----

Tableof Contents

 

argument regarding the Company’s petition on October 1,2008. The SEC has now rescheduled the oral argument for an unspecified futuredate. We cannot predict the outcome of such review at this time. The InitialDecision of the administrative law judge will not become effective prior to thecompletion of the SEC’s review. We cannot predict what, if any, impact the SEC’sultimate determination may have on our financial statements or the materialityof such impact, if any. If a final order is issued by the SEC revoking theregistration of our common stock, broker-dealers would not be permitted toeffect transactions in shares of our common stock until we file a newregistration with the SEC under the Exchange Act and that registration is madeeffective.

 

Given the significant delay in the filing ofour annual report on Form 10-K for 2007, certain amounts and discussions,as indicated, have been updated to include relevant 2008 and currentinformation as far as practicable to do so.

 

**Restatement of Previously Issued FinancialStatements**

 

On October 6, 2008, the Company restated its previously filedconsolidated financial statements for the year ended December 31, 2004 andits previously reported December 31, 2003 consolidated common stock, treasurystock, retained earnings, and accumulated other comprehensive loss to recognizecorrected items that relate toperiods prior to January 1, 2004. The restatement of our 2004 financial statements reflectchanges resulting from errorsidentified from Management’s comprehensive review of its accounting policies, practices, and financialrecords, including matters identified by the independent investigation, asdiscussed above. The Company used all available information in determining the impact of adjustments identified as a result of Management’s review. Therestatement is discussed in greater detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on October 6, 2008.

 

**PART 1**

 

## ***Item1. Business***

## *** ***

**The Company**

 

Nature’s Sunshine Products, Inc., foundedin 1972 and incorporated in Utah in 1976, together with our subsidiaries, isprimarily engaged in the manufacturing and marketing of nutritional andpersonal care products. We sell our products worldwide to a sales force ofindependent Distributors who use the products themselves or resell them toother Distributors or consumers.

 

Our operations are conducted in the United States as well as in variousother countries. Our subsidiaries 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 severalother countries, including Argentina, Australia, Chile, New Zealand and Norway.

 

We also sell our products through a separate division, SynergyWorldwide. Synergy Worldwide sells products in the United States, Japan, SouthKorea, Singapore, Thailand, Taiwan, Malaysia, Hong Kong, Philippines,Indonesia, the United Kingdom, Germany, Austria, the Netherlands and Australia.

 

Our principal executive office is located at 75 East 1700 South, Provo,Utah 84606. Our telephone number is (801) 342-4300 and our Internet websiteaddress is http://www.natr.com. We make available free of charge on our websiteour Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q,our Current Reports on Form 8-K, and amendments to those reports, filed orfurnished pursuant to Section 13(a) of the Securities Exchange Act of1934 as soon as practicable after we electronically file these documents with,or furnish them to, the Securities and Exchange Commission (the “SEC”).

 

5

----

Tableof Contents

 

**Financial Information by Business Segment**

 

We are principally engaged in one line ofbusiness; namely, manufacturing and marketing nutritional and personal careproducts. We conduct our business through three operating business segments.Two of the operating business segments operate under the *Nature’sSunshine Products* name and are based on geographic operations: aUnited States segment (“NSP United States”) and an international segment (“NSPInternational”). Our third operating business segment is *SynergyWorldwide*, a division that was acquired in 2000. Synergy Worldwideoffers 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. Information by business segment for each of our last three fiscalyears for sales revenue and operating income, and information by businesssegment as of the end of our last two fiscal years for identifiable assets, areset forth in Note 14 of the Notes to Consolidated Financial Statements setforth in Item 8 of this Report.

 

**Products and Manufacturing**

 

Our line of over 700 products includesherbal products, vitamins and mineral supplements, personal care, nutritionaldrinks, and miscellaneous other products. We purchase herbs and other rawmaterials in bulk and, after quality control testing, formulate, encapsulate,tablet or concentrate, and package them for shipment. Most of our products aremanufactured at our facility in Spanish Fork, Utah. Contract manufacturersproduce some of our personal care and other miscellaneous products for us inaccordance with our specifications and standards. We have implemented stringentquality control procedures to verify that the contract manufacturers havecomplied with our specifications and standards. Our product lines are describedbelow.

 

*Herbal Products*

 

We manufacture a wide selection of herbal products, which are sold inthe form of capsules or tablets. These capsules or tablets contain herb powderor a combination of two or more herb powders. We also produce both single herbsand herb combinations in the form of liquid herbs and extracts. Liquid herbsare manufactured by concentrating herb constituents in a vegetable glycerinbase. Extracts are created by dissolving powdered herbs into liquid solventsthat separate the key elements of the herbs from the fibrous plant material.For the years ended December 31, 2007, 2006, and 2005, herbal productsaccounted for approximately 52.9, 54.0, and 53.7 percent of net sales revenue,respectively.

 

*Vitamins and Mineral Supplements*

 

We manufacture a wide variety of single vitamins, which are sold in theform of chewable or non-chewable tablets. We also manufacture several multiplevitamins and mineral supplements, including a line containing naturalantioxidants. Generally, mineral supplements are sold in the form of tablets;however, certain minerals are offered only in liquid form. For the years ended December 31,2007, 2006, and 2005, vitamin and mineral supplements accounted forapproximately 41.6, 40.3, and 40.5 percent of net sales revenue, respectively.

 

*Personal Care Products*

 

We manufacture or contract with independent manufacturers to supply avariety of personal care products for external use, including oils and lotions,aloe vera gel, herbal shampoo, herbal skin treatment, toothpaste, and skincleanser. For the years ended December 31, 2007, 2006, and 2005, personalcare products accounted for approximately 2.3, 2.4, and 2.5 percent of netsales revenue, respectively.

 

*Other Products*

 

We manufacture or contract with independent manufacturers to supply avariety of other products, including a variety of nutritional drinks, homeopathicproducts, and powders. For the years ended December 31, 2007, 2006, and2005, other products accounted for approximately 3.2, 3.3, and 3.3 percent ofnet sales revenue, respectively.

 

6

----

Tableof Contents

 

**Distribution and Marketing**

 

Our independent Distributors (as hereinafter defined) market ourproducts to consumers through direct-selling techniques, as well as sponsorother Distributors. We seek to motivate and provide incentives to ourindependent Distributors by offering high quality products and providing ourDistributors with product support, training seminars, sales conventions, travelprograms, and financial benefits.

 

Our products sold in the United States are shipped directly from ourmanufacturing and warehouse facilities located in Spanish Fork, Utah, as wellas from our regional warehouses located in Columbus, Ohio; Dallas, Texas; andAtlanta, Georgia. Each international operation maintains warehouse facilitieswith inventory to supply its customers.

 

Demand for our products is created primarily from our independentDistributors. As of June 30, 2008, we had approximately 718,500 activeDistributors worldwide, which included approximately 227,000 Distributors inthe United States. A person who joins our independent sales force begins as a “Distributor”.An individual can become a Distributor by signing up under the sponsorship ofsomeone who is already a Distributor. Each Distributor is required to renewhis/her distributorship on a yearly basis; our experience indicates thatapproximately 45 percent of our Distributors renew annually. Many Distributorssell our products on a part-time basis to friends or associates or use theproducts themselves. A Distributor interested in earning additional income bycommitting more time and effort to selling our products may earn “Manager”status. Manager status is contingent upon attaining certain purchase volumelevels, recruiting additional Distributors, and demonstrating leadershipabilities. We had approximately 26,800 Managers worldwide as of June 30,2008, including approximately 7,600 Managers in the United States. Managersresell our products to Distributors within their sales group, sell our productsdirectly to consumers, or use the products themselves. Historically,approximately 60 percent of Distributors appointed as Managers have continuedto maintain that status annually.

 

In the United States, we generally sell our products on a cash orcredit card basis. From time to time, our United States operation extendsshort-term credit associated with product promotions. For certain of ourinternational operations, we use independent distribution centers and offercredit terms which are generally consistent with industry standards within eachrespective country.

 

We pay sales commissions (“Volume Incentives”) to our Managers andDistributors based upon the amount of sales group product purchases. Generally,a portion of these Volume Incentives are paid to the applicable Manager as arebate for product purchases made by the Manager and the Manager’s down-lineDistributors. The remaining portion of these Volume Incentives is paid in theform of commissions for purchases made by the Manager’s down-line Distributors.The amounts of Volume Incentives that we paid during the years ended December 31,2007, 2006, and 2005 are set forth in our Consolidated Financial Statements inItem 8 of this report. In addition to the opportunity to receive VolumeIncentives, Managers who qualify by attaining certain levels of monthly productpurchases are eligible for additional incentive programs including automobileallowances, sales convention privileges, and travel.

 

**Source and Availability of Raw Materials**

 

Raw materials used in the manufacture of our products are generallyavailable from a number of suppliers. To date, we have not experienced anymajor difficulty in obtaining adequate sources of supply. We attempt to ensurethe availability of many of our raw materials by contracting, in advance, forour annual requirements. In the past, we have found alternative sources of rawmaterials when needed. Although there can be no assurance we will be successfulin locating such sources in the future, we believe we will be able to do so.

 

**Trademarks and Trade Names**

 

We have obtained trademark registrations of our basic trademark, “Nature’sSunshine”, and the landscape logo for all of our Nature’s Sunshine productlines. We have also obtained trademark registrations for “Synergy” for all ofour Synergy product lines. We hold trademark registrations in the United Statesand in many other countries. Our customers’ recognition and association of ourbrands and trademarks with quality is an important element of our operatingstrategy.

 

**Seasonality**

 

Our business does not reflect significant seasonality.

 

7

----

Tableof Contents

 

**Inventories**

 

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. Due to different regulatory requirements across thecountries in which we sell our products, our finished goods inventories reflectproduct labels and sometimes product formulations specific for each country.Our inventories are subject to obsolescence due to finite shelf lives.

 

**Dependence Upon Customers**

 

We are not dependent upon a single customer or a few customers, theloss of which we believe would have a material adverse effect on our business.

 

**Backlog**

 

We typically ship orders for our products within 24 hours after receipt.As a result, we have not historically experienced significant backlogs.

 

**Competition**

 

Our products are sold in competition with other companies, some ofwhich have greater sales volumes and financial resources than we do, and whichsell brands that are, through advertising and promotions, better known toconsumers. We compete in the nutritional and personal care industry againstcompanies which sell through retail stores as well as against other directselling companies. For example, we compete against manufacturers and retailersof nutritional and personal care products, which are distributed throughsupermarkets, drug stores, health food stores, discount stores, etc. Inaddition to competition with these manufacturers and retailers, we compete forproduct sales and independent Distributors with many other direct salescompanies, including Herbalife, Pharmanex (NuSkin), USANA, Shaklee, Mannatechand Amway. The principal competitors in the retail encapsulated and tabletedherbal products market include Nature’s Way, NOW, Rexall Sundown, andNutraceuticals**.**We believe that the principalcomponents of competition in the direct sales marketing of nutritional andpersonal care products are quality, price, and brand recognition. In addition,the recruitment, training, travel, and financial incentives for the independentsales force are important factors.

 

**Research and Development**

 

We conduct research and development activities at our manufacturingfacility located in Spanish Fork, Utah. Our principal emphasis in our researchand development activities is the development of new products and theenhancement of existing products. The amount, excluding capital expenditures,spent on research and development activities was approximately $1.9 million in2007 and 2006, and $1.8 million in 2005, respectively. During the three yearsin the period ended December 31, 2007, we did not contract for anythird-party research and development.

 

**Compliance with Environmental Laws and Regulations**

 

The nature of our business has not required any material capitalexpenditures to comply with federal, state, or local provisions enacted oradopted regulating the discharge of materials into the environment. No materialexpenditures to meet such provisions are anticipated. Such regulatoryprovisions have not had any material effect upon our results of operations orcompetitive position.

 

**Regulation**

 

The formulation, manufacturing, packaging, labeling, advertising,distribution and sale of each of our major product groups are subject to regulationby one or more governmental agencies. The most active of these is the Food andDrug Administration (“FDA”), which regulates our products under the FederalFood, Drug and Cosmetic Act (“FDCA”) and regulations promulgated thereunder.The FDCA defines the terms “food” and “dietary supplement” and sets forthvarious conditions that unless complied with may constitute adulteration ormisbranding of such products. The FDCA has been amended several times withrespect to dietary supplements, most recently by the Nutrition Labeling andEducation Act of 1990 (the “NLEA”) and the Dietary Supplement Health andEducation Act of 1994 (the “DSHEA”).

 

FDA regulations relating specifically to foods and dietary supplementsfor human use are set forth in Title 21 of the Code of Federal Regulations.These regulations include basic labeling requirements for both foods anddietary supplements. Additionally, 

 

8

----

Tableof Contents

 

Good Manufacturing Practices (“GMPs”) exist for both foods and dietarysupplements. 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 are also regulated by the Federal Trade Commission (“FTC”),the Consumer Product Safety Commission (“CPSC”), the United States Departmentof Agriculture (“USDA”), and the Environmental Protection Agency (“EPA”). Ouractivities, including our multi-level distribution activities, are alsoregulated by various agencies of the states, localities, and foreign countriesin which our products are sold.

 

**Employees**

 

The number of individuals we employed as of June 30, 2008 was1,177. We believe that our relations with our employees are satisfactory.

 

**International Operations**

 

A significant portion of our net sales are concentrated within theUnited States, which represents 41.7 percent of net sales in 2007. Outside ofthe United States, Japan continues to be our largest market, representing 12.4percent of net sales during 2007. As we continue to expand internationally, ouroperating results will likely become more sensitive to economic and politicalconditions in foreign markets, as well as to foreign currency fluctuations.

 
| **Year Ended December 31,** | ** ** | **2007**    | ** **  | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|-------------|-------------|------------|------------|----------|------------|
| Sales Revenue:                             |       |        |        |       |       |     |       |   |   |   |   |   |   |
| United States                              | ** ** | **$**       | **152,943** | ** ** | **41.7**   | **%**    | $          | 157,132 |   | 43.4 | % | $ | 158,052 |   | 44.9 | % |
| Foreign                                    |       |        |        |       | ** ** |     |       |   |   |   |   |   |   |
| Japan                                      | ** ** | **45,554**  | ** **  | **12.4**   | ** ** | 52,301   |       | 14.4 |   | 55,540 |   | 15.8 |   |
| Russia                                     | ** ** | **34,314**  | ** **  | **9.4**    | ** ** | 28,394   |       | 7.8 |   | 23,710 |   | 6.8 |   |
| Other                                      | ** ** | **133,836** | ** **  | **36.5**   | ** ** | 124,395  |       | 34.4 |   | 114,382 |   | 32.5 |   |
| Total Foreign                              | ** ** | **213,704** | ** **  | **58.3**   | ** ** | 205,090  |       | 56.6 |   | 193,632 |   | 55.1 |   |
| ** **                                 | ** ** | **$**       | **366,647** | ** ** | **100.0**  | **%**    | $          | 362,222 |   | 100.0 | % | $ | 351,684 |   | 100.0 | % |

 

Our sales of nutritional and personal care products are establishedinternationally in Japan, Mexico, Central America, Canada, Venezuela, SouthKorea, Dominican Republic, Ecuador, the United Kingdom, Colombia, Thailand,Peru, Singapore, Israel, Brazil, Taiwan, Malaysia, Indonesia, Philippines, HongKong, China, Poland, Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia,Belarus, Germany, the Netherlands, Austria, and Australia. We also export ourproducts to numerous other countries, including Argentina, Chile, New Zealand,and Norway.

 

Our international operations are conducted in a manner we believe iscomparable with those conducted in the United States; however, in order toconform to local variations, economic realities, market customs, consumerhabits, and regulatory environments, differences may exist in the products andin the distribution and marketing programs.

 

Our international operations are subject to many of the same risksfaced by our United States operations, including competition and the strengthof the local economy. In addition, our international operations are subject tocertain risks inherent in carrying on business abroad, including foreignregulatory restrictions, fluctuations in monetary exchange rates, import-exportcontrols and the economic and political policies of foreign governments. Thesignificance of these risks increases as our international operations continueto expand. A significant portion of our long-lived assets are located in theUnited States, Mexico and Venezuela.

 

## ***Item1A. Risk Factors***

## *** ***

*You should carefully consider the followingrisks in evaluating our Company and our business. In addition, you should keepin mind that the risks described below are not the only risks that we face. Therisks described below are the risks that we currently believe are material toour business. However, additional risks not presently known to us, or risksthat we currently believe are not material, may also impair our businessoperations. You should also refer to the other information set forth in thisreport, including the information set forth in “Business” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” aswell as our consolidated financial statements and the related notes. Our businessprospects, financial condition, or results of operations could be adverselyaffected by any of the following risks. If we are adversely affected by suchrisks, then the trading price of our common stock could decline.*

 

9

----

Tableof Contents

 

**Risk Factors Related to Delayed FinancialReporting**

 

***The delay in reporting our financialstatements and related events has had, and will continue to have, a materialadverse effect on us.***

 

Because of the delay in completing ourfinancial statements for the years ended December 31, 2007, 2006, and2005, and our restatement of prior period financial statements, we have beenunable to timely file our required periodic reports with the SEC. This reportis being filed after it was due. We have not filed any Quarterly Reports on Form 10-Qsince November 2005, we were not able to timely file our Annual Report on Form 10-Kfor the year 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 theExchange Act;

·                  Limitations on access to public capitalmarkets;

·                  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 publicoffering or acquisitions until we are current in our financial reporting withthe SEC. We also will be unable to repurchase our common stock until we arecurrent in our financial reporting with the SEC.***

 

United States securities laws require that wesupply current annual and quarterly financial statements in order for us to beable to register securities for a public offering or an acquisition. Ourability to register securities for a public offering or an acquisition willdepend upon retaining our registration under the Exchange Act. If we succeed indoing so, we believe we will be able to register securities for publicofferings and acquisitions after we become current. However, we will beineligible to use “short-form” registration that allows us to incorporate byreference our SEC reports into our registration statements or to use shelfregistration until we have filed all of our periodic reports in a timely mannerfor a period of twelve months. This could increase the costs of sellingsecurities publicly and could significantly delay such sales. We will also beunable to engage in other transactions involving our common stock, including astock repurchase, until we have become current in our financial reporting.

 

***We have had materialweaknesses in our internal controls over financial reporting.***

 

As discussed in Item 9A of this report,Controls and 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.

 

***We are subject to ongoing investigations bythe SEC and the United States Department of Justice.***

 

In March 2006, we voluntarily disclosed to the SEC certaininformation related to the independent investigation by the Company’s AuditCommittee. Since that time, the SEC has subpoenaed certain documents andvoluntarily requested other information in connection with its subsequentinvestigation related to these events. We are cooperating fully with thisinvestigation. We cannot predict what impact, if any, and the materiality ofsuch impact, if any, the conclusion of this matter may have on our financialstatements.

 

In March 2006, the Company voluntarily disclosed to the UnitedStates Department of Justice (“DOJ”) certain information related to theindependent investigation by the Company’s Audit Committee. Since that time,the DOJ has requested that the Company voluntarily provide documents and otherinformation in connection with its subsequent investigation related to theseevents. The Company is cooperating fully with this investigation. The Companycannot predict what impact, if any, and the materiality of such impact, if any,the conclusion of this matter may have on our financial statements.

 

10

----

Tableof Contents

 

***Taxing authorities may determine that we oweadditional taxes from previous years.***

 

As a result of the restatement and delay in our financial reporting, wewill likely have to amend previously filed tax returns and reports. Wherelegal, regulatory or administrative rules require or allow us to amend ourprevious tax filings, we intend to comply with our obligations under applicablelaw. To the extent that tax authorities do not accept our conclusions about thetax effects of the restatement, liabilities for taxes could differ from thosewhich have been recorded in our consolidated financial statements. If it isdetermined that we have additional tax liabilities, there could be an adverseeffect on our financial condition, results of operations and cash flows.

 

In early 2006, the Internal Revenue Service began an audit of theCompany’s income tax returns. This audit is ongoing and covers income taxreturns for the years 2003 through 2005. We cannot predict what impact, if any,and the materiality of such impact, if any, the conclusion of these matters mayhave on our financial statements.

 

***Litigation arising in connection with ourinternal investigation and the restatement of our financial statements couldadversely affect our financial condition or operations.***

 

As of June 30, 2008, we had one securities class action lawsuitpending against us, former members of our Board of Directors and present andformer members of management that relate to the internal investigation and therestatement of our financial statements. The lawsuit and other legal matters inwhich we have become involved following the announcement of the restatement aredescribed in Item 3, “Legal Proceedings.” The securities class action lawsuit is currently in the early stages ofdiscovery.  The court granted in part theplaintiffs’ motion to certify the class on September 25, 2008. The trialis not scheduled to commence until April 19, 2010. We are not able topredict the outcome of the litigation; however, if we are unsuccessful in ourefforts to defend against the allegations raised in the litigation, ourbusiness and financial condition would likely be negatively impacted. Amongother consequences of a negative outcome of the litigation, we could becomeobligated to pay damages in an amount, which would adversely affect ourfinancial condition or our operations.

 

In addition to the possibility that we could become subject to damagesresulting from the lawsuit described above, the lawsuit and other legal matterscould have a disruptive effect upon the operation of our business and consumethe time and attention of our senior management. In addition, we are likely toincur substantial expenses in connection with such matters, includingsubstantial fees for attorneys.

 

We maintain insurance that may provide coverage for the potentialconsequences of a negative outcome of the litigation described above. We havegiven notice to our insurers of the claims. The insurers have responded byrequesting additional information and by reserving their rights under thepolicies, including the rights to deny coverage under various policy exclusionsor to rescind the policies in question as a result of our restatement of ourfinancial statements. There can be no assurance that the insurers will not seekto deny coverage or rescind the policies; that some or all of the claims willnot be covered by such policies; or that, even if covered, our ultimateliability will exceed the available insurance.

 

***The matters relating to the internalinvestigation by our Audit Committee and the restatement of our consolidatedfinancial statements have required us to incur substantial expenses.***

 

As described in the Explanatory Note immediately preceding Part I,Item 1, in this Form 10-K, our Audit Committee conducted an internalinvestigation, which initially focused on certain of our foreign operations,but subsequently expanded to include other matters related to our financialstatements and financial reporting. The internal investigation and relatedactivities have required us to incur substantial expenses for legal,accounting, tax and other professional services, and has diverted management’sattention from our business.

 

**Risk Factors Related to Our Business**

 

***Changes in laws and regulations regardingnetwork marketing may prohibit or restrict our ability to sell our products insome markets.***

 

Network marketing systems are frequentlysubject to laws and regulations by various government agencies throughout theworld. These laws and regulations are generally intended to prevent fraudulentor deceptive practices and ensure that sales are made to consumers of theproducts and that compensation, recognition, and advancement within the marketingorganization are based upon sales of the product. Failure to comply with theselaws and regulations could result in significant penalties. Violations couldresult

 

11

----

Tableof Contents

 

from misconduct by an associate, ambiguity instatutes, changes or new laws and regulations affecting our business, and courtrelated decisions. Furthermore, we may be restricted or prohibited from usingnetwork marketing plans in some foreign countries.

 

***Our products and manufacturing activities aresubject to extensive government regulations and could be subject to additionallaws and regulations.***

 

The formulation, manufacturing, packaging, labeling, advertising,distribution and sales of each of our major product groups are subject toregulation by numerous, domestic andforeign governmental agencies and authorities. These include the FDA, the FTC,the CPSC, the USDA, and other state regulatory agencies as well as regulatoryagencies in the foreign markets in which we operate. The markets in which weoperate have varied regulations which often require us to reformulate productsfor specific markets, conform product labeling to market regulations, andregister or qualify products or obtain necessary approvals with the applicablegovernmental authorities in order to market our products in these markets.Failure to comply with the regulatory requirements of these variousgovernmental agencies and authorities could result in enforcement actionsincluding: cease and desist orders, injunctions, limits on advertising,consumer redress, divestitures of assets, rescission of contracts, or suchother relief as may be deemed necessary. Violation of these orders could resultin substantial financial or other penalties. Any action against us couldmaterially affect our ability to successfully market our products.

 

In the future, we may be subject to additional laws or regulationsadministered by the FDA or other federal, state, local, or foreign regulatoryauthorities, the repeal or amendment of laws or regulations which we considerfavorable and/or more stringent interpretations of current laws or regulations.We can neither predict the nature of such future laws, regulations,interpretations, or applications, nor what effect additional governmentalregulations or administrative orders, when and if promulgated, would have onour business. They could, however, require reformulation of certain products tomeet new standards, 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 altered labelingand/or scientific substantiation. Any or all such requirements could have amaterial negative impact on our financial position, results of operations, andliquidity.

 

***If we are unable to attract and retainindependent Distributors, our business could suffer.***

 

We rely on our independent Distributors tomarket and sell our products through direct marketing techniques, as well assponsoring other Distributors. Many Distributors sell our product on apart-time basis to friends or associates or use the products for themselves.Our Distributors may terminate their service at any time, and, like most directselling companies, we experience high turnover among Distributors from year toyear. As a result, we need to continue to retain existing Distributors andrecruit additional Distributors in order to maintain and/or increase sales inthe future.

 

Several factors affect our ability to attractand retain independent Distributors, 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 ourindependent Distributors will continue to maintain their current levels ofproductivity or that we will be able to continue to attract and retainDistributors in sufficient numbers to sustain future growth or to maintainpresent growth levels.

 

12

----

Tableof Contents

 

***An economic slowdown in the markets in whichwe do business could reduce consumer demand for our products.***

 

Consumer spending habits, including spendingfor our products, are affected by, among other things, prevailing economicconditions, levels of employment, fuel prices, salaries and wages, theavailability of consumer credit, consumer confidence and consumer perception ofeconomic conditions. A general economic slowdown in the markets in which we dobusiness and an uncertain economic outlook may adversely affect consumerspending 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 couldlower our revenue and net income.***

 

In 2007, we recognized approximately 58.3percent of our revenue in markets outside the United States in each market’srespective local currency. We purchase inventory primarily in the United Statesin U.S. dollars. In preparing our financial statements, we translate revenuesand expenses in foreign countries from their local currencies into U.S. dollarsusing weighted-average exchange rates. Because a significant portion of oursales is in foreign countries, exchange rate fluctuations may have asignificant effect on our sales and earnings. Our reported net earnings may besignificantly affected by fluctuations in currency exchange rates, withearnings generally increasing with a weaker U.S. dollar and decreasing with astrengthening U.S. dollar. As operations expand in countries where foreigncurrency transactions may be made, our operating results will increasingly besubject to the risks of exchange rate fluctuations and we may not be able toaccurately estimate the impact that these changes may have on our futureresults of operations or financial condition.

 

***Availability and integrity of raw materialscould become compromised.***

 

We depend on outside suppliers for rawmaterials. We acquire all of our raw materials for the manufacture of ourproducts from third-party suppliers. We have some agreements for the supply ofmaterials used in the manufacture of our products. We also contract withthird-party manufacturers and suppliers for the production of some of ourproduct**s.**In the event we were to lose anysignificant suppliers and experience any difficulties in finding ortransitioning to alternative suppliers, it could result in product shortages orproduct back orders, which could harm our business. There can be no assurancethat suppliers will be able to provide us the raw materials in the quantitieswe request or at a price we are willing to pay. We are also subject to thedelays 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 experiencedproduction difficulties with respect to our products, including the delivery ofmaterials or products that do not meet our quality control standards. Thesequality problems have in the past resulted in, and in the future could resultin, stock outages or shortages of our products, and could harm our sales andcreate inventory write-offs for unusable product.

 

***Geopolitical issues and conflicts couldadversely affect our business.***

 

Because a substantial portion of our businessis conducted outside of the United States, our business is subject to globalpolitical issues and conflicts. If these conflicts or issues escalate, it couldharm our foreign operations. In addition, changes and actions by governments inforeign markets could harm our business.

 

***Our business is subject to the effects ofadverse publicity and negative public perception.***

 

Our ability to attract and retainDistributors, as well as their ability to maintain or grow sales in the future,can be affected by either adverse publicity or negative public perception inregards to our industry, our competition, our direct marketing model, thequality or efficacy of nutritional product supplements and ingredients, and ourbusiness generally. There can be no assurance we will not be subject to adversepublicity or negative public perception in the future or that it would not havean adverse or material negative impact on our financial position, results ofoperations, and liquidity.

 

***Taxation and transfer pricing affect ouroperations.***

 

As a U.S. company doing business in manyinternational markets, we are subject to foreign tax and intercompany pricinglaws, including those relating to the flow of funds between our Company and oursubsidiaries. These pricing laws are designed to ensure that appropriate levelsof income and deductions are reported by our U.S. and foreign entities and thatthey are taxed appropriately. Regulators in the United States and in foreignmarkets closely monitor our corporate structures, intercompany transactions,and how 

 

13

----

Tableof Contents

 

we effectuate intercompany fund transfers. If regulators challenge ourcorporate structures, transfer pricing methodologies or intercompany transfers,our operations 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 inwhich we have determined that nexus exists, which results in the collection ofsales tax.  Other states may, from time to time, claim we have staterelated activities constituting a sufficient nexus to require such collection. A successful assertion by one or more states that we should collect salestax on the sale of merchandise could result in substantial tax liabilitiesrelated to past sales.

 

Despite our best efforts to be aware of andcomply with such laws and changes to the interpretations thereof, there is arisk that we may not continue to operate in compliance with such laws. We may need to adjust our operatingprocedures in response to these changes, and such changes could have a materialnegative impact on our financial position, results of operation, and liquidity.

 

***Our business is subject to intellectualproperty risks.***

 

Most of our products are not protected bypatents. Restrictive regulations governing the precise labeling of ingredientsand percentages for nutritional supplements, the large number of manufacturers,who produce products with many active ingredients in common, and the rapidchange and frequent reformulation of products make patent protectionimpractical. As a result, we enter into confidentiality agreements with certainof our employees in our research and development activities, our independentassociates, suppliers, directors, officers, and consultants to help protect ourintellectual property, investment in research and development activities andtrade secrets. We have also obtained trademarks for the Natures SunshineProducts name and logo as well as the Synergy Worldwide name. There can be noassurance that our efforts to protect our intellectual property and trademarkswill be successful. Nor can there be any assurance that third-parties will notassert claims against us for infringement of intellectual property rights,which could result in our business being required to obtain licenses for suchrights, payment of royalties, or the termination of our manufacturing ofinfringing products, all of which could have a material negative impact on ourfinancial position, results of operations, and liquidity.

 

***Product liability claims could harm ourbusiness.***

 

As a manufacturer and distributor of productsthat are ingested, we face an inherent risk of exposure to product liabilityclaims in the event that, among other things, the use of our products resultsin injury to consumers due to tampering by unauthorized third parties orproduct contamination. We have historically had a very limited number ofproduct claims or reports from individuals who have asserted that they have sufferedadverse consequences as a result of using our products. These matters havehistorically been settled to our satisfaction and have not resulted in materialpayments. We have established a wholly owned captive insurance company toprovide us with product liability insurance coverage and have accrued an amountthat we believe is sufficient to cover probable and reasonable estimableliabilities related to product liability claims based upon our history. Therecan be no assurance that these estimates will prove to be sufficient nor canthere be any assurance that the ultimate outcome of any litigation for productliability will not have a material negative impact on our business prospects,financial position, results of operations, and liquidity.

 

***Inventory obsolescence due to finite shelflives could adversely affect our business.***

 

In order to provide a high level of productavailability to our independent Distributors and Managers, we maintain aconsiderable inventory of raw materials in the United States and of finishedgoods in every country in which we sell our products. Our inventories of bothraw materials and finished goods have finite shelf lives. If we overestimatethe demand for our products, we could experience significant write-downs on ourinventory due to obsolescence. Such write-downs could have a material negativeimpact on our financial position, results of operations, andliquidity.

 

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

 

Like many companies, our business is highlydependent upon our information technology infrastructure to effectively andefficiently manage our operations, including order entry, customer billing,accurately tracking purchases and volume incentives, managing accounting,finance, and manufacturing operations. The occurrences of natural disasters orother unanticipated problems 

 

14

----

Tableof Contents

 

could result in interruptions in ourday-to-day business that could adversely affect our business. We have adisaster recovery plan in place to mitigate the risk. Nevertheless, there canbe no assurance that a long-term failure or impairment of any of ourinformation systems would not adversely affect our ability to conduct ourday-to-day business.

 

***The Company could incur obligations relatingto the activities of our Distributors.***

 

We sell our products worldwide to a salesforce of independent Distributors who use the products themselves or resellthem to other Distributors or consumers. In the event that local laws andregulations or the interpretation of locals laws and regulations change andrequire us to treat our independent Distributors as employees, or if ourDistributors are deemed by local regulatory authorities in one or more of thejurisdictions in which we operate to be our employees rather than independentcontractors, under existing laws and interpretations, we may be heldresponsible for a variety of obligations that are imposed upon employers relatingto their employees, including employment related taxes and penalties. OurDistributors also operate in jurisdictions, where local legislation andgovernmental agencies require us to collect and remit taxes such as sales taxor value added taxes. In addition, there is the possibility that somejurisdictions could seek to hold the Company responsible for false productclaims or the negligent actions of an independent Distributor. If the Companywere found to be responsible for any of these issues related to ourDistributors, it could have a material negative impact on our financialposition, results of operations, and liquidity.

 

***Changes in key management.***

 

We believe our success depends in part on our ability to retain ourexecutive officers, and to continue to attract additional qualified individualsto our team. We cannot guarantee the continued service by our key officers. Theloss or limitation of any of our executive officers or the inability to attractadditional qualified management personnel could have a material negative impacton our financial position, results of operations, and liquidity.

 

***Our business is involved in a market withintense competition.***

 

Our business operates in a market with numerous manufacturers,distributors, and retailers of nutritional products. The market for ourproducts is intensely competitive. Many of our competitors are significantlylarger, have greater financial resources, and better name recognition than wedo. We also rely on our independent Distributors to market and sell ourproducts through direct marketing techniques, as well as sponsoring otherDistributors. Our ability to compete with other direct marketing companiesdepends greatly on our ability in attracting and retaining our Distributors. Inaddition, we currently do not have significant patent or other proprietaryprotection, and our competitors may introduce products with the same or similaringredients that we use in our products. As a result, we may have difficultydifferentiating our products from our competitors’ products, and competingproducts entering the nutritional market. There can be no assurance that ourfuture operations would not be harmed as a result of changing market conditionsand future competition.

 

## ***Item1B. Unresolved Staff Comments***

## *** ***

On March 23, 2006, we received a letter from the Division ofCorporation Finance of the SEC requesting more information on the nature of theinternal control weaknesses and potential violations of law disclosed in ourCurrent Report on Form 8-K, filed on March 20, 2006, as well as thepotential impact on our financial statements. These staff comments are not yetresolved, but we have responded to these staff comments with a letter to befiled concurrently with this Report.

 

## ***Item2. Properties***

## *** ***

Our corporate offices are located in two adjacent office buildings inProvo, Utah. The facilities consist of approximately 63,000 square feet and areleased from an unaffiliated third party through lease agreements, which expirein as early as three years but are renewable upon expiration.

 

Our principal warehousing and manufacturing facilities are housed in abuilding consisting of approximately 270,000 square feet owned by us andlocated on approximately ten acres in Spanish Fork, Utah. These facilitiessupport all of our business segments.

 

We own approximately 60,000 square feetof office and warehouse space in Mexico and approximately 13,000 square feet ofoffice and warehouse space in Venezuela. These facilities support our Nature’sSunshine Products international segment.

 

We also own approximately 53 acres ofundeveloped land in Springville, Utah and approximately 8 acres of undevelopedland in Provo, Utah.

 

15

----

Tableof Contents

 

We lease properties used primarily as distribution warehouses locatedin Columbus, Ohio; Dallas, Texas; Atlanta, Georgia; and Spanish Fork, Utah; aswell as offices and distribution warehouses in Pleasant Grove, Utah, Japan,Mexico, Central America, Canada, Venezuela, South Korea, the DominicanRepublic, Ecuador, the United Kingdom, Colombia, Thailand, Peru, Singapore,Israel, Brazil, Taiwan, and Australia. We believe these facilities are suitablefor their respective uses and are, in general, adequate for our present andnear-term future needs. During 2007, 2006, and 2005, we spent approximately$5.2 million, $5.3 million, and $3.7 million, respectively, for all of ourleased facilities.

 

## ***Item3. Legal Proceedings***

## *** ***

**Class Action Litigation**

 

Between April 3, 2006 and June 2, 2006, five separateshareholder class action lawsuits were filed against the Company and certain ofour present and former officers and directors in the United States DistrictCourt for the District of Utah. These matters were consolidated and on November 3,2006, the plaintiffs filed a Consolidated Complaint against the Company, ourChief Executive Officer and former director, Douglas Faggioli, our former ChiefFinancial Officer, Craig D. Huff, and a former director and former Chair of ourAudit Committee, Franz L. Cristiani. The Consolidated Complaint asserts threeseparate claims on behalf of purchasers of our common stock: (1) a claimagainst Mr. Faggioli and the Company for violation of Section 10(b) ofthe Exchange Act and 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, Huffand Cristiani moved to dismiss the Consolidated Complaint in its entirety. On May 21,2007, the court issued its decision denying the motion in large part, butshortening the proposed 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 non-public representations toKPMG).  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 is currently in the early stages of discovery. The trial isnot scheduled to commence until April 19, 2010. Although we and the otherdefendants are vigorously defending against the allegations in the lawsuit, andwe intend to continue doing so, we are unable to predict the outcome of thislitigation or whether the Company will incur any liability associated to thelitigation, or to estimate the effect such outcome would have on the financialcondition of the Company.

 

**Threatened Derivative Lawsuits**

 

By letter dated October 4, 2007, a shareholder of the Companyalleged that a number of the current and former officers and directors of theCompany breached their fiduciary duties to the Company by supposedly engagingin the same alleged wrongdoing that is the subject of the class action lawsuit.The shareholder demanded that the Company take action to recover from thespecified officers and directors all damages sustained by the Company as aresult of the alleged misconduct, and threatened to commence a derivativeaction if the Company failed to act on the shareholder’s demand within areasonable period of time.

 

On December 26, 2007, before the expiration of the Company’sallotted 90-day period for responding to the demand, the shareholder presenteda second but substantively identical demand on the Company, thereby triggeringa new 90-day response period. The Company’s Board of Directors responded tothis demand on March 20, 2008, rejecting the shareholder’s demands.

 

16

----

Tableof Contents

 

On May 21, 2008, this same shareholder filed a summons andcomplaint in the Fourth Judicial District Court for the State of Utah seekingan order compelling the Company to produce certain books and records to theshareholder. The Company filed its answer to the complaint on June 12,2008.

 

Although the Company and the other defendants are vigorously defendingagainst the allegations in the threatened derivative lawsuit above, it is notpossible at this time to predict the outcome of this litigation or whether theCompany will incur any liability associated to the litigation, or to estimatethe effect such outcome would have on the financial condition of the Company.

 

**SEC and DOJ Investigations**

 

In March 2006, we voluntarily disclosed to the SEC certaininformation related to the independent investigation by the Company’s AuditCommittee. Since that time, the SEC has subpoenaed certain documents andvoluntarily requested other information in connection with its subsequentinvestigation related to these events. We are cooperating fully with thisinvestigation. We cannot predict what impact, if any, and the materiality ofsuch impact, if any, the conclusion of this matter may have on our financialstatements.

 

In March 2006, the Company voluntarily disclosed to the UnitedStates Department of Justice (“DOJ”) certain information related to theindependent investigation by the Company’s Audit Committee. Since that time,the DOJ has requested that the Company voluntarily provide documents and otherinformation in connection with its subsequent investigation related to theseevents. The Company is cooperating fully with this investigation. The Companycannot predict what impact, if any, and the materiality of such impact, if any,the conclusion of this matter may have on our financial statements.

 

**SEC Section 12(j) Proceeding**

 

On July 12, 2007, we announced that the SEC had institutedadministrative proceedings pursuant to Section 12(j) of the ExchangeAct to suspend or revoke the registration of our common stock. On November 8,2007, an administrative law judge in the administrative proceeding issued anInitial Decision to revoke the registration of the Company’s common stock.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 hasnow rescheduled the oral argument for an unspecified future date. We cannotpredict the outcome of such review at this time. The Initial Decision of theadministrative law judge will not become effective pending the review. Wecannot presently predict what, if any, impact the SEC’s ultimate determinationmay 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 our commonstock, broker-dealers would not be permitted to effect transactions in sharesof our common stock until we file a new registration with the SEC under theExchange Act and that registration is made effective.

 

**Employee-Related Litigation**

 

One of the Company’s foreign subsidiaries is a defendant in litigationregarding primarily employee-related matters. The Company has recorded accrualsof approximately $0.6 million related to this litigation, which is included inaccrued liabilities.

 

## ***Item4. Submission of Matters to a Vote of Security Holders***

## *** ***

None.

 

**PART II**

** **

## ***Item5. Market for Registrant’s Common Equity, Related Shareholder Matters andIssuer Purchases of Equity Securities***

## *** ***

**Market and Share Prices**

 

Our common stock was traded on the NasdaqNational Market System (symbol “NATR”) until April 5, 2006, the date thatthe Nasdaq Listing Qualifications Panel determined to delist our common stockfrom The Nasdaq National Market. Our stock is currently traded on the Pink Sheets (symbol NATR.PK). Theinformation in the table below reflects the actual high and low sales prices ofour stock from January 1, 2006 through April 4, 2006 and the high andlow bid information from April 5, 2006 through December 31, 2007.

 

17

----

Tableof Contents

 
| ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | **Market Prices**                    | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|-------------------------------------------|------------|
| ** **     | ** ** | **Market Prices** | ** ** | ** **        | ** ** | **High/Best**                             | ** ** | **Low/Best** | ** ** |
| **2007**       | ** ** | **Best Ask**      | ** ** | **Best Bid** | ** ** | **2006**                                  | ** ** | **Ask** | ** ** | **Bid** | ** ** |
| First Quarter  |       | $                      | 12.60      |              | $          | 11.45                                     |       | First  Quarter |   | $ | 18.88 |   | $ | 10.23 |   |
| Second Quarter |       | 12.35                  |       | 10.20             |       | Second Quarter through April 4, 2006 |       | 12.64 |   | 7.83 |   |
|           |       |                   |       |              |       | Second Quarter from April 5, 2006    |       | 12.00 |   | 8.46 |   |
| Third Quarter  |       | 14.45                  |       | 11.50             |       | Third  Quarter                            |       | 12.25 |   | 8.15 |   |
| Fourth Quarter |       | 12.50                  |       | 8.10              |       | 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**

 

Since October 1, 2005, we haveissued and sold the following unregistered securities:

 

On July 10, 2006, we issued and sold500 shares of common stock into the market on behalf of Karen Nichols pursuantto a net exercise of stock options granted under our 1995 Stock Plan andpayment to Ms. Nichols of cash proceeds in excess of the exercise price,less applicable tax withholdings. No exemption from the registrationrequirements of Section 5 of the Securities Act is claimed.

 

On February 1, 2007, we issued andsold 95,690 shares of common stock to Douglas Faggioli, our Chief Executive Officer,for cash consideration in an aggregate amount of $735,665 upon the exercise ofstock options granted under our 1995 Stock Plan. This sale is exempt from theregistration requirement of Section 5 of the Securities Act pursuant to Section 4(2) ofthe Securities Act.

 

On February 2, 2007, we issued andsold 61,330 shares of common stock to Eugene L. Hughes, our founder andDirector, for cash consideration in an aggregate amount of $471,505 upon theexercise of stock options 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.

 

On February 6, 2007, we issued andsold 5,340 shares of common stock to Kent Hastings, our Director of Export Markets,for cash consideration in an aggregate amount of $41,054 upon the exercise ofstock options granted under our 1995 Stock Plan. This sale is exempt from theregistration requirement of Section 5 of the Securities Act pursuant to Section 4(2) ofthe Securities Act.

 

On July 27, 2007, we issued and sold500 shares of common stock to the estate of Robert Schaffer for cashconsideration in an aggregate amount of $4,157 upon the exercise of stockoptions granted under our 1995 Stock Plan. This sale is exempt from theregistration requirement of Section 5 of the Securities Act pursuant to Section 4(2) ofthe Securities Act.

 

**Dividends**

 

There were approximately 842 shareholdersof record as of June 30, 2008. During 2007 and 2006, the Company paidquarterly cash dividends of $0.05 per common share. The Company expects tocontinue to pay cash dividends in the future.

 

**Securities Authorized 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      |                                                                                                                                                                                            | —     |   |

 

18

----

Table of Contents

 

**Performance Graph**

 

The graph below depicts our common stock as an index, assuming $100.00was invested on January 1, 2002 along with the composite prices ofcompanies listed in the NASDAQ and our peer group. Standard & Poor’sInvestment Services has provided us with this information. The comparisons inthe graph are required by regulations of the SEC and are not intended toforecast or be indicative of the possible future performance of our commonstock. The publicly-traded companies in our peer group are USANA HealthSciences, Inc., Nu Skin Enterprises, Inc., Herbalife International, Inc.,and Mannatech, Incorporated.

 

 

**Item 6. Selected Financial Data**

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

 

The selected consolidated financial datapresented below is summarized from our results of operations for each of thefour years in the period ended December 31, 2007, as well as selectedconsolidated balance sheet data as of December 31, 2007, 2006, 2005, 2004,and 2003. In light of the substantial time, effort and expense incurred tocomplete the restatement of our consolidated financial statements for 2004, wehave determined that extensive additional efforts would be required to restate2003. In particular, turnover of relevant personnel and limitations of systemsand data all limit our ability to reconstruct additional financial informationfor 2003. Previously published information for 2003 should not be relied upon.

 

**Income Statement Data**

 
| ** ** | ** ** | **Net Sales  Revenue** | ** **  | **Cost of  Goods Sold** | ** ** | **Volume  Incentives** | ** ** | **Selling, General  and Administrative** | ** **  | **Operating  Income** | ** ** | **Income Before  Income Taxes** | ** ** | **Net (Loss)  Income** | ** ** |
|------------|------------|-----------------------------|-------------|-----------------------------------|------------|------------------------|------------|----------------------------------------------------|-------------|-----------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| **2007**   | ** ** | **$**                       | **366,647** | ** **                        | **$**      | **70,996**             | ** ** | **$**                                              | **143,884** | ** **            | **$**      | **148,706**                               | ** ** | **$**                       | **3,061**  | ** ** | **$** | **4,465** | ** ** | **$** | **(8,237** | **)** |
| 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       |       | 325,324                     |        | 61,263                            |       | 129,752                |       | 115,299                                            |        | 19,010                |       | 20,702                                    |       | 11,772                      |       |
|            |            |                             |             |                                   |            |                        |            |                                                    |             |                       |            |                                           |            |                             |            |  |  |  |  |  |  |  |

 

**Balance Sheet Data**

 
| ** ** | ** ** | **Working  Capital** | ** ** | **Current  Ratio** | ** ** | **Inventories** | ** ** | **Property, Plant and  Equipment, Net** | ** ** | **Total  Assets** | ** ** | **Long-term  Obligations** | ** ** | **Shareholders’  Equity** | ** ** |
|------------|------------|----------------------|------------|--------------------|------------|-----------------|------------|--------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------|------------|
| **2007**   | ** ** | **$**                | **32,017** | ** **         | **1.42**   | **%**           | **$**      | **35,249**                                             | ** ** | **$**             | **28,282** | ** **                 | **$**      | **165,338**                    | ** ** | **$** | **27,986** | ** ** | **$** | **60,392** | ** ** |
| 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       |       | 34,181               |       | 1.53               |       | 35,444          |       | 35,869                                                 |       | 143,981           |       | 3,491                      |       | 75,854                         |       |
| 2003       |       | 35,566               |       | 1.72               |       | 25,062          |       | 33,358                                                 |       | 123,507           |       | 3,586                      |       | 67,970                         |       |
|            |            |                      |            |                    |            |                 |            |                                                        |            |                   |            |                            |            |                                |            |  |  |  |  |  |  |

 

19

----

Table of Contents

 

**Common Share 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** | ** ** |
|------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| **2007**   | ** ** | **$**                                  | **0.20**   | ** **                                                 | **$**      | **(0.53**                                                    | **)**      | **$**                                        | **(0.53**  | **)**                                          | **15,495** | ** ** | **15,495** | ** ** |
| 2006       |       | 0.20                                   |       | (0.23                                                      | )          | (0.23                                                        | )          | 15,344                                       |       | 15,344                                         |       |
| 2005       |       | 0.20                                   |       | 0.23                                                       |       | 0.23                                                         |       | 15,211                                       |       | 15,515                                         |       |
| 2004       |       | 0.20                                   |       | 0.79                                                       |       | 0.76                                                         |       | 14,917                                       |       | 15,478                                         |       |
|            |            |                                        |            |                                                            |            |                                                              |            |                                              |            |                                                |            |  |  |  |

 

20

----

Tableof Contents

 

Other relevant nonfinancial data is presentedbelow:

 

**Other Information**

 
| ** ** | ** ** | **Number of Independent Managers** | ** ** | **Square Footage of  Property in Use** | ** ** | **Number of  Company Employees** | ** ** |
|------------|------------|---------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------|------------|
| **2007**   | ** ** | **24,115**                                        | ** ** | **706,519**                                                | ** ** | **1,170**                                  | ** ** |
| 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                                      |       |

 

## ***Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations***

## *** ***

The following discussion highlights theprincipal factors that have affected our financial condition, results ofoperations, liquidity and capital resources for the periods described. Thisdiscussion should be read in conjunction with our Consolidated FinancialStatements and the related notes in Item 8 of this Form 10-K. Thisdiscussion contains forward-looking statements. Please see “CautionaryStatements Regarding Forward-Looking Statements” for the risks, uncertaintiesand assumptions associated with these forward-looking statements.

 

**OVERVIEW**

 

*Our Business, 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, the United Kingdom, Columbia, Peru, Israel, Russia, Ukraine, Latvia,Lithuania, Kazakhstan, Mongolia, Belarus, China, Poland, and Brazil. We alsoexport our products to several other countries, including Argentina, Australia,Chile, New Zealand, and Norway.

 

We also sell our products through a separatedivision and operating business segment, Synergy Worldwide, which was acquiredin 2000. Synergy Worldwide offers products with formulations different fromthose of the Nature’s Sunshine Products offerings. In addition, SynergyWorldwide’s marketing and Distributor compensation plans are sufficientlydifferent from those of Nature’s Sunshine Products. Synergy Worldwide sellsproducts in Japan, the United States, South Korea, Singapore, Thailand, Taiwan,Malaysia, Hong Kong, the Philippines, Indonesia, the United Kingdom, Germany,Austria, the Netherlands, and Australia.

 

In 2007, we experienced healthy net salesrevenue growth overseas in our Nature’s Sunshine Products Internationalbusiness segment of approximately 15%, while our domestic business segmentsales remained flat and our Synergy Worldwide business segment experienced adecline in net sales revenue of approximately 18% due primarily to the loss ofseveral key distributor networks. Over the same period, our cost of goods soldremained constant as a percentage of net sales revenue, but our selling,general and administrative expenses increased somewhat primarily as a result ofcosts associated with increases in audit fees, the implementation of newinternal control procedures, and increase in our reserve for foreign taxcontingencies, resulting in a decrease in operating net income for 2007. On ourconsolidated balance sheet, we maintained a fairly consistent profile from 2006to 2007, with the exception of a liability related to unrecognized tax positionsof $25.9 million in accordance with FASB Financial Interpretation (“FIN”) 48, “Accountingfor Uncertainly in Income Taxes,” and a corresponding decrease in accruedliabilities of $15.8 million and an increase in other assets of $10.1 million.

 

**Critical Accounting Policies and Estimates**

 

Our consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America (“GAAP”) and form the basis for the followingdiscussion and analysis on critical accounting policies and

 

21

----

Tableof Contents

 

estimates. The preparation of these financial statements requires us tomake estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On a regular basis we evaluate our estimates and assumptions.We base our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults could differ from these estimates and those differences could have amaterial effect on our financial position and results of operations. Managementhas discussed the development, selection and disclosure of these estimates withthe Board of Directors and its Audit Committee.

 

A summary of our significant accountingpolicies is provided in Note 1 of the Notes to Consolidated FinancialStatements in Item 8 of this Report. We believe the critical accountingpolicies and estimates described below reflect our more significant estimatesand assumptions used in the preparation of our consolidated financialstatements. The impact and any associated risks on our business that arerelated to these policies are also discussed throughout this “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” wheresuch policies affect reported and expected financial results.

 

*Revenue Recognition*

 

Net sales revenue and related volumeincentive expenses are recorded when persuasive evidence of an arrangementexists, collectability is reasonably assured, the amount is fixed anddeterminable, and title and risk of loss have passed, generally when themerchandise has been delivered. Amounts received for undelivered merchandiseare recorded as deferred revenue. Sales revenue is recorded net of the rebateportion of volume incentives, and a reserve for product returns, which reducesrevenue, is accrued based on historical experience. From time to time, theCompany’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 recorded as revenue over the life of the membership, primarily oneyear. Prepaid event registration fees are deferred and recognized as revenueswhen the related event is held.

 

*Inventories*

 

Inventories are stated at the lower-of-cost-or-market,using the first-in, first-out method. The components of inventory cost includeraw materials, labor, and overhead. To estimate any necessarylower-of-cost-or-market adjustments, various assumptions are made in regard toexcess or slow-moving inventories, non-conforming inventories, expirationdates, current and future product demand, production planning, and marketconditions.

 

*Self-insurance Liabilities*

 

As amanufacturer and distributor of products that are ingested, we face an inherentrisk of exposure to product liability claims in the event that, among otherthings, the use of our products results in injury to consumers due to tamperingby unauthorized third parties or product contamination. We have historically had a very limited numberof product claims or reports from individuals who have asserted that they havesuffered adverse consequences as a result of using our products. These mattershave historically been settled to our satisfaction and have not resulted inmaterial payments. We have established a wholly owned captive insurance companyto provide us with product liability insurance coverage and have accrued anamount that we believe is sufficient to cover probable and reasonable estimableliabilities related to product liability claims based upon our history.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 onour business prospects, financial position, results of operations, orliquidity.

 

We self-insure 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.

 

*Incentive Trip Accrual*

 

We accrue for expenses for incentive tripsassociated with our direct sales marketing program, which rewards independentDistributors and Managers with paid attendance at our conventions and meetings.Expenses associated with incentive trips are accrued over qualification periodsas they are earned. We specifically analyze incentive trip accruals based onhistorical and current sales trends as well as contractual obligations whenevaluating the adequacy of the incentive trip accrual. Actual results couldresult in liabilities being more or less than the amounts recorded. We haveaccrued convention and meeting costs of approximately $5.5 million 

 

22

----

Tableof Contents

 

and $3.8 million at December 31, 2007 and 2006, respectively.

 

23

----

Tableof Contents

 

*Impairment of Long-Lived Assets*

 

The Company reviews its long-lived assets,such as property, plant and equipment and intangible assets for impairment whenevents or changes in circumstances indicate that the carrying value of an assetmay not be recoverable. The Company uses an estimate of future undiscounted netcash flows of the related assets or groups of assets over their remaining livesin measuring whether the assets are recoverable. An impairment loss iscalculated by determining the difference between the carrying values and thefair values of these assets. At December 31, 2007 and 2006, the Companydid not consider any of its long-lived assets to be impaired.

 

*Contingencies*

 

We are involved in certain legal proceedings.When a loss is considered probable in connection with litigation or income taxand non-income tax contingencies and when a loss can be reasonably estimatedwith a range, we record our best estimate within the range related to thecontingency. If there is no best estimate, we record the minimum of the range.As additional information becomes available, we assess the potential liabilityrelated to the contingency and revise the estimates. Revision in estimates ofthe potential liabilities could materially impact our results of operations inthe period of adjustment.

 

*IncomeTaxes*

 

Our income tax expense, deferred tax assetsand liabilities and contingent reserves reflect management’s best assessment ofestimated future taxes to be paid. We are subject to income taxes in both theU.S. and numerous foreign jurisdictions. Significant judgments and estimatesare required in determining the consolidated income tax expense.

 

Deferred income taxes arise from temporarydifferences between the tax and financial statement recognition of revenue andexpense. In evaluating our ability to recover our deferred tax assets weconsider all available positive and negative evidence, including scheduledreversals of deferred tax liabilities, projected future taxable income, taxplanning strategies and recent financial operations. In projecting futuretaxable income, we develop assumptions including the amount of future state,federal and foreign pretax operating income, the reversal of temporarydifferences, and the implementation of feasible and prudent tax planningstrategies. These assumptions require significant judgment about the forecastsof future taxable income and are consistent with the plans and estimates we areusing to manage the underlying businesses.

 

As of December 31, 2007, we have foreignincome tax net operating loss carryforwards of $7.7 million that will expire atvarious dates from 2008 through 2012. TheCompany has approximately $3.3 million of foreign tax credits, which begin toexpire at various times starting in 2012.

 

We believe that it is more likely than notthat the benefit from certain deferred tax assets, including foreign netoperating loss carryforwards and foreign tax credits, will not be realized. Inrecognition of this risk, we have provided a valuation allowance of $11.3million for certain deferred tax assets, including foreign net operating losscarryforwards and foreign tax credits. If our assumptions change and wedetermine we will be able to realize these deferred tax assets, the taxbenefits relating to any reversal of the valuation allowance on deferred taxassets at December 31, 2007 will be accounted for as a reduction of incometax expense.

 

Changes in tax laws and rates could alsoaffect recorded deferred tax assets and liabilities in the future. Managementis not aware of any such changes that would have a material effect on theCompany’s results of operations, cash flows or financial position.

 

The calculation of our tax liabilitiesinvolves dealing 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 must meet amore-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 transition. We adopted FIN 48 effective January 1, 2007.The adoption of FIN 48 did not have a material effect on our consolidatedfinancial statements.

 

24

----

Tableof Contents

 

**RESULTS OF OPERATIONS**

 

The following table summarizes ourconsolidated operating results as a percentage of net sales revenue for theperiods indicated:

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales revenue                        | ** ** | **100.0**                                  | **%**      | 100.0 | % | 100.0 | % |
|                                     |       |                                       |       |   |   |   |   |
| Costs and Expenses:                      |       |                                       |       |   |   |   |   |
| Cost of goods sold                       | ** ** | **19.4**                                   |       | 19.0 |   | 19.2 |   |
| Volume incentives                        | ** ** | **39.2**                                   |       | 40.3 |   | 41.0 |   |
| Selling, general and administrative      | ** ** | **40.6**                                   |       | 38.5 |   | 36.5 |   |
| ** **                               |       | **99.2**                                   |       | 97.8 |   | 96.7 |   |
|                                     |       |                                       |       |   |   |   |   |
| Operating Income                         | ** ** | **0.8**                                    |       | 2.2 |   | 3.3 |   |
|                                     |       |                                       |       |   |   |   |   |
| Other Income (Expense):                  |       |                                       |       |   |   |   |   |
| Interest and other income, net           | ** ** | **0.4**                                    |       | 0.4 |   | 0.2 |   |
| Interest expense                         | ** ** | **—**                                 |       | (0.2 | ) | (0.2 | ) |
| Foreign exchange (losses) gains, net     | ** ** | **—**                                 |       | — |   | (0.1 | ) |
| ** **                               |       | **0.4**                                    |       | 0.2 |   | (0.1 | ) |
|                                     |       |                                       |       |   |   |   |   |
| Income Before Provision for Income Taxes | ** ** | **1.2**                                    |       | 2.4 |   | 3.2 |   |
| Provision for Income Taxes               | ** ** | **3.5**                                    |       | 3.4 |   | 2.2 |   |
|                                     |       |                                       |       |   |   |   |   |
| Net (Loss) Income                        | ** ** | **(2.3**                                   | **)%**     | (1.0 | )% | 1.0 | % |

 

***Year Ended December 31, 2007 as Comparedto the Year Ended December 31, 2006***

 

With this Annual Report, we have presentedour financial statements for our fiscal years 2007 and 2006, incorporating tothe extent appropriate all information available to us as of the date hereof.We have not previously filed our financial statements for fiscal year 2007.

 

*Net Sales Revenue*

 

Consolidated net sales revenue for the yearended December 31, 2007, was $366.6 million compared to $362.2 million in2006, an increase of approximately 1.2 percent. During 2007, the increase innet sales revenue is primarily due to continued growth in the Company’sinternational business segment.

 

We distribute our products to consumersthrough an independent sales force comprised of Managers and Distributors.Active Managers totaled approximately 24,100 and 24,300 at December 31,2007 and 2006, respectively. Active Distributors totaled approximately 698,700and 668,600 at December 31, 2007 and 2006, respectively. We anticipate thenumber of active Distributors to increase as we expand our existing operations,enter new international markets, and as current Distributors grow their businesses.

 

Net sales revenue related to the NSP UnitedStates business segment operations were $148.3 million and $148.4 million forthe years ended December 31, 2007 and 2006, respectively.

 

NSP International net sales revenue increasedto $149.8 million in 2007 compared to $130.6 million in 2006, an increase ofapproximately 14.7 percent. The increase in international net sales revenue in2007 compared to 2006 is primarily the result of continued growth in ouroperations in Russia, Ukraine, Venezuela, and Japan. Price increases areplanned in various international markets to compensate for foreign currencydevaluations and increases in the cost of finished products. Managementbelieves the price increases will be acceptable to its sales force and will resultin increased net sales revenue.

 

Synergy Worldwide net sales revenue decreasedto $68.6 million in 2007 compared to $83.2 million in 2006, a decrease ofapproximately 17.6 percent. The decrease in Synergy Worldwide net sales isprimarily due to the loss of key distributor networks as a result of increasedcompetition in the United States and Japanese markets with growth remainingflat in the other markets in which 

 

25

----

Tableof Contents

 

Synergy Worldwide operates. Further information related to the NSPUnited States, NSP International and Synergy Worldwide business segments is setforth in Note 12 of Notes to Consolidated Financial Statements in Item 8 ofthis Report.

 

*Cost of Goods Sold*

 

Cost of goods sold as a percent of net salesrevenue increased slightly in 2007 compared to 2006 primarily as a result ofincreased provisions for obsolete inventory.

 

*Volume Incentives*

 

Volume incentives are a significant part ofour direct sales marketing program and represent commission payments made toour independent Distributors and Managers. These payments are designed toprovide incentives for reaching higher sales levels and for recruiting additionalDistributors. Volume incentives as a percent of net sales revenue decreasedslightly during 2007 as compared to 2006, primarily as a result of thedecreased sales revenue in our Synergy Worldwide business segment where volumeincentives are slightly higher than in the United States and our otherinternational operations, and as a result of sales in new markets where lowerlevels of volume incentives were paid.

 

*Selling, General and Administrative*

 

Selling, general and administrative expensesincreased $9.1 million in 2007 compared to 2006, from $139.6 million to $148.7million. Approximately $3.4 million is the result of expenses related to thecontinued growth of the Company’s international segments, as well as $1.1 ofexpenses related to new Synergy Worldwide markets.  Professional feesincreased $3.0 million as a result of continued work on becoming current in ourSEC filings.  In addition, bonuses to participants in the Company’sdiscretionary bonus plan increased approximately $1.3 million in 2007 comparedto 2006. Selling, general and administrative expenses as a percent of netsales revenue increased to 40.6 percent in 2007 compared to 38.5 percent in2006. Selling, general and administrative expenses includes general marketingand sales expenses, but not commissions, which are included under VolumeIncentives, and also includes research and development expenses and generaladministrative expenses. The amount, excluding capital expenditures, spent onresearch and development activities remained constant at $1.9 million for 2007and 2006.

 

*Income Taxes*

 

The effective income tax rate was 285 percentfor 2007, compared to 141 percent for 2006. The effective rate for 2007differed from the federal statutory rate of 35 percent primarily related to (i) additionalliabilities associated with uncertain tax positions which increased theeffective rate by 104 percent, (ii) additional tax contingencies whichincreased the effective rate by approximately 16 percent, (iii) change indeferred tax asset valuation allowances which increased the effective rate byapproximately 61 percent, (iv) a taxable gain on the sale of intercompanyassets eliminated for book purposes which increased the effective rate byapproximately 25 percent, (v) an intercompany loan translation andinstrument which increased the effective rate by 18 percent, and (vi) foreignand state tax rate differentials, as well as permanent nondeductible ordeductible items accounting for the remaining increase.

 

The effective rate for 2006 differed from thefederal statutory rate of 35 percent primarily related to additional non-incometax contingencies which increased the effective rate by approximately 54percent, a change in deferred tax asset valuation allowances which increasedthe effective rate by approximately 29 percent, a taxable gain on the sale ofintercompany assets eliminated for book purposes which increased the effectiverate by approximately 13 percent, a foreign exchange tax gain on anintercompany payable which increased the effective rate by 10 percent, andforeign and state tax rate differentials, as well as permanent nondeductible ordeductible items account for the remaining increase.

 

***Year Ended December 31, 2006 as Comparedto the Year Ended December 31, 2005***

 

With this Annual Report, we have presentedour financial statements for our fiscal years 2006 and 2005, incorporating tothe extent appropriate all information available to us as of the date hereof.

 

*Net Sales Revenue*

 

Consolidated net sales revenue for the yearended December 31, 2006, was $362.2 million compared to $351.7 million in2005, an increase of approximately 3.0 percent. During 2006, the increase innet sales revenue is primarily due to continued growth in the Company’sinternational business segment.

 

26

----

Tableof Contents

 

We distribute our products to consumersthrough an independent sales force comprised of Managers and 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 related to the NSP UnitedStates business segment operations increased approximately 0.1 percent in 2006to $148.4 million compared to $148.3 million in 2005. This slight increase wasthe result of both our price increases in our United States market of 1.9percent in 2006 (due to higher material costs) and a slight decrease in salesvolumes of 1.8 percent.

 

NSP International net sales revenue increasedto $130.6 million in 2006 compared to $120.0 million in 2005, an increase ofapproximately 8.8 percent. The increase in international net sales revenue in2006 compared to 2005 is primarily the result of continued growth in ouroperations in Russia, Venezuela, Canada, and Mexico. We implement priceincreases annually to compensate for foreign currency devaluations andincreases in the cost of finished products. Management believes the priceincreases will be acceptable to its sales force and will result in increasednet sales revenue.

 

Synergy Worldwide net sales revenue decreasedto $83.2 million in 2006 compared to $83.4 million in 2005, a decrease ofapproximately 0.2 percent. The slight decrease in Synergy Worldwide net salesis primarily due to increased competition in the United States and Japanesemarkets, which have been offset by continued growth in the Korean and SouthAsian markets. Further information related to the NSP United States, NSPInternational and Synergy Worldwide business segments is set forth in Note 12of Notes to Consolidated Financial Statements in Item 8 of this Report.

 

*Cost of Goods Sold*

 

Cost of goods sold as a percent of net salesrevenue decreased slightly in 2006 compared to 2005 primarily as a result of (1)decreased importation costs in several of our international operations, and (2) increasedefficiency gained from our expanded manufacturing facility.

 

*Volume Incentives*

 

Volume incentives are a significant part ofour direct sales marketing program and represent commission payments made toour independent Distributors and Managers. These payments are designed toprovide incentives for reaching higher sales levels and for recruitingadditional Distributors. Volume incentives as a percent of net sales revenuedecreased slightly during 2006 as compared to 2005, primarily as a result ofthe decreased sales revenue in our Synergy Worldwide business segment wherevolume incentives are slightly higher than in the United States and our other internationaloperations, and as a result of sales in new markets where lower levels ofvolume incentives were paid.

 

*Selling, General and Administrative*

 

Selling, general and administrative expensesincreased $11.2 million in 2006 compared to 2005, from $128.4 million to $139.6million, as a result of expenses related to the continued growth of the Company’sinternational segment as well as costs related to the internal investigationpreviously mentioned of $6.9 million and $5.1 million related to non-income taxcontingencies. Selling, general and administrative expenses as a percent of netsales revenue increased to 38.5 percent in 2006 compared to 36.5 percent in2005. Selling, general and administrative expenses includes general marketingand sales expenses, but not commissions, which are included under VolumeIncentives, and also includes research and development expenses and generaladministrative expenses. The amount, excluding capital expenditures, spent onresearch and development activities increased slightly, from $1.8 million in2005 to $1.9 million in 2006.

 

*Income Taxes*

 

The effective income tax rate was 141 percentfor 2006, compared to 69 percent for 2005. The effective rate for 2006 differedfrom the federal statutory rate of 35 percent primarily related to (i) additionaltax contingencies, which increased the effective rate by approximately 54percent, (ii) a change in deferred tax asset valuation allowances whichincreased the effective rate by approximately 29 percent, (iii) a taxablegain on the sale of intercompany assets eliminated for book purposes whichincreased the effective rate by approximately 13 percent, (iv) a foreignexchange tax gain on an intercompany payable which increased the effective rateby 10 percent, and (v) foreign and state tax rate differentials, as wellas permanent nondeductible or deductible items accounting for the remainingincrease.

 

27

----

Tableof Contents

 

The effective rate for 2005 differed from thefederal statutory rate of 35 percent primarily due to additional taxcontingencies which increased the effective rate by approximately 39 percent,and foreign and state tax rate differentials, as well as permanentnondeductible or deductible items accounting for the remaining increase.

 

28

----

Tableof Contents

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal use of cash is to pay foroperating expenses, including volume incentives, capital assets, inventorypurchases, funding of international expansion, and the payment of quarterlydividends. We have generally relied upon cash flows from operations to fundoperating activities, and have at times drawn on an operating line of credit inorder to fund stock repurchases and other strategic transactions. At December 31,2007, we had $45.3 million in cash and cash equivalents and $4.8 million inshort-term investments, which was available to be used along with our normalcash flows from operations to fund any unanticipated shortfalls in future cashflows.

 

As of December 31, 2007, working capital was $32.0 million,compared to $24.0 million as of December 31, 2006.

 

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

 
| ** **           | ** ** | **Year Ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Operating activities | ** ** | **$**                                      | **12,832** |   | $ | 14,252 |   | $ | 17,012 |   |
| Investing activities | ** ** | **(5,701**                                 | **)**      | (3,959 | ) | (3,679 | ) |
| Financing activities | ** ** | **(1,604**                                 | **)**      | (9,303 | ) | (7,256 | ) |
|                      |            |                                            |            |  |  |  |  |  |  |  |

 

*OperatingActivities*

 

For the year ended December 31, 2007, we generated cash fromoperating activities of $12.8 million compared to $14.3 million in 2006. Thedecrease in cash generated from operating activities was primarily due to ournet loss of $8.2 million for 2007 compared to our net loss of $3.6 million theprevious year, as well as a decrease in the collections of accounts receivablebalances and the timing of payments and accruals for income taxes payable. Thisdecrease was offset by a decrease in the use of cash for the purchasing ofinventory, the timing of payments of accrued liabilities, and a decrease indeferred tax benefits. Cash flows provided by operating activities in 2005 wereapproximately $17.0 million.

 

*InvestingActivities*

 

For the year ended December 31, 2007, net cash flow used ininvesting activities was approximately $5.7 million which included $4.3 millionrelated to capital expenditures for equipment, computer systems, and software,and $1.0 million for the acquisition of intangibles related to the purchase ofproduct formulations.

 

For the year ended December 31, 2006, net cash flow used ininvesting activities was approximately $4.0 million which included $2.7 millionrelated to capital expenditures for equipment, computer systems, and software,and $0.8 million for the acquisition of intangibles related to the purchase ofproduct formulations.

 

For the year ended December 31, 2005, net cash flow used ininvesting activities was approximately $3.7 million, which included $4.3million of capital expenditures for equipment, computer systems and software,as well as leasehold improvements made to enhance existing operations, as wellas the expansion of international markets.

 

*FinancingActivities*

 

For the yearsended December 31, 2007, 2006, and 2005, cash flows used for financingactivities were approximately $1.6 million, $9.3 million, and $7.3 million,respectively.

 

In 2006, weused funds of $7.0 million to pay off our outstanding line of credit.

 

During 2005,we used cash of approximately $11.4 million to purchase approximately 513,000shares in a Dutch Auction tender of $22.15 per share. These Dutch Auctiontenders were open to all shareholders of the Company, including employees. Asof December 31, 2007, there were no plans approved by the Board ofDirectors to purchase any additional shares.

 

During2007, 2006, and 2005, we used cash of $3.1 million, $3.1 million, and $3.1million 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 

 

29

----

Table of Contents

 

optionsof $1.3 million, $0.6 million, and $7.7 million for the years ended December 31,2007, 2006, and 2005, respectively.

 

We believethat our working capital requirements can be met through our available cash andcash equivalents and cash generated from operating activities for theforeseeable future; however, a prolonged economic downturn or a decrease in thedemand for our products could adversely affect our long-term liquidity. In theevent of a significant decrease in cash provided by our operating activities,we might need to obtain additional external sources of funding.

 

We do notcurrently maintain a long-term credit facility or any other external sources oflong-term funding; however, we believe that such funding could be obtained oncompetitive terms in the event additional sources of funds become necessary.

 

**CONTRACTUALOBLIGATIONS**

 

The following table summarizes information about contractualobligations as of December 31, 2007 (*in thousands*):

 
| ** **                                                     | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| Operating leases obligations                                   |       | $         | 8,900      |                                | $          | 4,145              |       | $                  | 3,633      |                        | $          | 968 |   | $ | 154 |   |
| Purchase obligations(1)                                        |       | 9,206     |       | 9,206                               |       | —             |       | —             |       | —                      |       |
| Other long-term liabilities reflected on  the balance sheet(2) |       | 1,674     |       | —                              |       | —             |       | —             |       | 1,674                       |       |
| Unrecognized tax positions(3)                                  |       | —    |       | —                              |       | —             |       | —             |       | —                      |       |
| Total                                                          |       | $         | 19,780     |                                | $          | 13,351             |       | $                  | 3,633      |                        | $          | 968 |   | $ | 1,828 |   |

 

----

| (1)    | Purchase obligations include non-cancelable  purchase agreements for both botanical and non-botanical raw materials  related to our forecasted 2008 production estimates, as well as related  packaging materials.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    | The Company provides a nonqualified  deferred compensation plan for its officers and certain key employees. Under  this plan, participants may defer up to 100 percent of their annual salary  and bonus (less the participant’s share of employment taxes). The deferrals  become an obligation owed to the participant by the Company under the plan.  Upon separation of the participant from the service of the Company, the  obligation owed to the participant under the plan will be paid as a lump sum  or over a period of either three or five years. As we cannot easily determine  when our officers and key employees will separate from the Company, we have  classified the obligation greater than five years for payment. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    | At December 31, 2007, there was  $25,888 of liabilities related to unrecognized tax positions. Because of the  high degree of uncertainty regarding the timing of future cash outflows  associated with these liabilities, if any, the Company is unable to estimate  the years in which cash settlement may occur with the respective tax  authorities.                                                                                                                                                                                                                                                                                                                                                                                   |

 

**OFFBALANCE SHEET ARRANGEMENTS**

 

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

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 157, “Fair ValueMeasurements”, which became effective for the Company on January 1,2008. This statement defines fair value, establishes a framework for measuringfair value and expands disclosures about fair value measurements. SFAS No. 157does not 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 (“FSP No. 157-2”), “Effective Date of FASB Statement No. 157”, which delays theCompany’s January 1, 2008, effective date of FSP No. 157-2 for allnonfinancial assets and nonfinancial liabilities, except those recognized ordisclosed at fair value in the consolidated financial statements on a recurringbasis (at least annually) until January 1, 2009. We adopted SFAS No. 157on January 1, 2008, and that adoption did not have a material effect on ourconsolidated financial statements.

 

In June 2006, the FASB issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes byprescribing a recognition 

 

30

----

Tableof Contents

 

threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Theinterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. We adopted FIN 48 effective January 1, 2007. The adoption ofFIN 48 did not have a material effect on our consolidated financial statements.

 

In September 2006, the SEC issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”). SAB 108provides guidance on how prior year misstatements should be considered whenquantifying misstatements in the current year financial statements. The SABrequires registrants to quantify misstatements using both a balance sheet andan income statement approach and evaluate whether either approach results inquantifying a misstatement that, when all relevant quantitative and qualitativefactors are considered, is material. SAB 108 does not change the guidance inSAB 99, “Materiality”, when evaluating the materiality of misstatements. SAB108 is effective for fiscal years ending after November 15, 2006. Uponinitial application, SAB 108 permits a one-time cumulative effect adjustment tobeginning retained earnings. The adoption of SAB 108 did not have a materialeffect on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS No. 159”). The fair value optionestablished by this statement permits all entities to choose to measureeligible items at fair value at specified election dates. A business entityshall report unrealized gains and losses on items for which the fair valueoption has been elected in earnings (or another performance indicator if thebusiness entity does not report earnings) at each subsequent reporting date.Although this statement is voluntary, it is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007. We adoptedSFAS No. 159 on January 1, 2008, and the adoption of the standard didnot have a material effect on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007),“Business Combinations”, (“SFAS No. 141R”), which changes how businesscombinations are accounted for and will impact financial statements both on theacquisition date and in subsequent periods. SFAS No. 141R is effective January 1,2009, and will be applied prospectively. The effect of adopting SFAS No. 141Rwill depend on the nature and terms of future acquisitions.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”),which changes the accounting and reporting standards for the noncontrollinginterests in a subsidiary in consolidated financial statements. SFAS 160recharacterizes minority interest as noncontrolling interests and requiresnoncontrolling interests to be classified as a component of shareholders’equity. SFAS 160 is effective January 1, 2009 and requires retroactiveadoption of the presentation and disclosure requirements for existing minorityinterest. The Company is currently evaluating the impact of SFAS 160 on theCompany’s consolidated financial statements.

 

In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”)No. 110. SAB 110 expresses the views of the SEC regarding 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 “plain vanilla” share options inaccordance with 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 andQualitative Disclosures about Market Risk***

## *** ***

We conduct business in several countries and intend to continue toexpand our international operations. Net sales revenue, operating income, and netincome are affected by fluctuations in currency exchange rates, interest ratesand other uncertainties inherent in doing business and selling product in morethan one currency. In addition, our operations are exposed to risks associatedwith changes in social, political, and economic conditions inherent ininternational operations, including changes in the laws and policies thatgovern international investment in countries where we have operations, as wellas, to a lesser extent, changes in United States laws and regulations relatingto international trade and investment.

 

**ForeignCurrency Risk**

 

During the year ended December 31, 2007, approximately 58.3percent of our net sales revenue and approximately 55.2 percent of ouroperating expenses were realized outside of the United States. Inventorypurchases are transacted primarily in U.S. dollars from vendors located in theUnited States. The local currency of each international subsidiary isconsidered the functional currency, while certain regions, including Russia andthe Ukraine, are served by a U.S. subsidiary through third party entities, forwhich all business is conducted in U.S. dollars. We conduct business intwenty-three different currencies with exchange rates that are not on a 1:1

 

31

----

Table of Contents

 

relationshipwith the U.S. dollar.  All revenues andexpenses are translated at average exchange rates for the periods reported.Therefore, our operating results will be positively impacted by a weakening ofthe U.S. dollar vis-à-vis another fluctuating currency and negatively impactedby a strengthening of the U.S. dollar vis-à-vis another fluctuating currency.Given the uncertainty and diversity of exchange rate fluctuations, we cannotestimate the effect of these fluctuations on our future business, productpricing, results of operations, or financial condition, but we have providedconsolidated sensitivity analyses below of functional currency/reporting currencyexchange rate risks. Our exposure to local currency/functional currencyexchange rate risk is not significant. Changes in various currency exchangerates affect the relative prices at which we sell our products. We regularlymonitor our foreign currency risks and periodically take measures to reduce therisk of foreign exchange rate fluctuations on our operating results. We do notuse derivative instruments for hedging, trading, or speculating on foreignexchange rate fluctuations.

 

The following table sets forth a compositesensitivity analysis of our net sales revenue, costs and expenses, andoperating income in connection with strengthening of the U.S. dollar (ourreporting currency) by 10%, 15% and 25% against every other fluctuatingfunctional currency in which we conduct business.  We note that while our individual net salesrevenue and cost and expenses components were less sensitive to increases inthe strength of the U.S. dollar, our operating income was sensitive to suchincreases on almost a one-to-one percentage point basis, assuming astrengthening of the U.S. dollar by 10%, 15% and 25% against every otherfluctuating currency in which we conduct business.

 
| ** **                                       | ** ** | **For year ended** | ** **  | **With Strengthening of U.S. Dollar by:** | ** ** |
|--------------------------------------------------|------------|------------------------------|-------------|--------------------------------------------------------------------|------------|
| **Exchange Rate Sensitivity -**   | ** ** | **December 31,**        | ** **  | **10%**                                                            | ** ** | **15%** | ** ** | **25%** | ** ** |
| **Operating Income**                        | ** ** | **2007**                     | ** **  | **Decrease ($)**                                              | ** ** | **Decrease (%)** | ** ** | **Decrease ($)** | ** ** | **Decrease (%)** | ** ** | **Decrease ($)** | ** ** | **Decrease (%)** | ** ** |
| **(Dollar amounts in thousands)** |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| ** **                                       |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Net Sales Revenue**                            | ** ** | **$**                        | **366,647** |                                                               | $          | (13,037 | ) | -3.6 | % | $ | (18,705 | ) | -5.1 | % | $ | (28,681 | ) | -7.8 | % |
|                                             |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cost and Expenses**                            |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cost of Goods Sold**                           | ** ** | **70,996**                   |        | (2,312                                                             | )          | -3.3 | % | (3,317 | ) | -4.7 | % | (5,085 | ) | -7.2 | % |
| **Volume Incentives**                            | ** ** | **143,884**                  |        | (5,282                                                             | )          | -3.7 | % | (7,578 | ) | -5.3 | % | (11,620 | ) | -8.1 | % |
| **Selling, General and Administrative**          | ** ** | **148,706**                  |        | (4,888                                                             | )          | -3.3 | % | (7,013 | ) | -4.7 | % | (10,753 | ) | -7.2 | % |
|                                             |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Operating Income**                             | ** ** | **3,061**                    |        | (556                                                               | )          | -18.2 | % | (797 | ) | -26.0 | % | (1,222 | ) | -39.9 | % |
|                                                  |            |                              |             |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table sets forth a composite sensitivity analysis of ourassets and liabilities by those balance sheet line items that are subject toexchange rate risk, together with the total gain or loss from the strengtheningof the U.S. dollar vis-à-vis our various fluctuating functional currencies.  The sensitivity of our assets andliabilities, taken by balance sheet line items, was somewhat less than thesensitivity of our operating income to increases in the strength of the U.S.dollar vis-à-vis other fluctuating currencies in which we conduct business.

 
| ** **                                                             | ** ** | ** ** | ** ** | **With Strengthening of U.S. Dollar by:** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | **10%**                                                            | ** ** | **15%** | ** ** | **25%** | ** ** |
| ** **                                                             | ** ** | ** ** | ** ** | **Gain**                                                           | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** |
| **Exchange Rate Sensitivity - Balance Sheet** | ** ** | **2007**   | ** ** | **(Loss) ($)**                                                | ** ** | **(Loss) (%)** | ** ** | **(Loss) ($)** | ** ** | **(Loss) (%)** | ** ** | **(Loss) ($)** | ** ** | **(Loss) (%)** | ** ** |
| **(Dollar amounts in thousands)**                       |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| ***Current Assets subject to Exchange Rate  Risk***                    |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cash and cash equivalents**                                          | ** ** | **$**      | **45,299** |                                                               | $          | (3,570 | ) | -7.9 | % | $ | (5,122 | ) | -11.3 | % | $ | (7,855 | ) | -17.3 | % |
| **Accounts receivable, net**                                           | ** ** | **7,450**  |       | (430                                                               | )          | -5.8 | % | (616 | ) | -8.3 | % | (945 | ) | -12.7 | % |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| ***Current Liabilities subject to Exchange  Rate Risk***               |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Accounts payable**                                                   | ** ** | **7,009**  |       | 137                                                                |       | 2.0 | % | 197 |   | 2.8 | % | 302 |   | 4.3 | % |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Total Loss from Strengthening of U.S.  Dollar**                      |       | ** ** |       | (3,863                                                             | )          |   |   | (5,541 | ) |   |   | (8,498 | ) |   |   |
|                                                                        |            |            |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

32

----

Table of Contents

 

The following table sets forth the localcurrencies other than the U.S. dollar in which our assets that are subject toexchange rate risk were denominated as of December 31, 2007 and exceeded$1 million upon translation into U.S. dollars. None of our liabilities that are denominated in a local currency otherthan the U.S. dollar and that are subject to exchange rate risk exceeded $1million upon translation into U.S. dollars. We use the spot exchange rate fortranslating balance sheet items from local currencies into our reportingcurrency.  The respective spot exchangerate for each such local currency meeting the foregoing thresholds is providedin the table as well.

 

**Translation of BalanceSheet Amounts Denominated in Local Currency**

(Dollar amounts in thousands)

 
| ** **                    | ** ** | ** **               | ** ** | **At Spot Exchange Rate per** | ** ** |
|-------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|
| ** **                    | ** ** | **Translated into** | ** ** | **One U.S. Dollar as of**     | ** ** |
| ** **                    | ** ** | **U.S. Dollars**    | ** ** | **December 31, 2007**                   | ** ** |
| **Cash and Cash Equivalents** |       |                     |       |                                              |       |
| Canada (Dollar)               |       | $                        | 4,488      |                                              | 0.9937     |   |
| Colombia (Peso)               |       | 1,987                    |       | 2018.16                                           |       |
| Indonesia (Rupiah)            |       | 1,633                    |       | 9390                                              |       |
| Japan (Yen)                   |       | 7,558                    |       | 111.45                                            |       |
| Mexico (Peso)                 |       | 5,876                    |       | 10.9123                                           |       |
| South Korea (Won)             |       | 3,140                    |       | 936.07                                            |       |
| Venezuela (Bolivar)           |       | 6,444                    |       | 2145.92                                           |       |
| Other                         |       | 8,149                    |       | Varies                                            |       |
| Total                         |       | 39,276                   |       | Not Applicable                                    |       |
|                          |       |                     |       |                                              |       |
| **Accounts Receivable**       |       |                     |       |                                              |       |
| Japan (Yen)                   |       | $                        | 2,097      |                                              | 111.45     |   |
| Peru (Peso)                   |       | 1,180                    |       | 2.9976                                            |       |
| Other                         |       | 1,446                    |       | Varies                                            |       |
| Total                         |       | 4,723                    |       | Not Applicable                                    |       |

 

Finally, the following table sets forth the annual weighted average offluctuating currency exchange rates of each of the local currencies per oneU.S. dollar for each of the local currencies in which sales revenue exceeded$10.0 million during any of the three years presented.  We use the annual weighted average exchangerate for translating items from the statement of operations from localcurrencies into our reporting currency.

 
| **Year ended December 31** | ** ** | **2007**    | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Canada (Dollar)                           | ** ** | **1.1**     |       | 1.1      |       | 1.2      |       |
| Japan (Yen)                               | ** ** | **117.7**   |       | 116.3    |       | 109.9    |       |
| Mexico (Peso)                             | ** ** | **10.9**    |       | 10.9     |       | 10.9     |       |
| Venezuela (Bolivar)                       | ** ** | **2,145.9** |       | 2,145.9  |       | 2,100.8  |       |

 

The functional currency in highly inflationary economies is the U.S.dollar and transactions denominated in the local currency are re-measured as ifthe functional currency were the U.S. dollar if they are considered material tothe consolidated financial statements. The remeasurement of local currenciesinto U.S. dollars creates translation adjustments, which are included in theconsolidated statements of operations. There were no countries considered tohave a highly inflationary economy during 2005, 2006, or 2007.

 

As of December 31, 2007, we have approximately $6.4 million incash denominated in Venezuelan bolivars. Currency restrictions enacted by the government of Venezuela have had anegative impact on the ability of our subsidiary in Venezuela to obtain U.S.dollars at the official exchange rate to pay for imported products or to repatriatedividends back to the Company.  OurVenezuelan subsidiary continues to expect to convert its bolivars into U.S.dollars at the official exchange rate to pay for imported products orrepatriate dividends.  As a result, wecontinue to use the official exchange rate to translate the financialstatements of our Venezuelan subsidiary into U.S. dollars.  Unless the official exchange rate is mademore readily available, however, our subsidiary’s operations could be adverselyaffected as it may need to obtain U.S. dollars at less favorable exchange ratesfrom non-government sources.

 

33

----

Table of Contents

 

**Interest Rate Risk**

 

The primary objectives of our investment activities are to preserveprincipal while maximizing yields without significantly increasing risk. Theseobjectives are accomplished by purchasing investment grade securities,substantially all of which either mature within the next 12 months or havecharacteristics of marketable securities. On December 31, 2007, we hadinvestments of $4.8 million of which $3.6 million were municipal obligations,which carry an average fixed interest rate of 4.9 percent and mature over a 5-yearperiod. A hypothetical 1.0 percent change in interest rates would not have hada material effect on our liquidity, financial position, or results ofoperations. A portion of our long-term investments are auction rate securities.While the recent auction failures will limit our ability to liquidate theseinvestments for some period of time, we do not believe the auction failureswill materially impact our ability to fund our working capital needs, capitalexpenditures, or other business requirements.

 

34

----

Table of Contents

 

## ***Item 8. Financial Statements andSupplementary Data***

 

**INDEX TO FINANCIAL STATEMENTS**

 
| REPORT OF INDEPENDENT REGISTERED PUBLIC  ACCOUNTING FIRM                                                                                                |   | 36     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                    |   |   |
| CONSOLIDATED BALANCE SHEETS AS OF DECEMBER  31, 2007, AND 2006                                                                                          |   | 37     |
|                                                                                                                                                    |   |   |
| CONSOLIDATED STATEMENTS OF OPERATIONS FOR  THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005                                                            |   | 38     |
|                                                                                                                                                    |   |   |
| CONSOLIDATED STATEMENTS OF CHANGES IN  SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED  DECEMBER 31, 2007, 2006, AND 2005 |   | 39     |
|                                                                                                                                                    |   |   |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR  THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005                                                            |   | 40     |
|                                                                                                                                                    |   |   |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                              |   | 41     |

 

35

----

Table of Contents

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Shareholders of Nature’s SunshineProducts, Inc.

 

We have audited the accompanying consolidated balance sheets of Nature’sSunshine Products, Inc. and subsidiaries (the “Company”) as of December 31,2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2007, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

As discussed in Note 1 to the consolidated financial statements, in2007 the Company changed its method of accounting for uncertain tax positionsto conform with Financial Accounting Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes”.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the Company’s internalcontrol over financial reporting as of December 31, 2007, based on thecriteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated October 6,2008 expressed an adverse opinion on the effectiveness of the Company’sinternal control over financial reporting.

 

/s/ Deloitte & Touche LLP

 

Salt Lake City, Utah

October 6, 2008

 

36

----

Table of Contents

 

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

 

**CONSOLIDATEDBALANCE SHEETS**

***(Amounts in thousands)***

** **
| **As of December 31**                                                                                                                     | ** ** | **2007**    | ** **  | **2006**   | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| **Assets**                                                                                                                                               |       |        | ** **  |       |       |
| Current Assets:                                                                                                                                          |       |        | ** **  |       |       |
| Cash and cash equivalents                                                                                                                                | ** ** | **$**       | **45,299**  | ** ** | $          | 39,061 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $739 and $1,129, respectively                                                            | ** ** | **7,450**   | ** **  | 6,409      |       |
| Investments available for sale                                                                                                                           | ** ** | **4,755**   | ** **  | 6,054      |       |
| Inventories                                                                                                                                              | ** ** | **35,249**  | ** **  | 38,639     |       |
| Deferred income tax assets                                                                                                                               | ** ** | **8,071**   | ** **  | 5,727      |       |
| Prepaid expenses and other current assets                                                                                                                | ** ** | **8,153**   | ** **  | 6,049      |       |
| Total current assets                                                                                                                                     | ** ** | **108,977** | ** **  | 101,939    |       |
| Property, plant and equipment, net                                                                                                                       | ** ** | **28,282**  | ** **  | 30,581     |       |
| Investment securities                                                                                                                                    | ** ** | **1,674**   | ** **  | 1,594      |       |
| Restricted investments                                                                                                                                   | ** ** | **2,075**   | ** **  | —     |       |
| Intangible assets                                                                                                                                        | ** ** | **1,656**   | ** **  | 755        |       |
| Deferred income tax assets                                                                                                                               | ** ** | **5,828**   | ** **  | 5,732      |       |
| Other assets                                                                                                                                             | ** ** | **16,846**  | ** **  | 7,746      |       |
| ** **                                                                                                                                               |       | **$**       | **165,338** | ** ** | $          | 148,347 |   |
| **Liabilities and Shareholders’ Equity**                                                                                                            |       |        | ** **  |       |       |
| Current Liabilities:                                                                                                                                     |       |        | ** **  |       |       |
| Accounts payable                                                                                                                                         | ** ** | **$**       | **7,009**   | ** ** | 6,529      |   |
| Accrued volume incentives                                                                                                                                | ** ** | **15,922**  | ** **  | 15,247     |       |
| Accrued liabilities                                                                                                                                      | ** ** | **44,322**  | ** **  | 43,816     |       |
| Deferred revenue                                                                                                                                         | ** ** | **5,207**   | ** **  | 4,814      |       |
| Income taxes payable                                                                                                                                     | ** ** | **4,500**   | ** **  | 7,565      |       |
| Total current liabilities                                                                                                                                | ** ** | **76,960**  | ** **  | 77,971     |       |
| Liability related to unrecognized tax  positions                                                                                                         | ** ** | **25,888**  | ** **  | —     |       |
| Deferred compensation payable                                                                                                                            | ** ** | **1,674**   | ** **  | 1,594      |       |
| Other  liabilities                                                                                                                                       | ** ** | **424**     | ** **  | 596        |       |
| Total long-term liabilities                                                                                                                              | ** ** | **27,986**  | ** **  | 2,190      |       |
|                                                                                                                                                     |       |        | ** **  |       |       |
| Commitments and Contingencies (Notes 8 and  11)                                                                                                          |       |        | ** **  |       |       |
|                                                                                                                                                     |       |        | ** **  |       |       |
| Shareholders’ Equity:                                                                                                                               |       |        | ** **  |       |       |
| Common stock, no par value; 20,000 shares  authorized, 15,510 and 15,348 shares issued and outstanding at  December 31, 2007 and 2006, respectively | ** ** | **66,619**  | ** **  | 64,795     |       |
| Retained earnings                                                                                                                                        | ** ** | **9,112**   | ** **  | 20,451     |       |
| Accumulated other comprehensive loss                                                                                                                     | ** ** | **(15,339** | **)**       | (17,060    | )          |
| Total shareholders’ equity                                                                                                                          | ** ** | **60,392**  | ** **  | 68,186     |       |
| ** **                                                                                                                                               |       | **$**       | **165,338** | ** ** | $          | 148,347 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

37

----

Table of Contents

 

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

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

** **
| **Year Ended December 31**                                                                          | ** ** | **2007**    | ** **  | **2006**   | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|----------|------------|
| Net Sales Revenue (net of the rebate  portion of volume incentives of $43,927, $41,344, and $39,453, respectively) | ** ** | **$**       | **366,647** | ** ** | $          | 362,222  |       | $ | 351,684 |   |
| Costs and Expenses:                                                                                                |       |        | ** **  |       |       |     |       |
| Cost of goods sold                                                                                                 | ** ** | **70,996**  | ** **  | 68,745     |       | 67,593   |       |
| Volume incentives                                                                                                  | ** ** | **143,884** | ** **  | 145,827    |       | 144,125  |       |
| Selling, general and administrative                                                                                | ** ** | **148,706** | ** **  | 139,645    |       | 128,381  |       |
| ** **                                                                                                         |       | **363,586** | ** **  | 354,217    |       | 340,099  | ** ** |
| Operating Income                                                                                                   | ** ** | **3,061**   | ** **  | 8,005      |       | 11,585   |       |
| Other Income (Expense):                                                                                            |       |        | ** **  |       |       |     |       |
| Interest and other income, net                                                                                     | ** ** | **1,409**   | ** **  | 1,319      |       | 821      |       |
| Interest expense                                                                                                   | ** ** | **(69**     | **)**       | (609       | )          | (730     | )          |
| Foreign exchange gains (losses), net                                                                               | ** ** | **64**      | ** **  | (86        | )          | (253     | )          |
| ** **                                                                                                         |       | **1,404**   | ** **  | 624        |       | (162     | )          |
| Income Before Provision for Income Taxes                                                                           | ** ** | **4,465**   | ** **  | 8,629      |       | 11,423   |       |
| Provision for Income Taxes                                                                                         | ** ** | **12,702**  | ** **  | 12,194     |       | 7,919    |       |
| Net (Loss) Income                                                                                                  | ** ** | **$**       | **(8,237**  | **)**      | $          | (3,565   | )          | $ | 3,504 |   |
|                                                                                                               |       |        | ** **  |       |       |     |       |
| Basic Net (Loss) Income Per Common Share                                                                           | ** ** | **$**       | **(0.53**   | **)**      | $          | (0.23    | )          | $ | 0.23 |   |
| Diluted Net (Loss) Income Per Common Share                                                                         | ** ** | **$**       | **(0.53**   | **)**      | $          | (0.23    | )          | $ | 0.23 |   |
| Basic Common Shares Outstanding                                                                                    | ** ** | **15,495**  | ** **  | 15,344     |       | 15,211   |       |
| Diluted Common Shares Outstanding                                                                                  | ** ** | **15,495**  | ** **  | 15,344     |       | 15,515   |       |

 

See accompanying notes to consolidatedfinancial statements.

 

38

----

Table of Contents

 

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

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**ANDCOMPREHENSIVE INCOME (LOSS)**

***(Amounts in thousands)***

 
| ** **                                                                                                               | ** ** | ** **            | ** ** | ** **   | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------|-------------|
| ** **                                                                                                               | ** ** | ** **            | ** ** | ** **   | ** ** | ** **        | ** ** | **Other**              | ** ** | ** ** | ** **  |
| ** **                                                                                                               | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | ** **             | ** ** |
| ** **                                                                                                               | ** ** | **Shares**            | ** ** | **Value**    | ** ** | **Earnings**      | ** ** | **Income (Loss)** | ** ** | **Total**  | ** **  |
| Balance at January 1, 2005                                                                                          |       | 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** | ** **  |
| **Common stock issued under stock option plan**                                                                          | ** ** | **162**               | ** ** | **1,252**    | ** ** | **—**        | ** ** | **—**             | ** ** | **1,252**  | ** **  |
| **Tax benefit related to exercise of stock  options**                                                                    | ** ** | **—**            | ** ** | **246**      | ** ** | **—**        | ** ** | **—**             | ** ** | **246**    | ** **  |
| **Share-based compensation expense**                                                                                     | ** ** | **—**            | ** ** | **326**      | ** ** | **—**        | ** ** | **—**             | ** ** | **326**    | ** **  |
| **Cash dividends**                                                                                                       | ** ** | **—**            | ** ** | **—**   | ** ** | **(3,102**        | **)**      | **—**             | ** ** | **(3,102** | **)**       |
| **Components of comprehensive income (loss):**                                                                           | ** ** | ** **            | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | ** ** | ** **  |
| **Foreign currency translation (net of tax of  $1,066)**                                                                 | ** ** | **—**            | ** ** | **—**   | ** ** | **—**        | ** ** | **1,625**              | ** ** | ** ** | ** **  |
| **Net unrealized gains on investment  securities (net of tax of $63)**                                                   | ** ** | **—**            | ** ** | **—**   | ** ** | **—**        | ** ** | **96**                 | ** ** | ** ** | ** **  |
| **Net loss**                                                                                                             | ** ** | **—**            | ** ** | **—**   | ** ** | **(8,237**        | **)**      | **—**             | ** ** | ** ** | ** **  |
| **Total  comprehensive loss**                                                                                            | ** ** | ** **            | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **(6,516** | **)**       |
| **Balance  at December 31, 2007**                                                                                   | ** ** | **15,510**            | ** ** | **$**        | **66,619** | ** **        | **$**      | **9,112**              | ** ** | **$**      | **(15,339** | **)** | **$** | **60,392** | ** ** |

 

See accompanying notes to consolidatedfinancial statements.

 

39

----

Table of Contents

 

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

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

***(Amounts In Thousands)***

 
| **Year Ended December 31**                                                                     | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                         |       |       |       |       |       |       |       |
| Net (loss) income                                                                                             | ** ** | **$**      | **(8,237** | **)**      | $          | (3,565     | )          | $ | 3,504 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities:                     |       |       | ** ** |       |       |       |       |
| Provision for doubtful accounts                                                                               | ** ** | **(208**   | **)**      | (441       | )          | 460        |       |
| Depreciation and amortization                                                                                 | ** ** | **6,409**  | ** ** | 6,224      |       | 5,959      |       |
| Share-based compensation expense                                                                              | ** ** | **326**    | ** ** | —     |       | —     |       |
| Tax benefit from stock option exercises                                                                       | ** ** | **(246**   | **)**      | (215       | )          | 3,426      |       |
| Loss (gain) on sale of property, plant and  equipment                                                         | ** ** | **(18**    | **)**      | 50         |       | (42        | )          |
| Deferred income taxes                                                                                         | ** ** | **(1,450** | **)**      | (2,685     | )          | 1,108      |       |
| Amortization of bond discount                                                                                 | ** ** | **48**     | ** ** | 69         |       | 72         |       |
| Purchase of trading investment securities                                                                     | ** ** | **(149**   | **)**      | (167       | )          | (261       | )          |
| Proceeds from sale of trading investment  securities                                                          | ** ** | **173**    | ** ** | 570        |       | 531        |       |
| Realized and unrealized (gains) losses on  investments                                                        | ** ** | **(171**   | **)**      | (157       | )          | 68         |       |
| Amortization of prepaid taxes related to  gain on intercompany sales                                          | ** ** | **1,471**  | ** ** | 1,280      | ** ** | **—** | ** ** |
| Foreign exchange gains                                                                                        | ** ** | **433**    | ** ** | 497        |       | 701        |       |
| Changes in assets and liabilities  (excluding the effects of FIN 48 reclassification as discussed in Note 8): |       |       | ** ** |       |       |       |       |
| Accounts receivable                                                                                           | ** ** | **(857**   | **)**      | 2,720      |       | 1,281      |       |
| Inventories                                                                                                   | ** ** | **3,780**  | ** ** | (3,423     | )          | 84         |       |
| Prepaid expenses and other current assets                                                                     | ** ** | **(1,826** | **)**      | 178        |       | 483        |       |
| Other assets                                                                                                  | ** ** | **(323**   | **)**      | (951       | )          | (5,876     | )          |
| Accounts payable                                                                                              | ** ** | **358**    | ** ** | (893       | )          | (31        | )          |
| Accrued volume incentives                                                                                     | ** ** | **383**    | ** ** | (235       | )          | 2,408      |       |
| Accrued liabilities                                                                                           | ** ** | **15,480** | ** ** | 11,121     |       | 2,357      |       |
| Deferred revenue                                                                                              | ** ** | **393**    | ** ** | 137        |       | (425       | )          |
| Income taxes payable                                                                                          | ** ** | **(3,017** | **)**      | 4,411      |       | 1,400      |       |
| Deferred compensation payable                                                                                 | ** ** | **80**     | ** ** | (273       | )          | (195       | )          |
| Net cash provided by operating activities                                                                     | ** ** | **12,832** | ** ** | 14,252     |       | 17,012     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                         |       |       | ** ** |       |       |       |       |
| Purchases of property, plant and equipment                                                                    | ** ** | **(4,456** | **)**      | (2,718     | )          | (4,284     | )          |
| Proceeds from sale of investments available  for sale                                                         | ** ** | **1,432**  | ** ** | 1,396      |       | 1,718      |       |
| Purchase of investments available for sale                                                                    | ** ** | **—** | ** ** | (1,901     | )          | (1,317     | )          |
| Purchase of restricted investments                                                                            | ** ** | **(2,075** | **)**      | —     |       | —     |       |
| Purchase of intangible assets                                                                                 | ** ** | **(1,000** | **)**      | (763       | )          | —     |       |
| Proceeds from sale of property, plant and  equipment                                                          | ** ** | **398**    | ** ** | 27         |       | 204        |       |
| Net cash used in investing activities                                                                         | ** ** | **(5,701** | **)**      | (3,959     | )          | (3,679     | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advances on line of credit                                                                                    | ** ** | **—** | ** ** | 4,643      |       | 27,000     |       |
| Payments on line of credit                                                                                    | ** ** | **—** | ** ** | (11,643    | )          | (27,500    | )          |
| Repurchase and retirement of common stock                                                                     | ** ** | **—** | ** ** | —     |       | (11,363    | )          |
| Payments of cash dividends                                                                                    | ** ** | **(3,102** | **)**      | (3,069     | )          | (3,053     | )          |
| Proceeds from exercise of stock options                                                                       | ** ** | **1,252**  | ** ** | 551        |       | 7,660      |       |
| Tax benefit from stock option exercises                                                                       | ** ** | **246**    | ** ** | 215        |       | —     |       |
| Net cash used in financing activities                                                                         | ** ** | **(1,604** | **)**      | (9,303     | )          | (7,256     | )          |
| Effect of exchange rates on cash and cash  equivalents                                                        | ** ** | **711**    | ** ** | 196        |       | (895       | )          |
| Net increase in cash and cash equivalents                                                                     | ** ** | **6,238**  | ** ** | 1,186      |       | 5,182      |       |
| Cash and cash equivalents at beginning of  the year                                                           | ** ** | **39,061** | ** ** | 37,875     |       | 32,693     |       |
| Cash and cash equivalents at end of the  year                                                                 | ** ** | **$**      | **45,299** | ** ** | $          | 39,061     |       | $ | 37,875 |   |
|                                                                                                          |       |       | ** ** |       |       |       |       |
| Supplemental disclosure of cash flow  information:                                                            |       |       | ** ** |       |       |       |       |
| Cash paid for income taxes                                                                                    | ** ** | **$**      | **11,140** | ** ** | **$**      | **6,015**  |       | $ | 2,867 |   |
| Cash paid for interest                                                                                        | ** ** | **85**     | ** ** | **297**    |       | 388        |       |
| Supplemental disclosure of noncash  investing and financing activities:                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of property, plant and equipment  included in accounts payable                                      | ** ** | **$**      | **78**     | ** ** | **$**      | **138**    |       | $ | 133 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

40

----

Table of Contents

 

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

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

 

**NOTE 1: NATURE OF OPERATIONS AND SIGNIFICANTACCOUNTING POLICIES**

 

**Nature of Operations**

 

Nature’s Sunshine Products, Inc. and itssubsidiaries (hereinafter referred to collectively as the “Company”) areprimarily engaged in the manufacturing and marketing of herbal products,vitamin and mineral supplements, personal care, and miscellaneous products.Nature’s Sunshine Products, Inc. is a Utah corporation with its principalplace of business in Provo, Utah. The Company sells its 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 the Company’s major product groups are subject to regulation by one or moregovernmental agencies.

 

The Company markets its products in theUnited States, South Korea, Mexico, Venezuela, Japan, Brazil, Canada, CentralAmerica, 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. The Company also exports itsproducts to several other countries, including Argentina, Australia, Chile, NewZealand, and Norway.

 

**Principles of Consolidation**

 

The accompanying consolidated financialstatements include the accounts and transactions of Nature’s Sunshine Products, Inc.and its subsidiaries. At December 31, 2007, 2006, and 2005, all of theCompany’s subsidiaries were wholly owned. Intercompany balances andtransactions have been eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities, in these financialstatements and accompanying notes. Actual results could differ from theseestimates and those differences could have a material effect on the Company’sfinancial position and results of operations.

 

The significant accounting estimates inherentin the preparation of the Company’s financial statements include estimatesassociated with its evaluation of impairment of long-lived assets, thedetermination of liabilities related to Distributor and Manager incentives, thedetermination of income tax assets and liabilities, certain other non-incometax and value-added tax contingencies, legal contingencies, share-basedcompensation, and the valuation of investments. In addition, significantestimates form the basis for allowances with respect to the collection ofaccounts receivable, inventory valuations and self-insurance liabilitiesassociated with product liability and medical claims. Various assumptions andother factors enter into the determination of these significant estimates. Theprocess of determining significant estimates takes into account historicalexperience and current and expected economic conditions.

 

**Cash and Cash Equivalents**

 

The Company considers all highly liquidshort-term investments with original maturities of three months or less to becash equivalents. Substantially all of the Company’s cash deposits eitherexceed the United States federally insured limit or are located in countriesthat do not have government insured accounts or are subject to tax withholdingswhen repatriating earnings.

 

41

----

Table of Contents

 

**Accounts Receivable Allowances**

 

Accounts receivable have been reduced by anallowance for amounts that may be uncollectible in the future. This estimatedallowance is based primarily on the aging category, historical trends andmanagement’s evaluation of the financial condition of the customer. Thisreserve is adjusted periodically as information about specific accounts becomesavailable.

 

42

----

Table of Contents

 

**Investment Securities**

 

The Company’s investment securities, whichare generally categorized as available-for-sale securities, are reported atfair value, with unrealized gains and losses, net of tax, recorded inaccumulated other comprehensive income (loss) in shareholders’ equity.Unrealized losses on available-for-sale securities that are determined to beother than temporary are included in the determination of net income in theperiod in which that determination is made. The cost of the securities sold isbased on the specific identification method. Realized gains and losses on salesof available-for-sale securities are included in interest and other income.

 

The Company also has certain investmentsecurities classified as trading securities. The Company maintains its tradingsecurities portfolio to generate returns that are offset by correspondingchanges in certain liabilities related to the Company’s deferred compensationplans (see Note 10). The trading securities portfolio consists of marketablesecurities, which are recorded at fair value and are included in long-terminvestment securities on the consolidated balance sheets because they remainassets of the Company until they are actually paid out to the participants. TheCompany has established a rabbi trust to finance obligations under the plan.Both realized and unrealized gains and losses on trading securities areincluded in interest and other income.

 

**Restricted Investments**

 

The Company’s restricted investments include auction rate preferredinvestments totaling $2,075 with Merrill Lynch with investment grades of AAA(original date of purchase) as of December 31, 2007. Auction ratepreferred investments are similar in nature to auction rates securities in thatthey are long-term bonds or preferred stocks that act like short-term debt;however unlike auction rates securities, these investments require at least200% collateral by the issuer. Interest rates for these investments reset inDutch auctions held weekly. These investments are carried at par, whichapproximates fair value. The auction process for action rate investmentshistorically provided a liquid market for these investments. However, in the secondhalf of 2007, this process began to deteriorate. While the Company’s portfoliowas not affected by the auction rate process in 2007, the investments held bythe Company experienced auction failures during the first quarter of 2008. Anunsuccessful auction is an event when there are fewer securities bid for thanare available for sale. As a result, the Company has reclassified thesesecurities as long-term investments. Given that all of the securitiesexperienced successful auctions prior to December 31, 2007 and the Companyhas the ability and intent to hold the investments until a successful auctionoccurs, management does not believe that the current state of the creditmarkets requires the Company to adjust the fair value of its portfolio ofauction rate securities. In addition, the Company has collected all interestpayable on the auction rate investments as they are due.

 

If the auction rate investments continue to experience unsuccessfulauctions, or if the credit rating of the auction rate security issuer or thethird party insurer of the issuers of the investments underlying the securitiesdeteriorates, management may be required to adjust the carrying value of theauction rate security through an impairment charge. While the recent auctionfailures will limit the Company’s ability to liquidate these investments forsome period of time, management does not believe the auction failures willimpact the Company’s ability to fund working capital needs, capitalexpenditures, or other business requirements. The Company will continue tomonitor the state of the credit markets and its potential impact, if any, onthe fair value and classification of its portfolio of auction rate securities.

 

**Fair Value of Financial Instruments**

 

The Company’s financial instruments consistprimarily of cash, cash equivalents, accounts receivable, investments, accountspayable, and line of credit. The carrying values of these financial instrumentsapproximate their fair values. The estimated fair values have been determinedusing appropriate market information and valuation methodologies.

 

**Inventories**

 

Inventories are stated at thelower-of-cost-or-market, using the first-in, first-out method. The componentsof inventory cost include raw materials, labor and overhead. To estimate anynecessary lower-of-cost-or-market adjustments, various assumptions are made inregard to excess or slow-moving inventories, non-conforming inventories,expiration dates, current and future product demand, production planning, andmarket conditions.

 

**Property, Plant and Equipment**

 

Property, plant and equipment are recorded atcost less accumulated depreciation and amortization. Depreciation is computedusing the straight-line method over the estimated useful lives of the relatedassets. Estimated useful lives for buildings range from 20 to 50 years,building improvements range from 7 to 10 years, machinery and equipment rangefrom 2 to 10 years, and furniture and 

 

43

----

Table of Contents

 

fixtures range from 2 to 5 years. Leaseholdimprovements are amortized over the shorter of the lease term or the estimateduseful lives of the related assets. Maintenance and repairs are expensed asincurred, and major improvements are capitalized.

 

**Intangible Assets**

 

Intangible assets consist of purchasedproduct formulations. Such intangible assets are amortized using thestraight-line method over the estimated economic lives of the assets of 15 years.Intangible assets, net of accumulated amortization, totaled $1,656 and $755 at December 31,2007 and 2006, respectively.

 

**Impairment of Long-Lived Assets**

 

The Company reviews its long-lived assets,such as property, plant and equipment and intangible assets for impairment whenevents or changes in circumstances indicate that the carrying value of an assetmay not be recoverable. The Company uses an estimate of future undiscounted netcash flows of the related assets or groups of assets over their remaining livesin measuring whether the assets are recoverable. An impairment loss iscalculated by determining the difference between the carrying values and thefair values of these assets. At December 31, 2007 and 2006, the Companydid not consider any of its long-lived assets to be impaired.

 

**Foreign Currency Translation**

 

The local currency of the foreignsubsidiaries 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 functional currency in highlyinflationary economies is the U.S. dollar and transactions denominated in thelocal currency are remeasured as if the functional currency were the U.S.dollar. The remeasurement of local currencies into U.S. dollars createstranslation adjustments, which are included in the consolidated statements ofoperations.  There were no countriesconsidered to have a highly inflationary economy during 2005, 2006, or 2007.

 

**Revenue Recognition**

 

Net sales revenue and related volumeincentive expenses are recorded when persuasive evidence of an arrangementexists, collectibility is reasonably assured, the amount is fixed anddeterminable, and title and risk of loss have passed, generally when themerchandise has been delivered. Amounts received for undelivered merchandiseare recorded as deferred revenue. Sales revenue is recorded net of the rebateportion of volume incentives. A reserve for product returns, which reducesrevenue, is accrued based on historical experience. From time to time, theCompany’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 to customers for shipping andhandling are reported as a component of net sales revenue. Shipping andhandling revenues of approximately $9,453, $10,131, and $9,110 were reported asnet sales revenue for the years ended December 31, 2007, 2006, and 2005,respectively. The corresponding shipping and handling expenses are reported inselling, general and administrative expenses and approximated the amountsreported as net sales revenue.

 

Taxes that have been assessed by governmentalauthorities and that are directly imposed on revenue-producing transactionsbetween the Company and its customers, including sales, use, value-added, andsome excise taxes, are presented on a net basis (excluded from net sales) aspermitted by Emerging Issues Task Force (EITF) 06-3, “How Taxes Collected fromCustomers and Remitted to Governmental Authorities should be Presented in theIncome Statement (that is, Gross versus Net Presentation)”.

 

**Advertising Costs**

 

Advertising costs are expensed as incurred.Advertising expense incurred for the years ended December 31, 2007, 2006,and 2005 totaled approximately $1,547, $1,453, and $1,665, respectively.

 

44

----

Table of Contents

 

**Research and Development**

 

All research and development costs areexpensed as incurred and classified in selling, general and administrativeexpense. Total research and development expenses were approximately $1,940,$1,920, and $1,754 in 2007, 2006, and 2005, respectively.

 

**Income Taxes**

 

Income taxes are recorded using the asset andliability method. This method recognizes a liability or asset for the deferredincome tax consequences of temporary differences between the tax basis ofassets or liabilities and their reported amounts in the consolidated financialstatements. These temporary differences will result in taxable or deductibleamounts in future years when the reported amounts of the assets or liabilitiesare recovered or settled. Net deferred tax assets are reduced by a valuationallowance if it is more likely than not that some or all of the deferred taxassets will not be realized. In evaluating the realization of its deferred taxassets, the Company considers all available positive and negative evidence,including past operating results and forecasts of future taxable income,including tax planning strategies. These forecasts require significant judgmentand assumptions to estimate future taxable income and are based on the plansand estimates that the Company uses to manage its business. The Company hasestablished a valuation allowance against its deferred tax assets in eachjurisdiction where it cannot conclude that it is more likely than not that suchassets will be realized. In the event that actual results differ from theforecasts or the Company adjusts the forecasts or assumptions in the future,the resulting change in the valuation allowance could have a significant impacton future income tax expense (see Note 8).

 

The Company is subject to income taxes in theUnited States and numerous foreign jurisdictions. In the ordinary course of theCompany’s business there are calculations and transactions, including transferpricing, where the ultimate tax determination is uncertain. In addition,changes in tax laws and regulations as well as adverse judicial rulings couldadversely affect the income tax provision. The Company believes that it hasadequately provided for income tax issues not yet resolved with federal, state,local and foreign tax authorities. However, if these provided amounts prove tobe more than what is necessary, the reversal of the reserves would result intax benefits being recognized in the period in which the Company determinesthat provision for the liabilities is no longer necessary. If an ultimate taxassessment exceeds the Company’s estimate of tax liabilities, an additionalcharge to expense would be required.

 

On January 1, 2007, the Company adoptedFinancial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes”, which clarifies theaccounting for uncertainty in income taxes recognized in the financialstatements in accordance with SFAS 109, “Accounting for Income Taxes”. UnderFIN 48, tax positions shall initially be recognized in the financial statementswhen it is more likely than not the position will be sustained upon examinationby the tax authorities. Such tax positions shall initially and subsequently bemeasured as the largest amount of tax benefit that has a greater than 50%likelihood of being realized upon ultimate settlement with the tax authorityassuming full knowledge of the position and all relevant facts.  The adoption of FIN 48 did not have amaterial impact on the consolidated financial statements.

 

**Net Income Per Common Share**

 

Basicnet income (loss) per common share (“Basic EPS”) excludes dilution and is computedby 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.

 

Following is areconciliation of the numerator and denominator of Basic EPS to the numeratorand denominator of Diluted EPS for all years:

 

45

----

Table of Contents

 
| ** **                        | ** ** | **Net Income (Loss)  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Net Income  (Loss) Per  Share Amount** | ** ** |
|-----------------------------------|------------|----------------------------------------------|------------|---------------------------|------------|---------------------------------------------------------|------------|
| Year Ended December 31, 2007 |       |                                         |       |                      |       |                                                    |       |
| Basic EPS                         |       | $                                            | (8,237     | )                         | 15,495     |                                                    | $          | (0.53 | ) |
| Effect of options                 |       | —                                       |       | —                    |       | —                                                  |       |
| Diluted EPS                       |       | $                                            | (8,237     | )                         | 15,495     |                                                    | $          | (0.53 | ) |
|                              |       |                                         |       |                      |       |                                                    |       |   |   |
| 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 |   |

 

Because of net losses in the years ended December 31, 2007 and2006, oustanding common stock options of 307 and 432, respectively, 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, there were outstanding options to purchase 15 shares of common stock thatwere not included in the computation of Diluted EPS because the options’exercise prices were greater than the average market price of the common sharesduring the year.

 

**Share-Based Compensation**

 

Effective January 1,2006, the Company adopted Statements of Financial Accounting Standards (“SFAS”)No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the statement of operations based on their fairvalues. This accounting utilizes a “modified grant-date” approach in which thefair value of an equity award is estimated on the grant date without regard toservice or performance vesting conditions. The Company adopted SFAS No. 123(R) usingthe “modified prospective” transition method. Under this transition method,compensation expense was recognized beginning January 1, 2006 based on therequirements of SFAS No. 123(R) for all stock options vesting after December 31,2005. Upon adoption, there were no unvested stock options, and therefore, theimpact of adopting SFAS No. 123(R) was not significant. Under SFAS No. 123(R),the Company records compensation expense over the vesting period of the stockoptions based on the fair value of the stock options on the date of grant.

 

Prior to January 1,2006, the Company accounted for stock option compensation under the recognitionand measurement provisions of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”), and related Interpretations, aspermitted by SFAS No. 123, “Accounting for Stock-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:

 
| **Year ended December 31** | ** ** | ** **                       | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|----------|------------|
| Net Income                                |       | As reported                      |       | $        | 3,504      |   |
|                                      |       | Stock option expense, net of tax |       | (199     | )          |
|                                      |       | Pro forma                        |       | 3,305    |       |
|                                      |       |                             |       |     |       |
| Basic Earnings Per Share                  |       | As reported                      |       | $        | 0.23       |   |
|                                      |       | Stock option expense, net of tax |       | (0.01    | )          |
|                                      |       | Pro forma                        |       | 0.22     |       |
|                                      |       |                             |       |     |       |
| Diluted Earnings Per Share                |       | As reported                      |       | $        | 0.23       |   |
|                                      |       | Stock option expense, net of tax |       | (0.01    | )          |
|                                      |       | Pro forma                        | ** ** | 0.22     | ** ** |

 

There were no stock option grants for the year ended December 31,2006 or 2005.

 

**Comprehensive Income (Loss)**

 

Comprehensive income (loss) includes all changes in shareholders’equity except those resulting from investments by, and distributions to,shareholders. Accordingly, the Company’s comprehensive income (loss) includesnet income (loss), net unrealized gains (losses) on investment securities, reclassificationsof realized gains, and foreign currency adjustments that arise from thetranslation of the financial statements of the Company’s foreign subsidiaries.

 

46

----

Table of Contents

 

**Recent Accounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),which became 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,“Effective Date of FASB Statement No. 157”(“FSP No. 157-2”), 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. The Company adopted SFAS No. 157 on January 1,2008, and that adoption did not have a material effect on the Company’sconsolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS No. 159”). The fair value optionestablished by this statement permits all entities to choose to measureeligible items at fair value at specified election dates. A business entityshall report unrealized gains and losses on items for which the fair valueoption has been elected in earnings (or another performance indicator if thebusiness entity does not report earnings) at each subsequent reporting date.Although this statement is voluntary, it is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007. TheCompany adopted SFAS No. 159 on January 1, 2008. The adoption of thestandard did not have a material effect on the Company’s consolidated financialstatements.

 

In September 2006, the SEC issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”). SAB 108provides guidance on how prior year misstatements should be considered whenquantifying misstatements in the current year financial statements. The SABrequires registrants to quantify misstatements using both a balance sheet andan income statement approach and evaluate whether either approach results inquantifying a misstatement that, when all relevant quantitative and qualitativefactors are considered, is material. SAB 108 does not change the guidance inSAB 99, “Materiality”, when evaluating the materiality of misstatements. SAB108 is effective for fiscal years ending after November 15, 2006. Uponinitial application, SAB 108 permits a one-time cumulative effect adjustment tobeginning retained earnings. The adoption of SAB 108 did not have a materialeffect on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), “Business Combinations” (“SFAS No. 141R”), which changes howbusiness combinations are accounted for and will impact financial statementsboth on the acquisition date and in subsequent periods. SFAS No. 141R iseffective January 1, 2009, and will be applied prospectively. The impactof adopting SFAS No. 141R will depend on the nature and terms of futureacquisitions.

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements” (“SFAS 160”), which changes theaccounting and reporting standards for the noncontrolling interests in asubsidiary in consolidated financial statements. SFAS 160 recharacterizesminority interest as noncontrolling interests and requires noncontrollinginterests to be classified as a component of shareholders’ equity. SFAS 160 iseffective January 1, 2009 and requires retroactive adoption of thepresentation and disclosure requirements for existing minority interest. TheCompany is currently evaluating the impact of SFAS 160 on the Company’sconsolidated financial statements.

 

In December 2007, the SEC issued SAB No. 110. SAB No. 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. 123(R). The guidance in SAB 110 is effective as of January 1,2008. The impact of adopting SAB No. 110 did not have a material effect onthe Company’s consolidated financial statements.

 

**NOTE 2: INVENTORIES**

 

The composition ofinventories is as follows:

 
| **As of December 31** | ** ** | **2007**   | ** ** | **2006** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| Raw materials                        | ** ** | **$**      | **8,175**  |     | $          | 8,670 |   |
| Work in process                      | ** ** | **912**    |       | 1,224    |       |
| Finished goods                       | ** ** | **26,162** |       | 28,745   |       |
| ** **                           |       | **$**      | **35,249** |     | $          | 38,639 |   |

 

47

----

Table of Contents

 

**NOTE 3: PROPERTY, PLANT AND EQUIPMENT**

 

The composition of property, plant andequipment is as follows:

 
| **As of December 31**      | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|-------------------------------------------|------------|-------------|------------|------------|------------|
| Land and improvements                     | ** ** | **$**       | **2,208**  | ** ** | $          | 2,208 |   |
| Buildings and improvements                | ** ** | **29,387**  | ** ** | 28,624     |       |
| Machinery and equipment                   | ** ** | **17,018**  | ** ** | 16,724     |       |
| Furniture and fixtures                    | ** ** | **25,476**  | ** ** | 27,066     |       |
| ** **                                |       | **74,089**  | ** ** | 74,622     |       |
| Accumulated depreciation and amortization | ** ** | **(45,807** | **)**      | (44,041    | )          |
| ** **                                |       | **$**       | **28,282** | ** ** | $          | 30,581 |   |

 

Depreciation expense was $6,310, $6,216, and $5,959 for the years endedDecember 31, 2007, 2006, and 2005, respectively.

 

**NOTE 4: INTANGIBLE ASSETS**

 

The Company acquired certain product formulations during the yearsended December 31, 2007 and 2006. At December 31, 2007 and 2006, theproduct formulations had a carrying amount of $1,763 and $763, accumulatedamortization of $107 and $8, and a net amount of $1,656 and $755, respectively.The estimated useful life of the product formulations is estimated to be 15years.

 

Amortization expense for intangible assets for the years ended December 31,2007 and 2006 was $99 and $8, respectively. Estimated amortization expense forthe five succeeding fiscal years and thereafter is as follows:

 
| **Year Ending  December 31:** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| 2008                                    |       | $                                    | 118        |   |
| 2009                                    |       | 118                                  |       |
| 2010                                    |       | 118                                  |       |
| 2011                                    |       | 118                                  |       |
| 2012                                    |       | 118                                  |       |
| Thereafter                              |       | 1,066                                |       |
| Total                                   |       | $                                    | 1,656      |   |

 

**NOTE 5: INVESTMENT SECURITIES**

 

The amortized cost andestimated fair values of available-for-sale securities by balance sheetclassification are as follows:

 
| **As of December 31, 2007** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Municipal  obligations                          |       | $                   | 3,536      |                         | $          | 36                            |       | $               | (6         | ) | $ | 3,566 |   |
| U.S.  Government Securities Funds               |       | 680                 |       | 3                            |       | —                        |       | 683             |       |
| Equity  securities                              |       | 239                 |       | 267                          |       | —                        |       | 506             |       |
| Total short-term investment securities          |       | $                   | 4,455      |                         | $          | 306                           |       | $               | (6         | ) | $ | 4,755 |   |

 

48

----

Table of Contents

 
| **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 |   |

 

Contractual maturities of municipalobligations fair value at December 31, 2007, are as follows:

 
| Mature after one year through five years |   | $     | 1,733  |   |
|------------------------------------------|--------|-------|--------|--------|
| Mature after five years                  |   | 1,833 |   |
| Total                                    |   | $     | 3,566  |   |

 

During 2007, 2006, and 2005, the proceeds from the sales ofavailable-for-sale securities were $1,432, $1,396, and $1,718, respectively.The gross realized gains on sales of available-for-sale securities (net of tax)were $0, $14, and $23 for the years ended December 31, 2007, 2006, and2005, respectively. The gross realized losses on the sales ofavailable-for-sale securities were $0, $5, and $3 for the years ended December 31,2007, 2006, and 2005, respectively.

 

The Company’s trading securities portfolio totaled $1,674 and $1,594 atDecember 31, 2007 and 2006, respectively, and generated gains of $171 and$148 for the years ended December 31, 2007 and 2006, respectively, and aloss of $88 for the year ended December 31, 2005.

 

As of December 31, 2007 and 2006, the Company had unrealizedlosses of $6 and $31, respectively, in its municipal obligations investments.These losses are due to the interest rate sensitivity of these investments.

 

**NOTE 6:  ACCRUED LIABILITIES**

 

The composition of accrued liabilities is as follows:

 
| **As of December 31** | ** ** | **2007**   | ** ** | **2006** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| Tax contingencies (See Note 11)      | ** ** | **$**      | **6,624**  |     | $          | 16,826 |   |
| Sales, use, and property tax         | ** ** | **8,833**  |       | 5,568    |       |
| Salaries and employee benefits       | ** ** | **8,545**  |       | 4,750    |       |
| Convention costs                     | ** ** | **5,517**  |       | 3,839    |       |
| Other                                | ** ** | **14,803** |       | 12,833   |       |
| Total                                | ** ** | **$**      | **44,322** |     | $          | 43,816 |   |

 

**NOTE 7: ACCUMULATED OTHER COMPREHENSIVE LOSS**

 

The components of accumulated other comprehensive loss, net of tax, areas follows:

 
| ** **                           | ** ** | **Foreign Currency  Translation  Adjustments** | ** ** | **Net Unrealized  Gains (Losses) On  Available-For-Sale  Securities** | ** ** | **Total  Accumulated Other  Comprehensive Loss** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Balance as of January 1, 2005   |       | $                                                   | (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                                                    | )          |
| Activity, net of tax                 |       | 1,625                                               |       | 96                                                                                   |       | 1,721                                                      |       |
| Balance as of December 31, 2007 |       | $                                                   | (15,529    | )                                                                                    | $          | 190                                                        |       | $ | (15,339 | ) |

 

49

----

Tableof Contents

 

**NOTE 8:  INCOME TAXES**

 

Income (loss) from operations beforeprovision (benefit) for income taxes are taxed under the followingjurisdictions:

 
| **Year  Ended December 31** | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Domestic                    | ** ** | **$**     | **265**    |     | $          | 1,138    |       | $ | (1,345 | ) |
| Foreign                     | ** ** | **4,200** |       | 7,491    |       | 12,768   |       |
| Total                       | ** ** | **$**     | **4,465**  |     | $          | 8,629    |       | $ | 11,423 |   |

 

Components of the provision (benefit) forincome taxes for each of the three years in the period ended December 31,2007 are as follows:

 
| **Year Ended December 31**       | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005** | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|----------|------------|
| Current:                         |       |       | ** ** |       |       |     |       |
| Federal                          | ** ** | **$**      | **5,161**  | ** ** | $          | 3,848    |       | $ | (782 | ) |
| State                            | ** ** | **1,196**  | ** ** | 388        |       | (280     | )          |
| Foreign                          | ** ** | **7,795**  | ** ** | 10,643     |       | 7,873    |       |
| Subtotal                         | ** ** | **14,152** | ** ** | 14,879     |       | 6,811    |       |
| Deferred:                        |       |       | ** ** |       |       |     |       |
| Federal                          | ** ** | **(1,324** | **)**      | (2,173     | )          | 1,163    |       |
| State                            | ** ** | **(527**   | **)**      | 237        |       | (163     | )          |
| Foreign                          | ** ** | **401**    | ** ** | (749       | )          | 108      |       |
| Subtotal                         | ** ** | **(1,450** | **)**      | (2,685     | )          | 1,108    |       |
| Total provision for income taxes | ** ** | **$**      | **12,702** | ** ** | $          | 12,194   |       | $ | 7,919 |   |

 

Theincome tax benefits associated with employee exercises of options under thenonqualified stock option plan decreased the income taxes payable by $246,$215, and $3,426 in 2007, 2006, and 2005, respectively. These benefits wererecorded as an increase 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**                                 | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Statutory U.S. federal income tax rate                     | ** ** | **35.0**   | **%**      | 35.0     | %          | 35.0     | %          |
| State income taxes, net of U.S. federal income tax benefit | ** ** | **10.6**   | ** ** | 4.8      |       | (3.5     | )          |
| Foreign taxes                                              | ** ** | **17.1**   | ** ** | (3.1     | )          | 0.8      |       |
| Valuation allowance change                                 | ** ** | **61.1**   | ** ** | 29.3     |       | (2.3     | )          |
| Tax contingencies                                          | ** ** | **16.0**   | ** ** | 54.0     |       | 38.6     |       |
| Foreign exchange gains                                     | ** ** | **(0.7**   | **)**      | 9.9      |       | —   |       |
| Gain on sale of intercompany assets                        | ** ** | **25.2**   | ** ** | 12.9     |       | —   |       |
| Charitable contributions                                   | ** ** | **(0.9**   | **)**      | (2.5     | )          | (0.6     | )          |
| Extra territorial income                                   | ** ** | **—** | ** ** | (2.6     | )          | (2.9     | )          |
| Foreign tax rate differential                              | ** ** | **5.6**    | ** ** | —   |       | (5.6     | )          |
| Intercompany loan translation adjustment                   | ** ** | **18.1**   | ** ** | —   |       | —   |       |
| Unrecognized tax benefits                                  | ** ** | **104.4**  | ** ** | —   |       | —   |       |
| Meals and entertainment                                    | ** ** | **2.4**    | ** ** | 1.2      |       | 0.9      |       |
| Tax adjustment for inflation                               | ** ** | **(7.1**   | **)**      | (0.7     | )          | (0.9     | )          |
| Domestic manufacturing deduction                           | ** ** | **(3.7**   | **)**      | (0.9     | )          | —   |       |
| Nondeductible foreign expenses                             | ** ** | **6.2**    | ** ** | 2.1      |       | 2.3      |       |
| Other                                                      | ** ** | **(4.8**   | **)**      | 1.9      |       | 7.5      |       |
| Effective income tax rate                                  | ** ** | **284.5**  | **%**      | 141.3    | %          | 69.3     | %          |

 

Pretaxearnings of a foreign subsidiary or affiliate are subject to U.S. taxation wheneffectively repatriated. The Company does not intend to reinvest undistributedearnings indefinitely in the Company’s foreign subsidiaries.

 

50

----

Tableof Contents

 

Thesignificant components of the deferred tax assets (liabilities) are as follows:

 
| **As of December 31**                                  | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|--------------------------------------------------------|------------|-------------|------------|------------|------------|
| Inventory                                              | ** ** | **$**       | **1,829**  | ** ** | $          | 2,087 |   |
| Accrued liabilities                                    | ** ** | **5,560**   | ** ** | 3,264      |       |
| Impaired investments                                   | ** ** | **757**     | ** ** | 750        |       |
| Deferred compensation                                  | ** ** | **785**     | ** ** | 613        |       |
| Amortization of intangibles                            | ** ** | **1,014**   | ** ** | 1,129      |       |
| Bad debts                                              | ** ** | **497**     | ** ** | 492        |       |
| Net operating losses                                   | ** ** | **4,304**   | ** ** | 2,346      |       |
| Capital losses                                         | ** ** | **688**     | ** ** | 785        |       |
| Foreign tax and withholding credits                    | ** ** | **3,953**   | ** ** | 3,953      |       |
| Non-income tax accruals                                | ** ** | **3,013**   | ** ** | 1,918      |       |
| Health insurance accruals                              | ** ** | **730**     | ** ** | 596        |       |
| Cumulative translation adjustment — outside basis | ** ** | **1,302**   | ** ** | 1,050      |       |
| Accelerated depreciation                               | ** ** | **139**     | ** ** | —     |       |
| Other deferred tax assets                              | ** ** | **2,328**   | ** ** | 2,319      |       |
| Valuation allowance                                    | ** ** | **(11,290** | **)**      | (7,822     | )          |
| Total deferred tax assets                              | ** ** | **15,609**  | ** ** | 13,480     |       |
| Accelerated depreciation                               | ** ** | **—**  | ** ** | (489       | )          |
| Other deferred tax liabilities                         | ** ** | **(2,446**  | **)**      | (2,324     | )          |
| Total deferred tax liabilities                         | ** ** | **(2,446**  | **)**      | (2,813     | )          |
| Total deferred taxes, net                              | ** ** | **$**       | **13,163** | ** ** | $          | 10,667 |   |

 

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

 
| **Year Ended December 31**               | ** ** | **2007**   | ** ** | **2006** | ** ** |
|------------------------------------------|------------|------------|------------|----------|------------|
| Net current deferred tax assets          | ** ** | **$**      | **8,071**  |     | $          | 5,727 |   |
| Net non-current deferred tax assets      | ** ** | **5,828**  |       | 5,732    |       |
| Total net deferred tax assets            | ** ** | **13,899** |       | 11,459   |       |
|                                     |       |       |       |     |       |
| Net current deferred tax liabilities     | ** ** | **(312**   | **)**      | (338     | )          |
| Net non-current deferred tax liabilities | ** ** | **(424**   | **)**      | (454     | )          |
| Total net deferred tax liabilities       | ** ** | **(736**   | **)**      | (792     | )          |
|                                     |       |       |       |     |       |
| Total deferred tax assets, net           | ** ** | **$**      | **13,163** |     | $          | 10,667 |   |

 

Net current deferred tax liabilities areincluded in accrued liabilities and net non-current deferred tax liabilitiesare included in other liabilities in the consolidated balance sheets.

 

Management has provided a valuation allowanceof $11,290 and $7,822 as of December 31, 2007 and 2006, respectively, forcertain deferred tax assets, including foreign net operating losses and foreigntax credits, for which management cannot conclude it is more likely than notthat they will be realized. The Company reviewed its tax positions andincreased its valuation allowance by approximately $3,468 and $2,525 for 2007and 2006, respectively, and decreased its valuation allowance by $259 for 2005.

 

At December 31, 2007, foreignsubsidiaries had unused operating loss carryovers of approximately $7,705.Generally, the tax net operating losses will expire at various dates from 2008through 2012. For financial reporting purposes, the release of these valuationallowances would reduce income tax expenses. The Company has approximately$3,348 of foreign tax credits which begin to expire at various times startingin 2012.

 

The Company is subject to regular audits byfederal, state and foreign tax authorities. These audits may result inadditional tax liabilities. The Company believes it has appropriately providedfor income taxes for all years. Several factors drive the calculation of itstax reserves. Some of these factors include: (i) the expiration of variousstatutes 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.

 

51

----

Tableof Contents

 

The Company’s federal income tax returns for2002 through 2007 are open to examination for federal tax purposes. The Companyhas several foreign tax jurisdictions which have open tax years from 2000through 2007. The IRS is currently conducting an audit of the Company’s U.S.federal income tax returns for the 2003 through 2005 tax years. The Companybelieves the outcome of these matters will not have a material adverse effecton the consolidated results of operations or consolidated financial position.

 

The Company adopted the provisions of FIN 48on January 1, 2007, which did not result in a cumulative-effectadjustment. The total liability for unrecognized tax benefits at January 1,2007, including accrued interest and penalties of approximately $2,501, wasapproximately $11,156 all of which would favorably impact the Company’s effectivetax rate if recognized. The Company accounts for interest expense and penaltiesfor unrecognized tax benefits as part of its income tax provision. The Companyanticipates that unrecognized tax benefits will increase approximately $2,000to $3,600 within the next twelve months due to additional transactions relatedto commissions and transfer pricing.

 

During the twelve-month period ended December 31,2007, the Company added approximately $4,728 to its liability for unrecognizedtax benefits all of which would favorably impact its effective tax rate ifrecognized. Included in this amount is approximately $1,773 for thetwelve-month period ended December 31, 2007, related to interest expenseand penalties. In addition, the Company recorded an unrecognized tax benefitrelated to the lapse of applicable statue of limitations of approximately $64all of which favorably impacted its effective tax rate. The total outstandingbalance for liabilities related to unrecognized tax benefits at December 31,2007 was $15,820, which included the liability related to unrecognized taxpositions in the consolidated financial statements.

 

Prior to the adoption of FIN 48 in 2007, thecompany has historically recorded uncertain tax positions in accordance withSFAS No. 5, and has included such amounts in accrued liabilities. Inconjunction with the adoption of FIN 48, as of December 31, 2007, theCompany has reclassified such tax uncertainties out of accrued liabilities inaccordance with FIN 48 as follows:

 

1)     Reduction in accrued liabilities ofapproximately $15,820

2)     Increase in other assets (due to competentauthority and royalty benefits) of approximately $10,068

3)     Increase in liability related tounrecognized tax positions of approximately $25,888

 

Although the Company believes its estimatesare reasonable, the Company can make no assurance that the final tax outcome ofthese matters will not be different from that which it has reflected in itshistorical income tax provisions and accruals. Such difference could have a materialimpact on the Company’s income tax provision and operating results in theperiod in which the Company makes such determination.

 

A reconciliation of the beginning and endingamount of liabilities associated with uncertain tax positions, excluding interestand penalties, is as follows for the year ended December 31, 2007:

 
| ** **                                 | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|
|                                       |       |     |       |
| Unrecognized tax benefits, opening balance |       | $        | 13,030     |   |
| Tax positions taken in a prior period      |       |     |       |
| Gross increases                            |       | —   |       |
| Gross decreases                            |       | —   |       |
| Tax positions taken in the current period  |       |     |       |
| Gross increases                            |       | 8,592    |       |
| Gross decreases                            |       | —   |       |
| Settlements with taxing authorities        |       | —   |       |
| Lapse of applicable statute of limitations |       | (8       | )          |
| Unrecognized tax benefits, ending balance  |       | $        | 21,614     |   |

 

**NOTE 9:  CAPITAL TRANSACTIONS**

 

**CommonStock**

 

During 2007 and 2006, the Company did notrepurchase any shares of common stock. During 2005, the Company repurchased 513shares of common stock for a total of $11,363 upon the completion of DutchAuction tender offers. The Dutch Auction tender offers were open to allshareholders of the Company including employees. Employees were required totender outstanding shares and be at risk consistent with all shareholders. Therepurchased shares have been accounted for as retired shares.

 

52

----

Tableof Contents

 

**Share-BasedCompensation**

 

TheCompany maintained a stock option plan, which expired in 2005 (“the Plan”). ThePlan provided for the granting or awarding of certain nonqualified stockoptions to officers, directors and other employees. The term, not to exceed 10years, and the vesting and exercise period of each stock option awarded underthe Plan were determined by the Company’s Board of Directors. All grants weremade at the quoted fair market value of the stock at the date of grant.

 

Stockoption activity for 2007, 2006, and 2005 consisted of the following:

 
| ** **                                    | ** ** | **Number of  Shares** | ** ** | **Weighted Average Exercise  Price Per Share** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------------|------------|
| Options outstanding at January 1, 2005   |       | 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                                                              |       |
| Granted                                       |       | 140                        |       | 11.85                                                              |       |
| Forfeited or canceled                         |       | (102                       | )          | 10.74                                                              |       |
| Exercised                                     |       | (163                       | )          | 7.69                                                               |       |
| Options outstanding at December 31, 2007 |       | 307                        |       | $                                                                  | 12.01      |   |

 

Theweighted average grant date fair value of options granted was $3.85 for theyear ended December 31, 2007. The aggregate intrinsic values on the datesof exercise of options exercised during the years ended December 31, 2007,2006, and 2005 were $623, $567, and $9,981, 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.

 

Duringthe year ended December 31, 2007, the Company issued 140 nonqualifiedstock options outside the stock option plan. The fair value of each optiongrant was estimated on the date of the grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions for theyear ended December 31, 2007:

 
| ** **               | ** ** | **2007** | ** ** |
|--------------------------|------------|----------|------------|
| Expected life (in years) |       | 3.5      |       |
| Risk-free interest rate  |       | 4.5      | %          |
| Expected volatility      |       | 42.88    | %          |
| Dividend yield           |       | 1.76     | %          |

 

Expectedoption lives and volatilities are based on historical data of the Company. Ourrisk free interest rate is calculated as the average U.S. Treasury bill ratethat corresponds with the option life. The Company has paid cash dividendstotaling $3,102, $3,069, and $3,053 for the years ended December 31, 2007,2006, and 2005, respectively.

 

Share-basedcompensation expense from nonqualified stock options for the years ended December 31,2007 was approximately $326 and the related tax benefit was approximately $124.There was no share-based compensation expense in 2006 and 2005. As of December 31,2007, there was approximately $86 of total unrecognized share-basedcompensation cost related to grants described above that will be recognizedover a weighted-average period of 0.25 years.

 

Thefollowing table summarizes information about options outstanding andexercisable at December 31, 2007.

 

53

----

Table of Contents

 
| ** **                                                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                        | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Option  Prices Per Share** | ** ** | **Options  Outstanding**     | ** ** | **Weighted-Avg.  Remaining  Contractual Life** | ** ** | **Weighted-Avg.  Exercise Price  Per Share** | ** ** | **Options  Outstanding** | ** ** | **Weighted-  Avg. Exercise  Price Per  Share** | ** ** |
| $6.87 to $9.99                                            |       | 32                           |       | 4.9                                                 |       | $ | 8.35 |   | 32 |   | $ | 8.35 |   |
| $10.00 to $11.99                                          |       | 163                          |       | 5.1                                                 |       | 11.73 |   | 23 |   | 11.02 |   |
| $12.00 to $19.71                                          |       | 112                          |       | 1.4                                                 |       | 13.45 |   | 112 |   | 13.45 |   |
|                                                      |       | 307                          |       | 3.7                                                 |       | $ | 12.01 |   | 167 |   | $ | 12.14 |   |

 

The aggregate intrinsic value of 307 optionsvested and expected to vest was $36 at December 31, 2007.  The aggregate intrinsic value of optionsoutstanding and exercisable at December 31, 2007 was $36.

 

**NOTE 10:  EMPLOYEE BENEFIT PLANS**

 

**Deferred Compensation Plans**

 

TheCompany sponsors a qualified deferred compensation plan, which qualifies under Section 401(k) ofthe Internal Revenue Code. The Company makes matching contributions of 100percent of employee contributions up to a maximum of five percent of theemployee’s compensation. The Company’s contributions to the plan vest after aperiod of three years. During 2007, 2006, and 2005, the Company contributed tothe plan approximately $1,087, $887, and $970, 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 of eitherthree 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 $1,674 and $1,594 as of December 31,2007 and December 31, 2006, respectively. The change in the liabilityassociated with the deferred compensation plan is recorded in the deferredcompensation payable.

 

**Managementand Employee Bonus Plan**

 

The Company has a discretionary bonus planthat provides for participants to receive payments based upon the achievementof specified annual increases in net sales revenue and operating income, aswell as individual objectives. The expense related to the bonus plan wasapproximately $3,580, $2,325, and $2,449 for the years ended December 31,2007, 2006, and 2005, respectively. These amounts were accrued as liabilitiesin the respective year-end consolidated balance sheets. All United Statesemployees as well as key international employees participate in the bonus plan.

 

**NOTE 11:  COMMITMENTS ANDCONTINGENCIES**

 

**Contractual Obligations**

 

TheCompany leases certain facilities and equipment used in its operations andaccounts for leases with escalating payments using the straight-line method.The Company incurred expenses of approximately $5,358, $5,496, and $3,863 inconnection with operating leases during 2007, 2006, and 2005, respectively. Theapproximate aggregate commitments under non-cancelable operating leases ineffect at December 31, 2007 were as follows:

 
| **Year Ending December 31** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2008                                       |       | $          | 4,145      |   |
| 2009                                       |       | 2,528      |       |
| 2010                                       |       | 1,105      |       |
| 2011                                       |       | 619        |       |
| 2012                                       |       | 349        |       |
| Thereafter                                 |       | 154        |       |
|                                       |       | $          | 8,900      |   |

 

TheCompany enters into contracts with suppliers to ensure the availability of bothbotanical and non-botanical raw materials, as well as packing materials, inadvance of its annual requirements. As of December 31, 2007, the Companyhas entered into non-cancelable purchase agreements for $9,206 related tofiscal year 2008 production needs.

 

54

----

Table of Contents

 

**LegalProceedings**

 

Currently,the Company is a party to various legal proceedings, including those notedbelow. Management cannot predict the ultimate outcome of these proceedings,individually or in the aggregate, or their resulting effect on the Company’sbusiness, financial position, results of operations or prospects as litigationand related matters are subject to inherent uncertainties, and unfavorablerulings could occur. Were an unfavorable outcome to occur, there exists thepossibility of a material adverse impact on the business, financial position,results of operations or prospects for the period in which the ruling occurs orfuture periods. The Company maintains directors and officers liability, productliability, general liability and excess liability insurance coverage. However,no assurances can be given that such insurance will continue to be available atan acceptable cost to the Company, that such coverage will be sufficient tocover one or more large claims, or that the insurers will not successfullydisclaim coverage as to a pending or future claim.

 

**Class Action Litigation**

 

Between April 3, 2006 and June 2,2006, five separate shareholder class action lawsuits were filed against theCompany and certain of its present and former officers and directors in theUnited States District Court for the District of Utah. These matters wereconsolidated and on November 3, 2006, the plaintiffs filed a ConsolidatedComplaint against the Company, the Company’s Chief Executive Officer and formerdirector, Douglas Faggioli, the Company’s former Chief Financial Officer, CraigD. Huff, and a former director and former Chair of the Company’s AuditCommittee, Franz L. Cristiani. The Consolidated Complaint asserts threeseparate claims on behalf of purchasers of the Company’s common stock: (1) aclaim against Mr. Faggioli and the Company for violation of Section 10(b) ofthe Exchange Act and 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 of misrepresentationsto the Company’s then independent auditor, KPMG, LLP (“KPMG”), for the purposeof obtaining unqualified or “clean” audit opinions and review opinions fromKPMG concerning certain of the Company’s annual and quarterly financialstatements; and (3) a claim against Messrs. Faggioli, Huff andCristiani for violation of Section 20(a) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”), alleging that the individualdefendants have “control person” liability for the previously-allegedviolations by the Company. The Consolidated Complaint seeks an unspecifiedamount of compensatory damages, together with interest thereon, litigationcosts and expenses, including attorneys’ fees and expert fees, and any suchother and further relief as may be allowed by law.

 

On January 5, 2007, the Company and Messrs. Faggioli,Huff and Cristiani moved to dismiss the Consolidated Complaint in its entirety.On May 21, 2007, the court issued its decision denying the motion in largepart, but shortening the proposed class period on one of the plaintiffs’claims. On June 6, 2007, the Company and the other defendants answered theConsolidated Complaint, wherein they denied all allegations of wrongdoing andraised a number of affirmative defenses. On November 1, 2007, theplaintiffs filed their motion for class certification, which the Companyopposed. On September 25, 2008, the court granted the plaintiffs’ motionfor class certification in part, establishing the class as all persons whopurchased or otherwise acquired the Company’s common stock, and were damagedthereby, from March 16, 2005 to March 20, 2006. On May 9, 2008,at the invitation of the Court based upon recent case law developments, theCompany 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 mayprovide coverage for the potential consequences of a negative outcome of thelitigation described above. The Company has given notice to its insurers of theclaims and the insurers have responded by requesting additional information andby reserving 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.

 

**Threatened Derivative Lawsuits**

 

By letter dated October 4, 2007, ashareholder of the Company alleged that a number of the current and formerofficers and directors of the Company breached their fiduciary duties to theCompany by supposedly engaging in the same alleged wrongdoing that 

 

55

----

Table of Contents

 

is the subject of the classaction lawsuit. The shareholder demanded that the Company take action torecover from the specified officers and directors all damages sustained by theCompany as a result of the alleged misconduct, and threatened to commence aderivative action if the Company failed to act on the shareholder’s demandwithin a reasonable period of time.

 

On December 26, 2007, before theexpiration of the Company’s allotted 90-day period for responding to thedemand, the shareholder presented a second but substantively identical demandon the Company, thereby triggering a new 90-day response period. The Company’sBoard of Directors responded to this demand on March 20, 2008, rejectingthe shareholder’s demands.

 

On May 21, 2008, this same shareholderfiled a summons and complaint in the Fourth Judicial District Court for theState of Utah seeking an order compelling the Company to produce certain booksand records to the shareholder. The Company filed its answer to the complainton June 12, 2008.

 

Although the Company and the other defendantsare vigorously 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 and DOJ Investigations**

 

In March 2006, the Company voluntarilydisclosed 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. TheCompany is cooperating fully with this investigation. The Company cannotpredict what impact, if any, and the materiality of such impact, if any, theconclusion of this matter may have on our financial statements.

 

In March 2006, the Company voluntarilydisclosed to the United States Department of Justice (“DOJ”) certaininformation related to the independent investigation by the Company’s AuditCommittee. Since that time, the DOJ has requested that the Company voluntarilyprovide documents and other information in connection with its subsequentinvestigation related to these events. The Company is cooperating fully withthis investigation. The Company cannot predict what impact, if any, and themateriality of such impact, if any, the conclusion of this matter may have onthe Company’s financial statements.

 

**SEC Section 12(j) Proceeding**

 

On July 12, 2007, the Company announcedthat the SEC 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 on October 1,2008. The SEC has now rescheduled the oral argument for an unspecified futuredate. The Company cannot predict the outcome of such review at this time. TheInitial Decision of the administrative law judge will not become effectivepending the review. The Company 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 theCompany files a new registration with the SEC under the Exchange Act and thatregistration is made effective.

 

**Self-Insurance Liabilities**

 

Similar to other manufacturers anddistributors of products that are ingested, the Company faces an inherent riskof exposure to product liability claims in the event that, among other things,the use of its products results in injury. Effective April 12, 2004, theCompany complied with the FDA’s ban on the ingredient ephedra. The Companycarries insurance in the types and amounts it considers reasonably adequate tocover the risks associated with its business. On June 1, 2003, the Companyestablished a wholly owned captive insurance company to provide it with productliability insurance coverage. The Company has accrued an amount that itbelieves is sufficient to cover probable and reasonably estimable liabilitiesrelated to product liability claims based on the Company’s history of suchclaims. However, there can be no assurance that these estimates will prove tobe sufficient 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.

 

56

----

Table of Contents

 

The Company self-insures for certain employeemedical benefits. The recorded liabilities for self-insured risks arecalculated using actuarial methods and are not discounted. The liabilitiesinclude amounts for actual claims and claims incurred but not reported. Actualexperience, including claim frequency and severity as well as health careinflation, could result in actual liabilities being more or less than theamounts currently recorded.

 

The Company has accrued $2,306 and $1,503 forproduct liability and employee medical claims at December 31, 2007 and2006, respectively, and such amounts are included in accrued liabilities on theCompany’s consolidated balance sheets.

 

**Employee-Related Litigation**

 

One of the Company’s foreign subsidiaries isa defendant in litigation regarding primarily employee-related matters. TheCompany has recorded accruals of approximately $600 and $836 related to thislitigation at December 31, 2007 and 2006, respectively, which is includedin accrued liabilities.

 

**Tax Contingencies**

 

The Company has reserved for uncertain taxpositions and certain state sales and use tax contingencies based on thelikelihood of an obligation in accordance with SFAS No. 5, “Accounting forContingencies.” Under SFAS No. 5, loss contingency provisions are recordedfor probable losses at management’s best estimate of a loss, or when a bestestimate cannot be made, a minimum loss contingency amount is recorded.  The Company provides provisions for potentialpayments of income and other tax to various tax authorities for contingenciesrelated to uncertain tax position and other issues.  The Company also provides provisions forstate sales taxes in each of the states where the Company has potential nexus.At December 31, 2006, the Company accrued $21,661 (including estimatedinterest and penalties) in accrued liabilities in the accompanying consolidatedbalance sheets for such uncertain tax positions ($12,242) and various othernon-income tax contingencies ($9,419). During 2007, in conjunction with theadoption of FIN 48, the Company reclassified all uncertain tax contingencies(including interest and penalties) out of accrued liabilities as discussed inNote 8. As of December 31, 2007, accrued liabilities includes $14,393related to non-income tax contingencies. 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 outcomes of those matters orto estimate the effect the ultimate outcomes, if greater than the amountsaccrued, would have on the financial condition of the Company.

 

**Government Regulations**

 

The Company is subject to governmentalregulations pertaining to product formulation, labeling and packaging, productclaims and advertising, and to the Company’s direct selling system. The Companyis also subject to the jurisdiction of numerous foreign tax and customsauthorities. Any assertions or determination that either the Company or theCompany’s Distributors are not in compliance with existing statutes, laws, rules orregulations could potentially have a material adverse effect on the Company’soperations. In addition, in any country or jurisdiction, the adoption of newstatutes, laws, rules or regulations, or changes in the interpretation ofexisting statutes, laws, rules or regulations could have a materialadverse effect on the Company and its operations. Although management believesthat the Company is in compliance, in all material respects, with the statutes,laws, rules and regulations of every jurisdiction in which it operates, noassurance can be given that the Company’s compliance with applicable statutes,laws, rules and regulations will not be challenged by foreign authoritiesor that such challenges will not have a material adverse effect on the Company’sfinancial position or results of operations or cash flows.

 

**NOTE 12:  OPERATING BUSINESS SEGMENT AND INTERNATIONALOPERATION INFORMATION**

 

TheCompany has three operating business segments. These operating segments arecomponents of the Company for which separate information is available that isevaluated regularly by the chief operating decision maker in deciding how toallocate resources and in assessing performance.

 

TheCompany has two operating business segments based on geographic operations thatinclude a United States segment and an international segment that operate underthe Nature’s Sunshine Products name. The Company’s third operating businesssegment is Synergy Worldwide, which offers products with formulations differentfrom those of the Nature’s Sunshine Products offerings. In addition, SynergyWorldwide’s marketing and Distributor compensation plans are sufficientlydifferent from those of Nature’s Sunshine Products. The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies in Note 1. Sales revenues for each segment have beenreduced by any intercompany sales as they are not included in the measure ofsegment profit or loss reviewed by the chief operating decision maker. TheCompany evaluates performance based on operating income (loss) by segmentbefore consideration of certain inter-segment transfers and expenses.

 

57

----

Table of Contents

 

Operating businesssegment information for the years ended December 31, 2007, 2006, and 2005is as follows:

 
| **Year Ended December 31** | ** ** | **2007**    | ** **  | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Sales Revenue:                            |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **$**       | **148,254** |     | $          | 148,374  |       | $ | 148,325 |   |
| International                             | ** ** | **149,822** |        | 130,596  |       | 119,988  |       |
| ** **                                |       | **298,076** |        | 278,970  |       | 268,313  |       |
| Synergy Worldwide                         | ** ** | **68,571**  |        | 83,252   |       | 83,371   |       |
| Total sales revenue                       | ** ** | **366,647** |        | 362,222  |       | 351,684  |       |
| Operating Expenses:                       |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **153,522** |        | 152,446  |       | 149,265  |       |
| International                             | ** ** | **137,123** |        | 118,976  |       | 104,262  |       |
| ** **                                |       | **290,645** |        | 271,422  |       | 253,527  |       |
| Synergy Worldwide                         | ** ** | **72,941**  |        | 82,795   |       | 86,572   |       |
| Total operating expenses                  | ** ** | **363,586** |        | 354,217  |       | 340,099  |       |
| Operating Income (Loss):                  |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **(5,268**  | **)**       | (4,072   | )          | (940     | )          |
| International                             | ** ** | **12,699**  |        | 11,620   |       | 15,726   |       |
| ** **                                |       | **7,431**   |        | 7,548    |       | 14,786   |       |
| Synergy Worldwide                         | ** ** | **(4,370**  | **)**       | 457      |       | (3,201   | )          |
| Total operating income                    | ** ** | **3,061**   |        | 8,005    |       | 11,585   |       |
|                                      |       |        |        |     |       |     |       |
| Other Income (Expense), net               | ** ** | **1,404**   |        | 624      |       | (162     | )          |
| Income Before Provision for Income Taxes  | ** ** | **$**       | **4,465**   |     | $          | 8,629    |       | $ | 11,423 |   |

 
| **Year Ended December 31** | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Capital Expenditures:                     |       |      |       |     |       |     |       |
| Nature’s Sunshine Products:          |       |      |       |     |       |     |       |
| United States                             | ** ** | **$**     | **3,000**  |     | $          | 1,488    |       | $ | 2,896 |   |
| International                             | ** ** | **422**   |       | 630      |       | 609      |       |
| ** **                                |       | **3,422** |       | 2,118    |       | 3,505    |       |
| Synergy Worldwide                         | ** ** | **974**   |       | 605      |       | 868      |       |
| Total capital expenditures                | ** ** | **$**     | **4,396**  |     | $          | 2,723    |       | $ | 4,373 |   |
| Depreciation and Amortization:            |       |      |       |     |       |     |       |
| Nature’s Sunshine Products:          |       |      |       |     |       |     |       |
| United States                             | ** ** | **$**     | **3,729**  |     | $          | 4,074    |       | $ | 3,834 |   |
| International                             | ** ** | **1,161** |       | 854      |       | 1,175    |       |
| ** **                                |       | **4,890** |       | 4,928    |       | 5,009    |       |
| Synergy Worldwide                         | ** ** | **1,519** |       | 1,296    |       | 950      |       |
| Total depreciation and amortization       | ** ** | **$**     | **6,409**  |     | $          | 6,224    |       | $ | 5,959 |   |

 
| **As of December 31** | ** ** | **2007**    | ** **  | **2006** | ** ** |
|--------------------------------------|------------|-------------|-------------|----------|------------|
| Assets:                              |       |        |        |     |       |
| Nature’s Sunshine Products      |       |        |        |     |       |
| United States                        | ** ** | **$**       | **93,322**  |     | $          | 86,045 |   |
| International                        | ** ** | **47,223**  |        | 39,420   |       |
| ** **                           |       | **140,545** |        | 125,465  |       |
| Synergy Worldwide                    | ** ** | **24,793**  |        | 22,882   |       |
| Total Assets                         | ** ** | **$**       | **165,338** |     | $          | 148,347 |   |

 

58

----

Tableof Contents

 

From an individual country perspective, onlythe United States, Japan, and Russia comprise approximately 10 percent or moreof consolidated net sales revenue for any of the years ended December 31,2007, 2006, and 2005 as follows:

 
| **Year Ended December 31** | ** ** | **2007**    | ** **  | **2006**    | ** ** | **2005**    | ** ** |
|-------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| Sales Revenue:                            |       |        |        |        |       |        |       |
| United States                             | ** ** | **$**       | **152,943** | ** **  | **$**      | **157,132** |       | $ | 158,052 |   |
| Japan                                     | ** ** | **45,554**  | ** **  | **52,301**  |       | 55,540      |       |
| Russia                                    | ** ** | **34,314**  | ** **  | **28,394**  |       | 23,710      |       |
| Other                                     | ** ** | **133,836** | ** **  | **124,395** |       | 114,382     |       |
| Total Sales Revenue                       | ** ** | **$**       | **366,647** | ** **  | **$**      | **362,222** |       | $ | 351,684 |   |

 

From an individual country perspective, onlythe United States comprises 10 percent or more of consolidated long-livedassets, consisting of property, plant and equipment and intangible assets, asfollows:

 
| **As of December 31** | ** ** | **2007**  | ** ** | **2006** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|
| Long-Lived Assets                    |       |      |       |     |       |
| United States                        | ** ** | **$**     | **25,022** |     | $          | 25,601 |   |
| Other                                | ** ** | **4,916** |       | 5,735    |       |
| Total Long-Lived Assets              | ** ** | **$**     | **29,938** |     | $          | 31,336 |   |

 

**NOTE 13:  RELATED PARTYTRANSACTIONS**

 

The Company maintains split-dollar lifeinsurance policies on certain executives. The cash surrender value of $294 and$313 related to such policies is recorded in other assets as of December 31,2007 and 2006, respectively.

 

**NOTE 14:  SUBSEQUENT EVENTS**

 

In January 2008,the Company purchased a warehouse in Venezuela for approximately $4,000. Thewarehouse was purchased with cash from cash balances maintained in Venezuela.

 

Since December 31,2007, the Company has declared quarterly cash dividends of five cents percommon share.

 

**NOTE 15:  SUMMARY OF QUARTERLYOPERATIONS (SEE NOTE 1) — UNAUDITED**

 

As part of the Company’s review of the quarterlyresults for 2008, it identified errors in the unaudited quarterly results forthe fiscal year 2007 previously disclosed in its Annual Report on Form 10-Kfor the year ended December 31, 2007. The errors were related to the misapplication of quarterly consolidationentries to recognize or defer the timing of revenue recognition, and thedirectly related costs and expenses, of customer orders related to when titlepasses upon delivery, consistent with the Company’s policy and the correctionof certain cost of sales and selling, general and administrative expenses tothe appropriate quarters. The quarterly tax provision amounts were alsocorrected to primarily reflect the impact of the corrections noted above and toadjust for certain other tax provision amounts in accordance with interim taxprovision guidance.  The Companydetermined that while the amounts for the fiscal year ended 2007 were correct;amounts were incorrectly recorded in the four unaudited quarterly results. As aresult, the Company has recorded adjustments to each of the summary quarterlyresults presented in Note 15 of the Company’s Annual Report on Form 10-K.  Consequently, net sales revenue, operatingincome, and diluted earnings per share increased by approximately $1,692, $3,821and $0.06 per share, respectively, for the three months ended March 31,2007; net sales revenue and operating income increased by $705 and $1,850,respectively; and diluted earnings per share decreased by $0.06 per share, forthe three months ended June 30, 2007; net sales revenue and dilutedearnings per share increased $1,639 and $0.16 per share, respectively;operating losses increased by $2,238 for the three months ended September 30,2008; and net sales revenue, operating income, and diluted earnings per sharedecreased $4,036, $3,433, and $0.16 per share, respectively, for the threemonths ended December 31, 2007.

 

There was no impact on beginning or ending retainedearnings, revenues, or expenses for the fiscal year ended December 31,2007, as a result of this adjustment.

 

The following tablespresent the impact of the restatement adjustments on the Company’s unauditedsummary of quarterly operations for each of the three month periods ended March 31,2007, June 31, 2007, September 31, 2007, and December 31, 2007(amounts in thousands):

 

59

----

Tableof Contents

 
| ** **                           | ** ** | **For the Quarters Ended** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **March 31, 2007**              | ** ** | **June 30, 2007** | ** ** | **September 30, 2007** | ** ** | **December 31, 2007** | ** ** |
| ** **                           | ** ** | **As Previously  Presented**         | ** ** | **As Restated** | ** ** | **As  Previously  Presented** | ** ** | **As Restated** | ** ** | **As  Previously  Presented** | ** ** | **As  Restated** | ** ** | **As  Previously  Presented** | ** ** | **As  Restated** | ** ** |
| Net  sales revenue                   |       | $                                         | 91,986     |   | $ | 93,678 |   | $ | 89,831 |   | $ | 90,536 |   | $ | 86,574 |   | $ | 88,213 |   | $ | 98,256 |   | $ | 94,220 |   |
| Cost  of goods sold                  |       | 19,106                                    |       | 18,520 |   | 17,934 |   | 15,939 |   | 15,744 |   | 18,325 |   | 18,212 |   | 18,212 |   |
| Volume  incentives                   |       | 37,809                                    |       | 36,666 |   | 35,385 |   | 35,734 |   | 34,346 |   | 35,140 |   | 36,344 |   | 36,344 |   |
| Selling,  general and administrative |       | 36,305                                    |       | 35,905 |   | 34,720 |   | 35,221 |   | 39,056 |   | 39,558 |   | 38,625 |   | 38,022 |   |
| Operating  (loss) income             |       | (1,234                                    | )          | 2,587 |   | 1,792 |   | 3,642 |   | (2,572 | ) | (4,810 | ) | 5,075 |   | 1,642 |   |
| Other  income and expenses, net      |       | 949                                       |       | 949 |   | 160 |   | 160 |   | 426 |   | 426 |   | (131 | ) | (131 | ) |
| (Loss)  income before income taxes   |       | (285                                      | )          | 3,536 |   | 1,952 |   | 3,802 |   | (2,146 | ) | (4,384 | ) | 4,944 |   | 1,511 |   |
| Taxes                                |       | 2,622                                     |       | 5,470 |   | 3,506 |   | 6,242 |   | 1,887 |   | (2,761 | ) | 4,687 |   | 3,751 |   |
| Net  loss                            |       | (2,907                                    | )          | (1,934 | ) | (1,554 | ) | (2,440 | ) | (4,033 | ) | (1,623 | ) | 257 |   | (2,240 | ) |
| Basic  net loss per share            |       | (0.19                                     | )          | (0.13 | ) | (0.10 | ) | (0.16 | ) | (0.26 | ) | (0.10 | ) | 0.02 |   | (0.14 | ) |
| Diluted  net loss per share          |       | (0.19                                     | )          | (0.13 | ) | (0.10 | ) | (0.16 | ) | (0.26 | ) | (0.10 | ) | 0.02 |   | (0.14 | ) |
|                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table displays the unauditedinterim consolidated statements of operations 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 | ) |
|                                     |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

Basic and diluted net income (loss) per shareare computed independently for each of the quarters presented. Therefore, thesum of the quarterly earnings per share may not equal the total computed forthe year.

 

**Item 9. Change In and Disagreements withAccountants on Accounting and Financial Disclosure**

 

NONE

 

**Item 9A. Controls and Procedures**

 

This Report includes the certifications ofour Chief Executive Officer and Chief Financial Officer required by Rule 13a-14of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1and 31.2. This Item 9A includes information concerning the controls and controlevaluations referred to in those certifications.

 

OVERVIEW

 

Management identified certain materialweaknesses which are described in the 2006 10-K. During 2007 and through thedate of this filing, management has been focused on remediating these materialweaknesses. This overview provides a summary of the status of each of thepreviously identified material weaknesses, followed by a discussion ofmanagement’s evaluation of disclosure controls 

 

60

----

Tableof Contents

 

and procedures, management’s report on internal control over financialreporting, and management’s efforts to remediate the material weaknesses, asset forth in the table below.

 

As shown below, one material weaknessreported as of December 31, 2006 was remediated as of December 31,2007.  Other material weaknesses reportedas of December 31, 2006 remain material weaknesses as of December 31,2007, for which management continues to remediate.

 
| **Material  Weakness Reported  as of December 31, 2006** | ** ** | **Status as of  December 31, 2007** | ** ** | **Status as of the Date  of this Filing** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------|
|                                                          |       |                                     |       |                                      |
| Control Environment:                                          |       |                                     |       |                                      |
| Accounting Policies                                           |       | Remediated                               |       | Remediated                                |
| Maintenance of Risk Assessment Programs                       |       | Remediation in process                   |       | Remediation in process                    |
|                                                          |       |                                     |       |                                      |
| Application of GAAP                                           |       | Remediation in process                   |       | Remediation in process                    |
|                                                          |       |                                     |       |                                      |
| Accounting for Income Taxes                                   |       | Remediation in process                   |       | Remediation in process                    |
|                                                          |       |                                     |       |                                      |
| Financial Reporting Process                                   |       | Remediation in process                   |       | Remediation in process                    |
|                                                          |       |                                     |       |                                      |
| Monitoring of Service Provider                                |       | Remediation in process                   |       | Remediation in process                    |
|                                                          |       |                                     |       |                                      |
| Information Technology:                                       |       |                                     |       |                                      |
| Access Control                                                |       | Remediation in process                   |       | Remediation in process                    |
| Change Management                                             |       | Remediation in process                   |       | Remediation in process                    |
| Spreadsheets                                                  |       | Remediation in process                   |       | Remediation in process                    |

 

**Evaluation of Disclosure Controls andProcedures**

 

Disclosure controls and procedures (asdefined in Rule 13a-15(e) under the Exchange Act) are designed toensure that information required to be disclosed in reports filed or submittedunder the Exchange Act is recorded, processed, summarized, and reported withinthe time periods specified in rules and forms adopted by the Securitiesand Exchange Commission (SEC), and that such information is accumulated andcommunicated to management, including the chief executive officer and the chieffinancial officer, to allow timely decisions regarding required disclosures.

 

In connection with the preparation of thisreport, the Company’s management, under the supervision and with theparticipation of the Chief Executive Officer and Chief Financial Officer,assessed the effectiveness of the design and operation of our disclosurecontrols and procedures. Based on that evaluation, our Chief Executive Officerand Chief Financial Officer have concluded that our disclosure controls andprocedures were not effective as of December 31, 2007, as a result of theexistence of material weaknesses in our internal control over financialreporting.

 

Since December 31, 2006, we have madesignificant progress in improving our disclosure controls and procedures. Wehave taken, and are taking, the actions described below under “Management’sPlan to Remediate Material Weaknesses” to remediate the remaining materialweaknesses in our internal control over financial reporting.

 

We continue to strive to improve ourprocesses to enable us to provide complete and accurate public disclosure on atimely basis. Management believes that we will not be able to conclude that ourdisclosure controls and procedures are effective until the material weaknesseshave been fully remediated and we are able to file required reports with theSEC on a timely basis.

 

Nevertheless, based on management’s internalreview of our processes and procedures, efforts to remediate the materialweaknesses in internal control over financial reporting described below and theperformance of additional procedures by management designed to ensure thereliability 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.

 

61

----

Tableof Contents

 

**Management’s Report on Internal Control overFinancial Reporting**

 

*Overview*

 

Our management is responsible forestablishing and maintaining adequate internal control over financialreporting. Internal control over financial reporting is defined in Rule 13a-15(f) underthe Exchange Act as a process designed by, or under the supervision of, ourprincipal executive and principal financial officers and effected by our boardof directors, management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America, and includesthose policies and procedures that:

 
| · |   | Pertain to the maintenance of records that, in reasonable detail,  accurately and fairly reflect the transactions and dispositions of our  assets;                                                                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Provide reasonable assurance that transactions are recorded as  necessary to permit preparation of financial statements in accordance with  accounting principles generally accepted in the United States of America, and  that our receipts and expenditures are being made only in accordance with  authorization of management and directors; and |
|   |   |                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Provide reasonable assurance regarding prevention or timely detection  of unauthorized acquisition, use or disposition of our assets that could have  a material effect on the financial statements.                                                                                                                                                 |

 

Because of the inherent limitations ofinternal control over financial reporting, including the possibility ofcollusion or improper management override of controls, material misstatementsdue to error or fraud may not be prevented or detected on a timely basis. Also,projections of any evaluation of effectiveness of the internal control overfinancial reporting to future periods are subject to the risk that the controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

*Definition of Material Weakness*

 

A “material weakness” is defined under SEC rules asa deficiency, or a combination of deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a materialmisstatement of a company’s annual or interim financial statements will not beprevented or detected on a timely basis by the company’s internal controls.

 

*Management’s Assessment of Internal Controlover Financial Reporting*

 

Management, with the participation of our CEOand our CFO, assessed the effectiveness of our internal control over financialreporting as of December 31, 2007. Management’s assessment of internalcontrol over financial reporting was conducted using the criteria in *Internal Control — Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Management has concluded that the Company didnot maintain effective internal control over financial reporting as of December 31,2007, based on the criteria established in COSO**becauseof the continued existence of material weaknesses related to the controlenvironment, application of generally accepted accounting principles (“GAAP”),accounting for income taxes, the financial reporting process, monitoring of aservice provider, and information technology systems. Certain of these materialweaknesses have resulted in adjustments to the Company’s consolidated financialstatements for the year ended December 31, 2007. A description of thematerial weaknesses relating to each of these areas as of December 31,2007 is included below.

 

Control Environment**—**The Company did not maintain an effective controlenvironment for internal control over financial reporting. Specifically, weconcluded that we did not have appropriate controls in the following area:

 
| · |   | *Maintenance of Risk Assessment Programs* – We  did not maintain an adequate risk oversight function to evaluate and report  on risks to financial reporting throughout the organization, including  completion of a comprehensive, worldwide risk assessment to identify all  potential risk areas and evaluate the adequacy of controls to mitigate  identified risks. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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, and theproper classification of certain balance sheet and income statement accounts.

 

62

----

Table of Contents

 

Accounting for Income Taxes*—*The Company’s processes, procedures and controls relatedto the preparation and review of the annual tax provision were not effective toensure that amounts related to the tax provision and related current ordeferred income tax asset and liability accounts were accurate, recorded in theproper period, and determined in accordance with generally accepted accountingprinciples. Specifically, we 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) file tax returns in certain foreign jurisdictions. Additionally,we had insufficient personnel with appropriate qualifications and training inaccounting for income taxes.

 

Financial Reporting Process*—*The Company did not maintain an effective financialreporting process to prepare financial statements in accordance with generallyaccepted accounting principles. Specifically, our process lacked timely andcomplete financial statement reviews, effective journal entry controls, andappropriate reconciliation processes. Further, we were unable to complete regulatory filings as required bythe rules of the SEC.

 

Monitoring of a Service Provider*—*The Company did not effectively monitor a serviceprovider responsible for managing the entire operations for one of our foreignlocations in terms of an out-sourced arrangement. Transactions are recorded inthe Company’s system based on monthly reporting from the service provider.  The Company had established a monitoringprocess including a recalculation of commissions expense based on salesreported by the service provider, and certain cash and inventory shipmentreconciliation procedures. These monitoring processes and procedures were not,however, performed on a regular basis, and were not adequately documented orreviewed which increased the likelihood of material misstatements in ourfinancial statements.

 

Information Technology Systems**—**The Company did not maintain effective internal controlover financial reporting related to certain information technology applicationsand general computer controls which are considered to have an impact onfinancial reporting and which resulted in a more than reasonable possibilitythat material misstatements in our financial statements would not be preventedor detected. Specifically, we lacked effective controls in the following areas:

 
| · | * * | *Access Control* – The Company did not  maintain effectively designed controls to prevent unauthorized access to  certain programs and data, and provide for periodic review and monitoring of  access including reviews of security logs and analysis of segregation of  duties conflicts.                                                                     |
|--------|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                                                                                                                                                                                                                                 |
| · | * * | *Change Management* – The Company did not  maintain effectively designed controls to ensure that all information  technology program and data changes were authorized, developer access to the  production environment was limited, and that all program and data changes  were adequately tested for accuracy and appropriate implementation.                  |
|   |     |                                                                                                                                                                                                                                                                                                                                                                 |
| · | * * | *Spreadsheets –* The Company did not maintain  effectively designed controls to ensure that critical spreadsheets were  identified, access to these spreadsheets was restricted to appropriate  personnel, changes to data or formulas were authorized and appropriate, or  that the spreadsheets were adequately reviewed by someone other than the  preparer. |

 

Deloitte & Touche LLP, the Company’sindependent registered public accounting firm, issued its attestation report onthe effectiveness of our internal control over financial reporting as of December 31,2007, and expressed an adverse opinion.

 

**Changes in Internal Control Over FinancialReporting**

 

Management has evaluated whether any changesin our internal control over financial reporting that occurred during theperiod from January 1, 2007 through the date of this filing have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting. We anticipate that these changes and other ongoingenhancements and remediation activities, which are described in the “RemediationActivities Related to Material Weaknesses” section below, will continue to havea material impact on our internal control over financial reporting in futureperiods.

 
| · |   | Formalized our accounting policies in 2007 in conjunction with our  enhancement of our documentation of internal control processes and  procedures, and we have performed procedures to standardize our accounting  policies throughout the organization. We have also increased the frequency of  training for the general managers and international subsidiary controllers to  provide for consistent communication of our policies over financial reporting  and internal controls over financial reporting. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | Established an outsourced agreement with a third-party internal audit  service provider to assist with specific internal audit procedures, including  the documentation, and evaluation of design and operating effectiveness of  internal control over                                                                                                                                                                                                                                                          |

 

63

----

Table of Contents

 
|   |   | financial reporting to support management’s 2007 assessment of  internal controls over financial reporting. This included visits during 2007  to certain material foreign locations.                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                        |
| · |   | Performed a complete management assessment of internal controls over  financial reporting in 2007, which included documentation of business  processes and entity level controls and the creation of risk matrixes to  facilitate the evaluation and testing of the Company’s key business processes  and internal control activities. |

 

**Remediation Activities Related to MaterialWeaknesses**

 

In addition, the Company has taken, oranticipates taking, the following additional actions to remediate the specificmaterial weaknesses described above.

 

*Control Environment*— Remediation activities related to our control environment include thefollowing:

 

*Maintenance of Risk Assessment Programs –*****Management has, in conjunction with the assessment ofinternal controls for 2007, identified key financial reporting risks and hasevaluated the adequacy of the internal control procedures to address theidentified risks. This included the completion of comprehensive, worldwideentity level control questionnaires and fraud risk assessments in 2007 bysenior management, the Company’s General Counsel and the Manager of InternalAudit. In addition, the Company enhanced the in-house internal audit functionin 2007 by hiring a Manager of Internal Audit who is a Certified InternalAuditor with direct reporting to the Audit Committee. This has providedenhanced assistance to the Audit Committee in monitoring identified risks andin establishing more robust internal audit plans. In addition, management willcontinue to provide compliance training throughout the worldwide organization.

 

*Application of GAAP —*We have implemented procedures to address revenue recognition issues. 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. Toaddress income statement and balance sheet classification issues, we haveenhanced our close processes and procedures as described in the financial reportingprocess remediation activities below.

 

*Accounting for Income Taxes—*In 2007, we hired a new Tax Director and Tax Accountant and have utilizedvarious out-sourced service providers for tax consulting services to assist inour accounting for income taxes. We continue to evaluate our tax process andtax resource requirements. In 2007 we performed a comprehensive review of ourforeign statutory tax filings, and have assessed the impact of the delinquentfilings and the process that we need to complete these filings. In addition, in2007 and 2008 our management performed an analysis with the assistance ofoutside legal counsel to assess, estimate, and record the exposure related toour uncertain tax positions in accordance with generally accepted accountingprinciples. We continue to evaluate the adequacy of our tax resources.

 

*Financial Reporting Process—*During 2007, we redesigned and implemented improved procedures to providefor enhanced retention of documentation to support sub-ledger and account reconciliations.We are continuing to evaluate the reconciliation process related to clearingaccounts and controls over journal entries. During 2007 and 2008, we enhancedmonthly close procedures to include completion of a formal monthly closechecklist, recurring journal entry checklist, variance analysis of financialstatement fluctuations, enhanced budget to actual reviews, and review andapproval of all accrued liability accounts. In 2008, we hired a FinancialReporting Manager, who brings additional knowledge of GAAP and financialreporting practices. In addition, the Company has added a disclosure committeein 2007 and enhanced our procedures to provide for additional management reviewof financial statements and disclosures.

 

We believe that we will not have fully remediated this materialweakness until we are able to file required reports with the SEC on a timelybasis.

 

*Monitoring of a Service Provider—*We are in the process of redesigning our procedures to more effectivelymonitor the service provider responsible for the management of the operationsof one of our foreign locations. In particular, we are improving our monitoringprocess to ensure that the commissions expense recalculations and otherreconciliations processes (based on information reported by the outside serviceprovider) are performed on a regular basis, documented and reviewed. Inaddition, in conjunction with our 2007 assessment of internal controls, ourout-sourced internal auditor performed a site visit to the foreign location toobserve the facility, interview on site employees of the service provider, andevaluate the internal control procedures of the service provider. Additionalvisits to the location will be conducted as part of internal audit’s overallplan.

 

64

----

Tableof Contents

 

*Information Technology Systems—*During 2007, we implemented the following procedures to enhance ourinformation technology processes and controls:

 

*Access Controls***–** In 2007, management performed a broad and detailedanalysis of user access for the applications we have determined to have amaterial impact on our financial reporting for our domestic locations. We arecontinuing to remediate segregation of duties conflicts. Our management isevaluating the level of risk at material international locations, and willperform additional access reviews at additional international locations asconsidered necessary. The Company is in the process of redesigning usersecurity within our financial reporting systems.

 

During 2007, we improved physical access controls including limitingaccess to certain check printers and our main data center. In addition,management performed an evaluation of the password requirements for certain keyfinancial reporting applications, and implemented strengthened passwords in2007 to improve length, aging, and complexity for our passwords in certain keysystems. We are currently evaluating enhancements to password requirements forour remaining applications.

 

*Change Management***–** During 2007, our management implemented enhancedprocedures to control changes to the production environment, and we continue toevaluate additional measures to ensure that adequate documentation is retained.In addition, during 2007 our management redesigned job descriptions within thechange control process of certain of the Company’s application systems toimprove segregation of duties, including removing the ability of theInformation Technology Director to perform code changes and increasing hisresponsibilities to conduct code review. In addition, an additional developer’sjob responsibilities were changed to assist in reviewing code before it isplaced into production, including code changes regarding financial reports.

 

*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 our financialreporting. In conjunction with the assessment of internal controls for 2007,management performed detailed testing at locations that have a material impacton our financial reporting around security and change management forspreadsheets. Management intends to further enhance the design of our controlsover spreadsheets by establishing procedures for benchmarking criticalspreadsheets to ensure that formulas are appropriate and protected, and thatthe logic and design of the spreadsheets is appropriate and consistent.Management is also implementing enhanced review procedures and we will extendany or all of our enhanced procedures to additional international locations asconsidered necessary.

 

Management is also in the process ofimplementing an application package that will facilitate a worldwideconsolidation and reduce our reliance on spreadsheets.  In addition, our information technologymanagement has selected an application to provide for a world-wide standardizationof the general ledger system. Management has developed a timeline forimplementation of this application.

 

**Conclusion**

 

We believe the measures described above willfacilitate remediation of the material weaknesses we have identified and willcontinue to strengthen our internal control over financial reporting. We arecommitted to continually improving our internal control processes and willdiligently and vigorously review our financial reporting controls andprocedures. As we continue to evaluate and work to improve our internal controlover financial reporting, we may determine that additional measures arenecessary to address control deficiencies. Moreover, we may decide to modify,or in appropriate circumstances not to complete, certain of the remediationmeasures described above.

 

65

----

Tableof Contents

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Nature’s Sunshine Products, Inc.:

 

We have audited Nature’s Sunshine Products, Inc.and subsidiaries (the “Company”) internal control over financial reporting asof December 31, 2007, based on criteria established in *Internal Control — Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’sReport on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on the Company’s internal control over financial reportingbased on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on that risk, and performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financialreporting is a process designed by, or under the supervision of, the company’sprincipal executive and principal financial officers, or persons performingsimilar 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 includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financialreporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud may not beprevented or detected 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.

 

A material weakness is a deficiency, or combination of deficiencies, ininternal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the Company’s annual or interimfinancial statements will not be prevented or detected on a timely basis. Thefollowing material weaknesses have been identified and included in management’sassessment:

 

·                  *Control Environment–*The Company did not maintain an effective control environment forinternal control over financial reporting. Specifically, the Company concludedthat they did not have appropriate controls in the following areas:

 

·                  *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.

 

·                  *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, andthe 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 certain deferred income andtax payable accounts, (ii) appropriately consider the need to record ordisclose contingencies for certain income tax 

 

66

----

Tableof Contents

 

positions inaccordance with generally accepted accounting principles*,*and (iii) file tax returns in certain foreign jurisdictions. Additionally,they had insufficient 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, their process lacked timely and complete financialstatement reviews, effective journal entry controls, and appropriatereconciliation processes. Further, they were unable to complete regulatoryfilings 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 had established a monitoringprocess including a recalculation of commissions expense based on salesreported by the service provider, and certain additional cash and inventoryshipment reconciliation procedures. These monitoring processes and procedureswere not performed on a regular basis, and were not adequately documented orreviewed, which increased the likelihood of material misstatements in theirfinancial statements.

 

·                  *Information Technology Systems* – TheCompany did not maintain effective internal control over financial reportingrelated to certain information technology applications and general computercontrols which are considered to have an impact on financial reporting andresulted in a more than reasonable possibility that material misstatements intheir financial statements would not be prevented or detected. Specifically,they lacked effective 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.

 

These material weaknesses were considered in determining the nature,timing, and extent of audit tests applied in our audit of the consolidatedfinancial statements and financial statement schedule as of and for the yearended December 31, 2007, of the Company and this report does not affectour report on such financial statements and financial statement schedule.

 

In our opinion, because of the effect of the material weaknessesidentified above on the achievement of the objectives of the control criteria,the Company has not maintained effective internal control over financialreporting as of December 31, 2007, based on the criteria established in *Internal Control — Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year ended December 31,2007, of the Company and our report dated October 6, 2008 expressed anunqualified opinion on those financial statements and financial statementschedule.

 

 
| /s/ Deloitte & Touche LLP |   |
|------------------------------------|--------|
|                               |   |
| Salt Lake City, Utah               |   |
| October 6, 2008               |   |

 

67

----

Tableof Contents

 

## ***Item 9B. Other Information***

## *** ***

None.

 

**PART III**

** **

## ***Item 10. Directors, ExecutiveOfficers and Corporate Governance***

## *** ***

The Company’s directorsand executive officers, as of June 30, 2008, are as follows:

 
| **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 information regarding thebusiness experience of the executive officers and directors is set forth below.

 

KRISTINE F. HUGHES. Mrs. Hughesis the Chairperson of our Board of Directors and a member of our CompensationCommittee. She was a co-founder in 1972 of Hughes Development Corporation, apredecessor of our Company, and has served as an officer or director of ourcompany and/or its predecessors since 1980. Mrs. Hughes is the wife ofEugene L. Hughes, one of our founders and directors.

 

ROBERT K.BOWEN. Mr. Bowen is a member of our Board of Directors and a member of ourAudit Committee. A Certified Public Accountant, Mr. Bowen has beena partner at the accounting firm of Hansen, Barnett & Maxwell, P.C.since 1980.

 

LARRY A. DEPPE. Mr. Deppeis an independent member of our Board of Directors and a member of our AuditCommittee. Mr. Deppe is a certified public accountant with over 35 yearsexperience auditing and teaching accounting. Mr. Deppe is currently anAssociate Professor of Accounting in the School of Accountancy at Weber StateUniversity, Ogden, Utah. Prior to embarking on an academic career, Mr. Deppefor eight years held various accounting posts with Intermountain Health Care,the Office of the Utah State Auditor, Christensen, Inc. and Arthur Young &Co. Active in professional affairs, Mr. Deppe served two four-year termsas Chair of the Utah State Board of Accountancy.

 

EUGENE L HUGHES. Mr. Hughesis a founder and member of our Board of Directors. He co-founded HughesDevelopment Corporation, a predecessor of our Company, in 1972. He has servedas an officer or director of our Company and/or its predecessors since 1972. Mr. Hughesgraduated from Brigham Young University. He is the husband of Kristine F.Hughes, our Chairperson of the Board.

 

PAULINE HUGHES FRANCIS. Mrs. Francisis a member of our Board of Directors, a member of our Audit Committee, and amember of our Compensation Committee. She has served on our Board of Directorssince 1988. Mrs. Francis was a co-founder in 

 

68

----

Tableof Contents

 

1972 of Hughes Development Corporation, apredecessor of the Company, and has acted as a consultant from time to time toour Company and its predecessors.

 

DOUGLAS FAGGIOLI. Mr. Faggioliis the President and Chief Executive Officer of our Company. Prior to hisappointment as President and Chief Executive Officer in November 2003, Mr. Faggioliserved as Executive Vice President, Chief Operating Officer and a Director ofour Company. He began his employment with us in 1983 and has served as one ofour officers since 1989. He is a Certified Public Accountant.

 

STEPHEN M. BUNKER. Mr. Bunkerserves as Vice President over Finance and Chief Financial Officer since March 27,2006. Mr. Bunker served as Vice President of Finance and Treasurer ofGeneva Steel Holdings, Corporation from July 2001 until March 2006.Previous to July 2001 Mr. Bunker served as Corporate Controller forGeneva Steel Corporation. Mr. Bunker is a certified public accountant, andworked for Arthur Andersen for six years.

 

JAMON JARVIS. Mr. Jarvisis the General Counsel of our Company. He has served in this position since March 2007.Prior to this appointment, Mr. Jarvis served as General Counsel and ChiefFinancial Officer of InterNetwork, Inc., in San Francisco, California,from January 2004 to November 2006; and as Executive Vice PresidentFinance, General Counsel and Corporate Secretary at Spontaneous Technology, Inc.,in Salt Lake City, Utah, September 2001 to October 2003. Mr. Jarvisreceived his B.A. in History in 1990 from Brigham Young University and his J.D.in 1993 from Cornell Law School.

 

GREG HALLIDAY. Mr. Hallidayis the President – U.S. Sales for Nature’s Sunshine Products. He has served inthis position since 2006 and previously served as Vice President – Nature’sSunshine Products U.S. Sales. Mr. Halliday received his B.S. in 1989 andM.B.A. with an emphasis in Marketing in 1991 from the Marriott School ofManagement at Brigham Young University.

 

BRYANT J. YATES. Mr. Yatesis the President – International of our Company. Mr. Yates, has served asExecutive 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.

 

JOHN R. DEWYZE. Mr. DeWyzeis the Executive Vice President — Operations for Nature’s Sunshine Products andhas served in this position since 1997. Mr. DeWyze received his B.S. inChemistry in 1981 from Grand Valley State University and his M.B.A. in 1994from the University of Southern Indiana.

 

WILLIAM J. KELLER. Dr. Kelleris the Vice President – Health Sciences and Educational Services for Nature’sSunshine Products. He was appointed to serve in this capacity in April 2001.Prior to joining our Company, Dr. Keller was the DepartmentChair/Professor in the School of Pharmacy at Stamford University and NortheastLouisiana University. Dr. Keller received his B.S. in Pharmacy and M.S. inPharmaceutical Sciences from Idaho State University. In 1972, the University ofWashington awarded him a Ph.D. in Pharmacognosy.

 

LYNDA MARIE HAMMONS. Mrs. Hammonsis the Vice President – Quality and Regulatory Affairs for Nature’s SunshineProducts. She has served in this capacity since June 2001. Mrs. Hammonsreceived her B.S. in Chemistry and Microbiology from Bowling Green StateUniversity and her M.B.A. with an emphasis on Quality Management from theUniversity of Cincinnati. Mrs. Hammons is also a Certified QualityEngineer, a Certified Quality Technician and a Certified Quality Auditor—AmericanSociety for Quality.

 

R. KAY OLSEN. Mr. Olsenis the Vice President – Information Technology of our Company and has served inthis capacity since March 2002. Mr. Olsen received his B.S. inInformation Management from Brigham Young University and his M.B.A. from theUniversity of Phoenix.

 

**Board Composition and Election**

 

Directors are elected atannual meetings of shareholders. Our Bylaws provide for a classified Board ofDirectors, consisting of three staggered classes of directors, as nearly equalin number as possible. As a result, shareholders will elect a portion of ourBoard of Directors each year. The Class I directors’ terms were originallyset to expire at our annual meeting held in 2006, the Class II directors’terms were originally set to expire at our annual meeting held in 2007, and theClass III directors’ terms were originally set to expire at our annualmeeting held in 2008. Due to our inability to file our Quarterly and AnnualReports with the SEC in those years, we were not able to hold annual meetingsin 2007, 2006, or 2005. The Class of each director is set forth above.

 

69

----

Tableof Contents

 

**Committees of the Board ofDirectors**

 

The Board of Directors has formed thefollowing committees:

 

*The Compensation Committee*. TheCompensation Committee reviews compensation policies applicable to officers andkey employees, recommends to the Board of Directors the compensation to be paidto our Chief Executive Officer and determines the compensation and benefits ofall directors on the Board. The Compensation Committee has adopted a writtencharter. The members of the Compensation Committee are Kristine F. Hughes,Pauline Hughes Francis, and Robert K. Bowen; Ms. Francis is an “IndependentDirector” as discussed in Item 13, “Certain Relationships and RelatedTransactions, and Director Independence.”

 

*The Audit Committee*. The AuditCommittee is a separately-designated standing committee of the Board, whichoversees our financial statements, preparation process and related compliancematters and performance of the internal audit function, is responsible forengagement and oversight of our independent registered public accounting firmand reviews the adequacy and effectiveness of our internal control system andprocedures.

 

The members of the AuditCommittee are Larry A. Deppe (Chairman), Robert K. Bowen and Pauline HughesFrancis, each of whom is an Independent Director and independent for thepurposes of the regulations promulgated by the SEC. Our Board of Directors hasdetermined that Larry A. Deppe and Robert K. Bowen are audit committeefinancial experts, as that term is defined in Item 401(h) of RegulationS-K promulgated by the Securities and Exchange Commission. We believe PaulineHughes Francis falls outside the SEC safe harbor providing that a person willnot be deemed an affiliate for purposes of determining audit committee memberindependence if he or she beneficially owns 10 percent or less of an issuer’svoting stock. As of June 30, 2008, Ms. Francis beneficially ownedapproximately 12.4 percent of the Company’s common stock. The Board hasdetermined that Ms. Francis is independent for purposes of SEC regulationsand the NASD Marketplace Rules.

 

*The Nominating 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.

 

The members of theNominating Committee are Kristine Hughes, Pauline Hughes Francis, Robert K.Bowen.  Ms. Francis and Mr. Bowenare both an “Independent Director” as discussed in Item 13,****“CertainRelationships and Related Transactions, and Director Independence.”

 

**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**

 

We adopted a revisedCode of Conduct on August 29, 2008****that appliesto all of our employees, including our Chief Executive Officer, Chief FinancialOfficer and senior financial and accounting officers. Among other matters, theCode of Conduct establishes policies to deter wrongdoing and to promote bothhonest and ethical conduct, including ethical handling of actual or apparentconflicts 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.

 

70

----

Tableof Contents

 

## ***Item 11. Executive Compensation***

## *** ***

**CompensationDiscussion and Analysis**

 

This CompensationDiscussion and Analysis provides disclosure about the policies and objectivesunderlying the compensation programs for our executive officers. Accordingly,we will address and analyze each element of the compensation provided to ourchief executive officer, our chief financial officer and the other executiveofficers named in the Summary Compensation Table which follows this discussion.The Compensation Committee of our Board of Directors administers thecompensation programs for our chief executive officer. Our chief executiveofficer administers the compensation programs for our other executive officers.

 

***Compensation Policy for Executive Officers****.* We have designed the various elementscomprising the compensation packages of our executive officers to achieve thefollowing objectives:

 
| · |   | reflect individual  accomplishments and contributions to the Company as well as overall Company  performance; |
|--------|--------|---------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                          |
| · |   | align each executive  officer’s interests with those of the Company’s shareholders; and             |
|   |   |                                                                                                          |
| · |   | attract and retain  qualified executives who will help the Company meets its goals.                           |

 

Each executive officer’scompensation package has historically consisted of three elements: (i) abase salary, (ii) a cash bonus based upon pre-established financialobjectives and the individual officer’s personal performance, and (iii) participationin long-term, stock-based incentive awards, in the form of stock options,designed to align and strengthen the mutuality of interests between ourexecutive officers and our shareholders.

 

When establishing thecompensation levels for the executive officers, we take into account theCompany’s overall financial performance and its evaluation of each executiveofficer’s individual performance level and his or her potential contribution tothe 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.

 

In setting executiveofficer compensation, the Compensation Committee and our chief executiveofficer review a report (the “Executive Compensation Report”) prepared by ourDirector of Human Resources in order to assess the competitiveness of theCompany’s compensation programs in comparison to market averages. The ExecutiveCompensation Report examined the data contained in Watson Wyatt’s ECS TopManagement Compensation Survey and Mercer’s Executive Compensation Survey for2006-07. The Executive Compensation Report compared the Company’s executivecompensation practices including base pay, short-term incentives, long-termincentives and other practices to industry and national survey data as well asthe base pay, bonus and total compensation of officers on 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 base salary level of each executive officer is reviewed in the last quarterof each year, with any salary adjustments for the upcoming year to be effectiveon or about January 1 of that year. The Company targets base salaries tobe in the range of 80% to 90% of market. However, the Company may also consider the performance of the executive,contributions by the executive towards the Company’s mission/goals and tenureat the Company.  The Company believesthat this component of compensation should provide a level of security andstability from year to year and not be dependent to any material extent on theCompany’s financial performance.  TheCompensation Committee approved a salary increase of 6% for our chief executiveofficer for 2007.  The salary level for Mr. Yateswas increased 39% due to his appointment as President — International.  The salary levels for Mr. Bunker,Mr Halliday, and Mr. DeWyze increased approximately 14%, 10%, and 2%,respectively. These increases were to bring these executives’ salaries in-linewith local market rates.  After examiningthe practices of companies with similar sales revenue in 2007, the Companyfound that, on average, our officers’ base salaries for 2007 were approximately23% below the base salaries of officers at those companies.

 

*Incentive Compensation*.The bonus structure is generally designed to bring the total cash compensationfor our executives up to market in a typical year and to exceed market whenjustified by Company performance. For Messrs. Bunker, DeWyze, Halliday and

 

71

----

Table of Contents

 

Yates, our chief executive officer had established bonuses of up to 75%of their respective base salaries for 2007 based on the Company’s performance.The actual bonuses paid to Messrs. Bunker, DeWyze and Halliday were belowthese amounts. The reduction was based on the weighted average bonuses actuallypaid to the employees in the Company’s U.S. Sales, International, and Synergydivisions. The actual bonus paid to Mr. Yates was above 75% of his basesalary due to performance in the Company’s International division only.Accordingly, Messrs. Bunker, DeWyze, Halliday and Yates received bonusesequal to 72.7%, 47.6%, 48.0%, and 125.3% respectively, of their base salaries.  Because the pre-established operating incomeand sales revenue goals were not achived, Mr. Faggioli did not receive abonus for 2007.  Cash bonuses paid to ourother named executive officers (excluding our chief executive officer) in 2007were 81% above the market average for companies with similar annual revenues,resulting in the total cash compensation of our officers being 18% below suchmarket averages.

 

*Long-Term Incentives**.*In prior years, we have structured ourlong-term incentive program for executive officers in the form of option grantsunder our 1995 Stock Option Plan which was administered by our CompensationCommittee. Each option grant has been designed to align the interests of theexecutive officer with those of the shareholders and to provide him with asignificant incentive to manage the company from the perspective of an ownerwith an equity stake in the business. Each option grant allows the officer toacquire shares of our common stock at a fixed price per share over a specified period,usually ten years. Options granted in past years have generally vested andbecome exercisable in a series of installments over a period of one to threeyears measured from the grant date, contingent upon the officer’s continuedemployment. All outstanding options are fully vested at this time. Our 1995Stock Option Plan terminated in 2005 and no options have been granted underthis plan since its termination.  TheCompany’s Board of Directors approved non-plan options grants to Mr. Bunker,Mr. Halliday, and Mr. Yates on March 15, 2007 to acquire up to20,000, 3,000, and 15,000 shares of common stock, respectively. The optionshave a maximum term of six years and become exercisable on the later of (i) oneyear from the date of grant or (ii) the date upon which the Companyregisters the underlying shares on a Form S-8 registration statement.These options were granted as a result of (i) the arrival at new officersin 2006 and 2007, (ii) the promotion of certain officers and directors, (iii) andthe expiration of certain options previously granted.

 

***Executive Officer Perquisites****.* It is not our practice to provide ourexecutive officers with any meaningful perquisites. However, in 2007 we paidpremiums on $250,000 key person life insurance policies for our named executiveofficers and provided our named executive officers the opportunity to receiveup to $2,500 for tuition assistance; however, none of our executive officerselected to receive tuition assistance. We believe these perquisites are animportant factor in retaining our executive officers.

 

***Other Programs****.*Our executive officers are eligible to participate in our 401(k) employeesavings plan on the same basis as all other regular U.S. employees.

 

***Deferred Compensation Programs.***The Company has adopted a deferred compensation plan for its executiveofficers, certain other selected employees and its non-employee directors toenable them to save for retirement by deferring their income and the associatedtax to a future date following termination of employment. Under theSupplemental Elective Deferral Plan (the “SEDP”), the named executive officersand other participants have the opportunity to defer compensation to futuredates specified by the participant with a return based on investmentalternatives selected by the participant. The Company believes that the SEDP iscomparable to similar plans offered by its competitors. The amounts deferredunder the SEDP for the named executive officers are reported below in theSummary Compensation Table and the Nonqualified Deferred Compensation Table.

 

***Officer Employment Agreements.***Wehave entered into employment agreements with each of our named executiveofficers. We believe that the employment agreements with our executive officersachieve two important goals crucial to our long-term financial success; namely,the long-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 thematerial terms of the officer employment agreements, together with aquantification of the severance benefits payable under those agreements to eachof the executive officers named in the Summary Compensation Table may be foundin the section below entitled “Executive Compensation and Other Information —Employment Contracts, Termination of Employment and Change in ControlArrangements.”

 

72

----

Tableof Contents

 

***Compliance with Internal Revenue Code Section 162(m)****.* Section 162(m) of the InternalRevenue Code disallows a tax deduction to publicly held companies forcompensation paid to certain of their executive officers to the extent suchcompensation exceeds $1.0 million per covered officer in any year. Thelimitation applies only to compensation that is not considered to beperformance-based under the terms of Section 162(m). The stockoptions granted to Mr. Bunker, Mr. Yates, and Mr. Halliday on March 15,2007 will not quality as performance-based compensation. Accordingly thecompensation deemed paid when these options are exercised will be subject to Section 162(m) limitationson deductions.  Non-performance-based compensation paid to our executive officers for2007 did not exceed the $1.0 million limit per officer. However, as we continueto increase salaries and bonuses for our executive officers and the amountrecognized from equity awards, 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 the aggregatemay be in excess of the amount deductible by reason of Section 162(m) orother provisions of the Internal Revenue Code. We believe it is important tomaintain cash and equity incentive compensation at the levels needed to attractand retain the executive officers essential to our success, even if all or partof that compensation may not be deductible by reason of the Section 162(m) limitation.

 

The CompensationCommittee has reviewed and discussed the Compensation Discussion and Analysisdisclosure with management. Based on this review and discussion, theCompensation 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, 2007.

 

Submitted by:

Pauline Hughes Francis

Kristine Hughes

Robert K. Bowen

 

**Executive Compensation**

 

The following table setsforth a summary, for the years ended December 31, 2007 and 2006 of thecompensation of the principal executive officer, the principal financialofficer, the three most highly compensated executive officers of the Company(not including the principal executive officer and the principal financialofficer) whose total compensation for the 2007 fiscal year was in excess of$100,000 and who were serving as executive officers at the end of 2007. Thelisted individuals shall be hereinafter referred to as the “named executiveofficers.”

 

**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  ($)(3)** | ** ** | **Total ($)** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|--------------------------|------------|--------------------|------------|------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------|------------|
| **(a)**                                                                   | ** ** | **(b)**  | ** ** | **(c)**                  | ** ** | **(d)**            | ** ** | **(e)**                | ** ** | **(f)**                 | ** ** | **(g)**                                                | ** ** | **(h)**                                                                                                  | ** ** | **(i)**                                  | ** ** | **(j)**            |       |
| Douglas Faggioli,  President, CEO & Director                     |       | 2007     |       | 371,000                  |       | —             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 14,126                                   |       | 385,126            |       |
|                                                                      |       | 2006     |       | 350,000                  |       | —             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 13,860                                   |       | 363,860            |       |
|                                                                      |       |     |       |                     |       |               |       |                   |       |                    |       |                                                   |       |                                                                                                     |       |                                     |       |               |       |
| Stephen Bunker, CFO                                                       |       | 2007     |       | 200,000                  |       | 145,338            |       | —                 |       | 46,442                  |       | —                                                 |       | —                                                                                                   |       | 12,007                                   |       | 403,787            |       |
|                                                                      |       | 2006     |       | 131,250                  |       | 18,081             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 7,283                                    |       | 156,614            |       |
|                                                                      |       |     |       |                     |       |               |       |                   |       |                    |       |                                                   |       |                                                                                                     |       |                                     |       |               |       |
| John DeWyze, EVP &  VP of Operations                             |       | 2007     |       | 191,000                  |       | 90,970             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 12,591                                   |       | 294,561            |       |
|                                                                      |       | 2006     |       | 187,000                  |       | 51,515             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 12,643                                   |       | 251,158            |       |
|                                                                      |       |     |       |                     |       |               |       |                   |       |                    |       |                                                   |       |                                                                                                     |       |                                     |       |               |       |
| Greg Halliday, President  -  Nature’s Sunshine Products U.S.         |       | 2007     |       | 180,000                  |       | 86,573             |       | —                 |       | 6,966                   |       | —                                                 |       | —                                                                                                   |       | 9,881                                    |       | 283,420            |       |
|                                                                      |       | 2006     |       | 163,000                  |       | 4,000              |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 10,771                                   |       | 177,771            |       |
|                                                                      |       |     |       |                     |       |               |       |                   |       |                    |       |                                                   |       |                                                                                                     |       |                                     |       |               |       |
| Bryant Yates, President  -  Nature’s Sunshine Products International |       | 2007     |       | 160,000                  |       | 200,450            |       | —                 |       | 34,831                  |       | —                                                 |       | —                                                                                                   |       | 2,971                                    |       | 398,252            |       |
|                                                                      |       | 2006     |       | 115,343                  |       | 28,600             |       | —                 |       | —                  |       | —                                                 |       | —                                                                                                   |       | 2,426                                    |       | 146,369            |       |

 

73

----

Table of Contents

 

----

(1)  Amounts for 2007include amounts that were deferred into the Company’s Supplemental ElectiveDeferral Plan (“SEDP”) for 2007, as follows: Mr. Faggioli – $52,000; Mr. Bunker – $0; Mr. DeWyze –$19,128 and $30,920; Mr. Halliday – $5,801 and $8,146; and Mr. Yates –$0. The SEDP provides selected employees and non-employee directors with theability to defer compensation to future dates specified by the participant witha return based on investment alternatives selected by the participant. The SEDPis more fully described in the section following the Nonqualified DeferredCompensation Plans table below.

 

(2)  Option awards arecalculated in the same manner as the expense of these awards that is recognizedin our consolidated financial statements. Option awards are valued under FAS123R and then amortized to expense during the vesting period of the award. SeeNote 10 to the Notes to Consolidated Financial Statements contained herein fora description of the assumptions used in valuing stock awards and stockoptions. For this purpose, the estimate of forfeitures relating to vestingconditions is disregarded. The full amount of the FAS 123R value of the2007 stock options is reported under “Equity Compensation Plan” on page 88.

 

(3)  “All OtherCompensation” includes the following amounts paid by the Company for the fiscalyear ended December 31, 2007. The amounts disclosed are the actual coststo the Company of providing these benefits.

 
| **Name**         | ** ** | **401(k) Plan  Company  Contribution ($)** | ** ** | **Life Insurance ($)** | ** ** | **Disability Payments  ($)** | ** ** | **Severance  Payments* ($)** | ** ** | **Total ($)** | ** ** |
|------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|--------------------|------------|
| Douglas Faggioli |       | 11,150                                               |       | 2,436                            |       | 540                               |       | —                            |       | 14,126             |       |
| Stephen Bunker   |       | 10,989                                               |       | 658                              |       | 360                               |       | —                            |       | 12,007             |       |
| John DeWyze      |       | 10,926                                               |       | 1,305                            |       | 360                               |       | —                            |       | 12,591             |       |
| Greg Halliday    |       | 8,912                                                |       | 609                              |       | 360                               |       | —                            |       | 9,881              |       |
| Bryant Yates     |       | 2,160                                                |       | 451                              |       | 360                               |       | —                            |       | 2,971              |       |

 

**Grants of Plan-BasedAwards in Fiscal Year 2007**

 

The following table provides certain summary informationconcerning each grant of an award made to named executive officers in 2007under a compensation plan.

 
| ** **       | ** ** | ** **      | ** ** | **Estimated Future Payouts Under Non-Equity  Incentive Plan Awards** | ** ** | **Estimated Future Payouts Under Equity Incentive  Plan Awards** | ** ** | **All Other  Stock  Awards:  Number of  Shares of  Stock or** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying** | ** ** | **Exercise  or Base  Price of  Option  Awards** | ** ** | **Grant Date  Fair  Value of  Stock  Option** | ** ** |
|------------------|------------|-----------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **Name**         | ** ** | **Grant  Date** | ** ** | **Threshold  ($)**                                                                                 | ** ** | **Target ($)**                                                                                 | ** ** | **Maximum ($)**                                                                   | ** ** | **Threshold  ($)**                                                          | ** ** | **Target ($)**                                            | ** ** | **Maximum ($)**                                         | ** ** | **Units (#)** | ** ** | **Options  (#)** | ** ** | **(S/Sh)** | ** ** | **Awards** | ** ** |
| **(a)**          | ** ** | **(b)**         | ** ** | **(c)**                                                                                            | ** ** | **(d)**                                                                                        | ** ** | **(e)**                                                                           | ** ** | **(f)**                                                                     | ** ** | **(g)**                                                   | ** ** | **(h)**                                                 | ** ** | **(i)** | ** ** | **(j)** | ** ** | **(k)** | ** ** | **(l)** | ** ** |
| Douglas Faggioli |       | —          |       |                                                                                               |       |                                                                                           |       |                                                                              |       |                                                                        |       |                                                      |       |                                                    |       |   |   | — |   | — |   | — |   |
| Stephen Bunker   |       | 3/15/2007       |       |                                                                                               |       |                                                                                           |       |                                                                              |       |                                                                        |       |                                                      |       |                                                    |       |   |   | 20,000 |   | 11.85 |   | $ | 3.85 |   |
| John DeWyze      |       | —          |       |                                                                                               |       |                                                                                           |       |                                                                              |       |                                                                        |       |                                                      |       |                                                    |       |   |   | — |   | — |   | — |   |
| Greg Halliday    |       | 3/15/2007       |       |                                                                                               |       |                                                                                           |       |                                                                              |       |                                                                        |       |                                                      |       |                                                    |       |   |   | 3,000 |   | 11.85 |   | $ | 3.85 |   |
| Bryant Yates     |       | 3/15/2007       |       |                                                                                               |       |                                                                                           |       |                                                                              |       |                                                                        |       |                                                      |       |                                                    |       |   |   | 15,000 |   | 11.85 |   | $ | 3.85 |   |

 

74

----

Tableof Contents

 

**Outstanding Equity Awardsat Fiscal Year-End**

 

Thefollowing table provides certain summary information concerning outstandingequity awards held by the named executive officers as of December 31,2007:

 
| ** **       | ** ** | **Option Awards**                                                                 | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------|------------|
| **Name**         | ** ** | **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 |   |
| TOTAL            |       | 27,000                                                                                 |       | — |   | — |   |   |   |   |   |
|             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Stephen Bunker   |       | —                                                                                 |       | 20,000 |   | — |   | 11.85 |   | 3/14/2013 |   |
| TOTAL            |       | —                                                                                 |       | 20,000 |   | — |   |   |   |   |   |
|             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| John DeWyze      |       | 16,300                                                                                 |       | — |   | — |   | 12.25 |   | 2/23/2009 |   |
|             |       | 250                                                                                    |       | — |   | — |   | 8.13 |   | 1/3/2010 |   |
| TOTAL            |       | 16,550                                                                                 |       | — |   | — |   |   |   |   |   |
|             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Greg Halliday    |       | 2,560                                                                                  |       | — |   | — |   | 12.25 |   | 2/23/2009 |   |
|             |       | 500                                                                                    |       | — |   | — |   | 12.55 |   | 8/1/2011 |   |
|             |       | 10,000                                                                                 |       | — |   | — |   | 14.90 |   | 5/28/2010 |   |
|             |       | —                                                                                 |       | 3,000 |   | — |   | 11.85 |   | 3/14/2013 |   |
| TOTAL            |       | 13,060                                                                                 |       | 3,000 |   | — |   |   |   |   |   |
|             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Bryant Yates     |       | —                                                                                 |       | 15,000 |   | — |   | 11.85 |   | 3/14/2013 |   |
| TOTAL            |       | —                                                                                 |       | 15,000 |   | — |   |   |   |   |   |

 

**Option Exercises and Stock Vested**

 

The following table presents options exercised bynamed executive officers during 2007. No named executive officer held shares ofstock that vested in 2007.

 

Option Awards

 
| **Name & Principal Position** | ** ** | **Number of Shares Acquired On Exercise** | ** ** | **$ Value Realized On Exercise** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(a)**                                          | ** ** | **(b)**                                                            | ** ** | **(c)**                                              | ** ** |
|                                             |       |                                                               |       |                                                 |       |
| Douglas Faggioli                                 |       | 95,690                                                             |       | $                                                    | 364,770    |   |
| Stephen Bunker                                   |       | —                                                             |       | —                                               |       |
| John DeWyze                                      |       | —                                                             |       | —                                               |       |
| Greg Halliday                                    |       | —                                                             |       | —                                               |       |
| Bryant Yates                                     |       | —                                                             |       | —                                               |       |
|                                                  |            |                                                                    |            |                                                      |            |  |

 

**Pension Benefits**

 

The Company does not have a pension plan in whichthe named executive officers can participate to receive payments or otherbenefits at, following, or in connection with retirement.

 

**Nonqualified Deferred Compensation Plans**

 

Information regarding the named executive officers’ participationin the Company’s nonqualified deferred compensation plan is

 

75

----

Tableof Contents

 

included below.

 

Supplemental Elective Deferral Plan. The Company has adopted the Nature’sSunshine Products, Inc. Supplemental Elective Deferral Plan (the “SEDP”).The following table sets forth information relating to the SEDP for 2007 forthe named executive officers:

 
| **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                                                         |       | —                                                       |       | 47,780                                                        |       | —                                              |       | 677,772                                                    |       |
| Stephen Bunker                                   |       | —                                                         |       | —                                                       |       | —                                                        |       | —                                              |       | —                                                     |       |
| John DeWyze                                      |       | 19,128                                                         |       | —                                                       |       | 19,138                                                        |       | —                                              |       | 187,079                                                    |       |
| Greg Halliday                                    |       | 5,801                                                          |       | —                                                       |       | 993                                                           |       | —                                              |       | 15,058                                                     |       |
| Bryant Yates                                     |       | —                                                         |       | —                                                       |       | —                                                        |       | —                                              |       | —                                                     |       |

 

----

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

 

(2) Earnings is defined to reflect the difference in the account balance betweenthe beginning and end of the year, less any executive or Company contributionsand any amounts withdrawn or distributed. Earnings include realized andunrealized gains, capital gains and dividends paid.

 

The SEDP permits the named executive officers, certain other employeesand the Company’s non-employee directors with the opportunity to deferspecified percentages (up to 75%) of their compensation, including amounts thatcould not be deferred under the Company’s Tax Deferred Retirement Plan becauseof the limitations under such plan imposed by the Internal Revenue Code.Participants may elect deferred amounts to be paid in monthly payments over 3or 5 years or in a lump sum upon separation from service. Deferrals arecredited with gain or loss based on the performance of one or more investmentalternatives selected by the participant from among the investment fundsoffered by the Board. No actual investments are held in the participants’accounts and participants will at all times remain general unsecured creditorsof the Company with respect to their account balances.

 

**PotentialPayments Upon Termination or Change in Control**

 

Included below is a summary of the material terms and conditions of theemployment agreements the Company has entered into with its named executiveofficers that provide for certain payments and benefits upon termination ofemployment. The employment agreements are the only arrangements the Company haswith its named executive officers to provide benefits upon termination ofemployment. The Company does not have any contract, agreement, plan orarrangement with its named executive officers that provides for payments at,following or in connection with a change in control of the Company.

 

Pursuant to the terms of the employment agreement each named executiveofficer has entered into with the Company, each named executive officer iseligible to receive certain termination benefits. The employment agreementsprovide that in the event the named executive officer is terminated by theCompany without cause or due to non-renewal of the employment agreement or inthe event the named executive officer’s employment ceases due to death orincapacity, he will be entitled to receive a severance payment equal to hisannual base salary for the year of termination and continued medical and lifeinsurance coverage for 12 months (3 months for Mr. Halliday). Suchseverance payment may be distributed in a lump sum or in a series of bi-weeklypayments. Pursuant to the terms of their employment agreements, for a period of1 year after 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.

 

The following table sets forth the estimated payments and benefits thatwould have been payable to the named executive officers under their agreementsin the termination circumstances indicated below had their employmentterminated on December 31, 2007. All cash payments are assumed to be madein a lump sum and would be paid by the Company. The amounts set forth in thistable represent estimates and forward-looking information that is subject tosubstantial variation, based on the timing of the triggering event. The Companycautions the reader to consider these limitations in reviewing the followingtable.

 

76

----

Tableof Contents

 

**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** | ** ** | **Mr. Halliday** | ** ** | **Mr. Yates** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                            | ** ** | ** **            | ** ** | ** **          | ** ** | ** **          | ** ** | ** **            | ** ** | ** **         | ** ** |
| Salary severance                                      |       | $                     | 350,000    |                | $          | 200,360             |       | $                     | 217,920    |               | $          | 42,786 |   | $ | 160,360 |   |
| Continued Medical & Life Insurance  Coverage |       | 10,188                |       | 8,410               |       | 9,057               |       | 8,361                 |       | 8,203              |       |
| TOTAL                                                 |       | $                     | 360,188    |                | $          | 208,770             |       | $                     | 226,977    |               | $          | 51,147 |   | $ | 168,563 |   |

 

**DirectorCompensation**

 

The following table sets forth certain information regarding thecompensation of each individual who served as a member of our Board ofDirectors during the 2007 fiscal year. Except with respect to Mr. EugeneHughes, the compensation disclosed is for services rendered as a Board memberduring that year. Mr. Eugene Hughes is also our employee, and thecompensation disclosed for him below reflects his compensation he received inhis capacity as an employee. He did not receive any additional compensation forhis Board service.

 
| **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     |       | 141,711                                                            |       | —                     |       | —                      |       | —                                                 |       | —                                                                                               |       | 9,915                                    |       | 151,626            |       |
| Pauline Hughes Francis |       | 53,234                                                             |       | —                     |       | —                      |       | —                                                 |       | —                                                                                               |       | 18,376                                   |       | 71,610             |       |
| Franz L. Cristiani     |       | 6,250                                                              |       | —                     |       | —                      |       | —                                                 |       | —                                                                                               |       | —                                   |       | 6,250              |       |
| Robert Bowen           |       | 37,500                                                             |       | —                     |       | —                      |       | —                                                 |       | —                                                                                               |       | 300                                      |       | 37,800             |       |
| Larry Deppe            |       | 41,500                                                             |       | —                     |       | —                      |       | —                                                 |       | —                                                                                               |       | —                                   |       | 41,500             |       |
| Eugene Hughes          |       | 314,927                                                            |       | —                     |       | —                      |       | —                                                 |       | —                                                                                               |       | 39,500                                   |       | 354,427            |       |

 

----

(1) Consists of retainer fees for service as a member of the Board with respect toKristine Hughes, Pauline Hughes Francis and Messrs. Cristiani, Bowen andDeppe; Mr. Hughes received salary of $209,000, of which he deferred$13,000 into the SEDP, and a cash bonus of $105,927 in 2007. Retainers paid toKristine Hughes and Pauline Hughes Francis were paid on a monthly basis;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     |       | 141,711               |       | —                                                            |       |                             |       | 141,711            |       |
| Pauline Hughes Francis |       | 52,234                |       | 1,000                                                             |       |                             |       | 53,234             |       |
| Franz L. Cristiani     |       | 6,250                 |       | —                                                            |       |                             |       | 6,250              |       |
| Robert Bowen           |       | 37,500                |       | —                                                            |       |                             |       | 37,500             |       |
| Larry Deppe            |       | 38,500                |       | 3,000                                                             |       |                             |       | 41,500             |       |
| Eugene Hughes          |       | —                |       | —                                                            |       |                             |       | —             |       |

 

RetainerFees. Retainers were paid on a monthly basis to Ms. Kristine Hughes and Ms. PaulineHughes Francis and on a quarterly basis to Messrs. Cristiani, Bowen andDeppe. Mr. Deppe received an additional $3,000 retainer for serving asChair of the Audit Committee for the second, third and fourth quarters of 2007.Ms. Pauline Hughes Francis received an additional $1,000 retainer forserving as the Chair of the Compensation Committee for 2007.

 

----

(2) “All Other Compensation” includes the following amounts paid by the Company forthe fiscal year ended December 31, 2007:

 
| **Name**               | ** ** | **401(k) Plan  Company  Contribution ($)** | ** ** | **Life Insurance  Premiums ($)** | ** ** | **Disability  Payments ($)** | ** ** | **Product  Credit* ($)** | ** ** | **Total ($)** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|--------------------|------------|
| Kristine F. Hughes     |       | —                                               |       | 9,165                                      |       | —                            |       | 750                           |       | 9,915              |       |
| Pauline Hughes Francis |       | —                                               |       | 1,690                                      |       | —                            |       | 750                           |       | 2,440              |       |
| Franz L. Cristiani     |       | —                                               |       | —                                     |       | —                            |       | —                        |       | —             |       |
| Robert Bowen           |       | —                                               |       | —                                     |       | —                            |       | 300                           |       | 300                |       |
| Larry Deppe            |       | —                                               |       | —                                     |       | —                            |       | —                        |       | —             |       |
| Eugene Hughes          |       | 10,905                                               |       | 27,485                                     |       | 360                               |       | 750                           |       | 39,500             |       |

 

77

----

Tableof Contents

 

----

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

 

MeetingFees. Our directors do not receive fees for attendance at Board or Committeemeetings.

 

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.No stock options or other equity awards were granted to our directors during2007.

 

NonqualifiedDeferred Compensation. None of our non-employee directors participated in theSEDP. Mr. Hughes elected to defer under the SEDP $13,000 of the compensationhe received in 2007 in his capacity as an employee. The SEDP is more fullydescribed above in the section following the Nonqualified Deferred CompensationPlans table.

 

## ***Item 12. Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters***

## *** ***

The following table sets forth informationregarding beneficial ownership of our Common Stock as of June 30, 2008 by (1) eachperson who is known by us to beneficially own more than five percent of theoutstanding shares of our Common Stock, (2) each of our directors, (3) eachof our executive officers and (4) all directors and executive officers ofthe Company as a group. To our knowledge and except as otherwise indicated, thepersons named in the table have sole voting and investment power with respectto all shares shown as beneficially owned by them, subject to communityproperty laws where applicable. Unless we indicate otherwise, each holder’saddress is c/o Nature’s Sunshine Products, Inc., 75 East 1700 South,Provo, Utah 84606.

 
| **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  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                                | %          |

 

78

----

Tableof Contents

 

----

*              Less than onepercent.

 

(1)           All entries excludebeneficial ownership of shares that are issuable pursuant to options that havenot vested or that are not other wise exercisable as of the date hereof andwhich will not become vested or exercisable within 60 days of June 30,2008.

 

(2)           Calculated based on15,510,159 shares of our Common Stock outstanding on the June 30, 2008,with percentages rounded to the nearest one-tenth of one percent. Shares ofCommon Stock subject to options that are presently exercisable or exercisablewithin 60 days are deemed to be beneficially owned by the person holding theoption for the purpose of computing the percentage ownership of that person butnot treated as outstanding for computing the percentage of any other person.

 

(3)           Reflects the numberof shares held at June 30, 2008 per Schedule 13F filing.

 

(4)           Reflects the number of sharesheld at February 12, 2007 per Schedule 13D/A filing.

 

(5)           Reflects the number of sharesheld at December 31, 2007 per Schedule 13G filing.

 

**Equity Compensation Plans**

 

The following table contains informationregarding the Company’s equity compensation 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. Certain Relationshipsand Related Transactions, and Director Independence***

## *** ***

The Board’s Audit Committee is responsiblefor review, approval, or ratification of “related-person transactions”involving the Company or its subsidiaries and related persons. Under SEC 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, two Japanese Managers madedonations of approximately $170 to Legacy for the Future (“Legacy”). Legacy wasa charitable entity organized and controlled by a then officer and director ofthe Company. The donation was paid to the Company in Japan and was then wiredto Legacy. Legacy subsequently purchased two products from the Company at theCompany’s cost. The products were near their expiration date and were providedto under-nourished children in a third world country.

 

**Director Independence**

 

The Board of Directors has determined thateach of the following directors is an “independent director” under applicable

 

79

----

Tableof Contents

 

NASDAQ standards:

 

Robert K. Bowen

Larry A. Deppe

Pauline Hughes Francis

 

In this report, these three directors arereferred to individually as an “Independent Director” and collectively as the “IndependentDirectors.”

 

## ***Item 14. Principal AccountantFees and Services.***

## *** ***

We engaged Deloitte & Touche LLP as our independent,registered public accounting firm on February 2, 2007. For our fiscal yearended December 31, 2005 and until its resignation on March 31, 2006,KPMG LLP served as our registered independent public accountant. The feesincurred by the Company during the fiscal year ended December 31, 2007 forprofessional services rendered by the Company’s principal accountant, Deloitte &Touche LLP, are set forth below. Deloitte & Touche LLP did not performany services for the Company during the fiscal year ended December 31,2006.

 

**Audit Fees**

 

During the fiscal year ended December 31,2007 and through October 6, 2008, Deloitte & Touche LLP billedthe Company approximately $3,582,000 for professional services rendered for theaudit of the Company’s consolidated financial statements for the fiscal yearended December 31, 2007 and $9,608,000 for professional services renderedfor the audit of the Company’s consolidated financial statements for the yearsended December 31, 2006, 2005, and 2004.

 

**Tax Fees**

 

The aggregate fees billed for tax servicesrendered by Deloitte & Touche LLP for the years ended December 31,2007 and 2006 were approximately $713,000 and $665,000 respectively.

 

**Audit Related Fees and All Other Fees**

 

During the fiscal year ended December 31,2007, Deloitte & Touche LLP did not provide any services to theCompany other than those identified above.

 

All of the fees above were approved by theAudit Committee. The Audit Committee has considered whether the provision ofnon-audit services is compatible with maintaining the principal accountant’sindependence and has concluded that it is.

 

**Pre-Approval Policies and Procedures**

 

The Company pre-approves a schedule of auditand non-audit services expected to be performed by the Company’s registeredpublic accountant in a given fiscal year. In addition, the Audit Committeedelegates authority to its Chairman to pre-approve certain additional audit andnon-audit services rendered by Company’s registered public accountant (otherthan services that have been generally pre-approved by the Audit Committee)during the period between meetings of the Audit Committee. The Chairman mustreport any such pre-approval decisions to the Audit Committee at its nextscheduled meeting. During the year ended December 31, 2007, 100 percent ofthe aggregate amounts set forth above under the captions “Audit-Related Fees,” “TaxFees,” and “All Other Fees” were pre-approved by the Chairman of the AuditCommittee and subsequently reported to the Audit Committee in accordance withthe procedures set forth above. Deloitte & Touche LLP did not performany services for the Company during the fiscal year ended December 31,2006.

 

**PART IV**

** **

## ***Item 15. Exhibits and FinancialStatement Schedules***

 
| **(a)(1)** | ** ** | **List of Financial Statements**                 |
|------------|------------|--------------------------------------------------|
|       |       |                                             |
|       |       | The following are filed as part of this  Report: |

 

80

----

Table of Contents

 
|       |       | Report of Independent Registered Public  Accounting Firm                                                                                                                                                                                                |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                    |
|       |       | Consolidated balance sheets as of December 31,  2007 and 2006                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                    |
|       |       | Consolidated statements of operations for  the years ended December 31, 2007, 2006, and 2005                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                    |
|       |       | Consolidated statements of changes in  shareholders’ equity and comprehensive income (loss) for the years ended December 31,  2007, 2006, and 2005                                                                                            |
|       |       |                                                                                                                                                                                                                                                    |
|       |       | Consolidated statements of cash flows for  the years ended December 31, 2007, 2006, and 2005                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                    |
|       |       | Notes to consolidated financial statements                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                    |
| **(a)(2)** | ** ** | **List of Financial Statement Schedules**                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                    |
|       |       | Schedule II - Valuation and Qualifying  Accounts.                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                    |
|       |       | Financial statement schedules other than  the one listed are omitted for the reason that they are not required or are  not applicable, or the required information is shown in the financial  statements or notes thereto, or contained in this Report. |
|       |       |                                                                                                                                                                                                                                                    |
| **(a)(3)** | ** ** | **List of Exhibits**                                                                                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                    |
|       |       | Exhibit Index as seen below                                                                                                                                                                                                                        |

 

81

----

Table of Contents

 

**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

**Nature’s Sunshine Products, Inc.**

(Registrant)

 
| Date: **December 30, 2008** | By:    | /s/ Douglas Faggioli                  |
|----------------------------------|--------|---------------------------------------|
|                             |   |                                  |
|                             |   | Douglas Faggioli,                     |
|                             |   | President and Chief Executive Officer |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| **Signature** | ** **             | **Title**  | ** **                                        | **Date**   |
|---------------|------------------------|------------|---------------------------------------------------|------------|
| ** **    | ** **             | ** ** | ** **                                        | ** ** |
| /s/           | Kristine F. Hughes     |       | Chair of the Board and Director                   | ** ** | **December 30**,  2008 |
|          | Kristine F. Hughes     |       |                                              |       |   |
|          |                   |       |                                              |       |   |
| /s/           | Douglas Faggioli       |       | President and Chief Executive Officer             | ** ** | **December 30**,  2008 |
|          | Douglas Faggioli       |       |                                              |       |   |
|          |                   |       |                                              |       |   |
| /s/           | Stephen M. Bunker      |       | Vice President of Finance, Treasurer,             | ** ** | **December 30**,  2008 |
|          | Stephen M. Bunker      |       | Chief Financial Officer, Chief Accounting Officer |       |   |
|          |                   |       |                                              |       |   |
| /s/           | Robert K. Bowen        |       | Director                                          | ** ** | **December 30**,  2008 |
|          | Robert K. Bowen        |       |                                              |       |   |
|          |                   |       |                                              |       |   |
| /s/           | Larry A. Deppe         |       | Director                                          | ** ** | **December 30**,  2008 |
|          | Larry A. Deppe         |       |                                              |       |   |
|          |                   |       |                                              |       |   |
| /s/           | Eugene L Hughes        |       | Director                                          | ** ** | **December 30**,  2008 |
|          | Eugene L Hughes        |       |                                              |       |   |
|          |                   |       |                                              |       |   |
| /s/           | Pauline Hughes Francis |       | Director                                          | ** ** | **December 30**,  2008 |
|          | Pauline Hughes Francis |       |                                              |       |   |

 

82

----

Table of Contents

 

**NATURE’S SUNSHINE PRODUCTS, INC.**

**SCHEDULE II — VALUATION AND QUALIFYINGACCOUNTS**

**FOR THE YEARS ENDED DECEMBER 31, 2007, 2006,AND 2005**

*(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, 2007**      |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for doubtful accounts receivable |       | $                                            | 1,129      |           | $          | (208                          | )          | $                      | (508       | )                                         | $          | 259                                        |       | $ | 67 |   | $ | 739 |   |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for obsolete inventory           |       | 3,325                                        |       | 964            |       | (1,563                        | )          | 89                     |       | —                                    |       | 2,815                                      |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation allowance                    |       | 7,822                                        |       | 3,468          |       | —                        |       | —                 |       | —                                    |       | 11,290                                     |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year ended December 31, 2006**      |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for doubtful accounts 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                                      |       |

 

83

----

Table of Contents

 

**LIST OF EXHIBITS**

 
| ** **        | ** **                                                       | ** **  | ** **                                                                                                                 | **Located At**    |
|-------------------|------------------------------------------------------------------|-------------|----------------------------------------------------------------------------------------------------------------------------|------------------------|
| ** **        | ** **                                                       | ** **  | ** **                                                                                                                 | **Sequentially**       |
| **Item No.** | ** **                                                       | **Exhibit** | ** **                                                                                                                 | **Numbered Page** |
|              |                                                             |        |                                                                                                                       |                   |
|              | 3.1(1)     -                            |        | Restated Articles of Incorporation                                                                                         |                   |   |
|              | 3.2(1)     -                            |        | By-laws, as amended                                                                                                        |                   |   |
|              | 10.1(1)*                                                         |        | Nature’s Sunshine Products, Inc. Tax Deferred Retirement Plan,  restated March 1, 2008                      |                   |   |
|              | 10.2(1)*                                                         |        | Nature’s Sunshine Products, Inc. Supplemental Elective Deferral  Plan as restated effective January 1, 2008 |                   |   |
|              | 10.3(1)*                                                         |        | Employment Agreement between the Registrant and Douglas Faggioli  dated November 1, 1994                              |                   |   |
|              | 10.4(2)*                                                         |        | Employment Agreement between the Registrant and Stephen M. Bunker  dated December 21, 2007                            |                   |   |
|              | 10.5(2)*                                                         |        | Employment Agreement between the Registrant and Bryant J. Yates dated  December 21, 2007                              |                   |   |
|              | 10.6(1)*                                                         |        | Employment Agreement between the Registrant and John DeWyze dated  September 20, 1999                                 |                   |   |
|              | 10.7(1)*                                                         |        | Employment Agreement between the Registrant and Gregory R. Halliday  dated June 1, 2001                               |                   |   |
|              | 10.8(1)* -                                                       |        | 1995 Stock Option Plan, as amended                                                                                         |                   |   |
|              | 10.9(1)* -                                                       |        | Form of Stock Option Agreement (1995 Stock Option Plan)                                                               |                   |   |
|              | 14(1)                                                            |        | Nature’s Sunshine Products, Inc. Code of Conduct                                                                 |                   |   |
|              | 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 |

 

----

(1)                      Previously filed with theCommission on October 7, 2008 as an exhibit to the Annual Report on Form 10-Kfor the year ended December 31, 2006 and is incorporated herein byreference.

(2)                      Previously filed with theCommission as an exhibit to the Current Report on Form 8-K dated December 21,2007 (filed December 31, 2007) and is incorporated herein by reference.

*                             Management contract orcompensatory plan.

 

84

----