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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

**x****Annual report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934 for thefiscal 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.**

 

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

 

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

 

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

 

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

 

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

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

 

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

 

The aggregate market value of the voting stock 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.

 

**DocumentsIncorporated by Reference: **Foritems incorporated by reference, see List of Exhibits in Item 15 of this Form10-K.

 

 

 

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**TABLE OF CONTENTS**

 
| PART 1   |                                                                                                               | 5      |
|---------------|--------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                               |   |
| ITEM 1.       | BUSINESS                                                                                                           | 5      |
|          |                                                                                                               |   |
| ITEM 1A.      | RISK FACTORS                                                                                                       | 9      |
|          |                                                                                                               |   |
| ITEM 1B.      | UNRESOLVED STAFF COMMENTS                                                                                          | 16     |
|          |                                                                                                               |   |
| ITEM 2.       | PROPERTIES                                                                                                         | 16     |
|          |                                                                                                               |   |
| ITEM 3.       | LEGAL PROCEEDINGS                                                                                                  | 16     |
|          |                                                                                                               |   |
| ITEM 4.       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                               | 18     |
|          |                                                                                                               |   |
| PART II  |                                                                                                               | 19     |
|          |                                                                                                               |   |
| ITEM 5.       | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 19     |
|          |                                                                                                               |   |
| ITEM 7.       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                        | 23     |
|          |                                                                                                               |   |
| ITEM 7A.      | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                                        | 32     |
|          |                                                                                                               |   |
| ITEM 8.       | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 34     |
|          |                                                                                                               |   |
| ITEM 9.       | CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE                               | 64     |
|          |                                                                                                               |   |
| ITEM 9A.      | CONTROLS AND PROCEDURES                                                                                            | 65     |
|          |                                                                                                               |   |
| ITEM 9B.      | OTHER EVENTS                                                                                                       | 74     |
|          |                                                                                                               |   |
| PART III |                                                                                                               | 74     |
|          |                                                                                                               |   |
| ITEM 10.      | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE                                                            | 74     |
|          |                                                                                                               |   |
| ITEM 11.      | EXECUTIVE COMPENSATION                                                                                             | 77     |
|          |                                                                                                               |   |
| ITEM 12.      | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                    | 87     |
|          |                                                                                                               |   |
| ITEM 13.      | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,  AND DIRECTOR INDEPENDENCE                                         | 87     |
|          |                                                                                                               |   |
| ITEM 14.      | PRINCIPAL ACCOUNTANT FEES AND SERVICES.                                                                            | 88     |
|          |                                                                                                               |   |
| PART IV  |                                                                                                               | 90     |
|          |                                                                                                               |   |
| ITEM 15.      | FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND  REPORTS ON FORM 8-K                                              | 90     |
|          |                                                                                                               |   |
| SIGNATURES    | 91                                                                                                                 |

 

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**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 ofhistorical fact) that address activities, events or developments that weintend, expect, project, believe or anticipate will or may occur in the futureare forward-looking statements. These statements are often characterized by terminologysuch as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,”“will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similarexpressions, and are based on assumptions and assessments made by management inlight of their experience and their perception of historical trends, currentconditions, expected future developments and other factors they believe to beappropriate. Forward-looking statements are not guarantees of futureperformance and are subject to risks and uncertainties. Important factors thatcould cause actual results, developments and business decisions to differmaterially from forward-looking statements are described in this report,including the risks set forth under “Risk Factors” in Item 1A.

 

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

 

**EXPLANATORY NOTE**

 

**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”). Based onissues raised in the Preliminary Report, on March 15, 2006, the AuditCommittee determined that the financial statements****filedwith the SEC in connection with the following previously issued reports of theCompany should 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. Following KPMG’s resignation, we began theprocess of obtaining a new independent registered public accounting firm. On February 2,2007, our Audit Committee engaged Deloitte & Touche LLP (“Deloitte”)to serve as our independent registered public accounting firm.

 

**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

 

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our inability to file such reports, on April 5,2006, the Nasdaq Listing Qualifications Panel determined to delist our commonstock from The Nasdaq National Market.

 

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 bequoted only on Pink Sheets could adversely affect the trading market—andpotentially the market price—of our common stock.

 

Preceding the filing of this report, we filed the Annual Report on Form10-K for 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 argument regarding theCompany’s petition on October 1, 2008. The SEC has now rescheduled theoral argument for an unspecified future date. We cannot predict the outcome ofsuch review at this time. The Initial Decision of the administrative law judgewill not become effective prior to the completion of the SEC’s review. Wecannot predict what, if any, impact the SEC’s ultimate determination may haveon our financial statements or the materiality of such impact, if any. If afinal order is issued by the SEC revoking the registration of our common stock,broker-dealers would not be permitted to effect transactions in shares of ourcommon stock until we file a new registration with the SEC under the ExchangeAct and that registration is made effective.

 

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 Financial Statements**

 

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 financial records,including matters identified by the independent investigation, as discussed 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.

 

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**PART 1**

 

## ***Item 1. Business***

 

**The Company**

 

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

 

Our operations 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, Synergy Worldwide.Synergy Worldwide sells products in the United States, Japan, South Korea,Singapore, Thailand, Taiwan, Malaysia, Hong Kong, Philippines, Indonesia, theUnited 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”).

 

**Financial Information by Business Segment**

 

We areprincipally engaged in one line of business; namely, manufacturing andmarketing nutritional and personal care products. We conduct our business throughthree operating business segments. Two of the operating business segmentsoperate under the *Nature’s Sunshine Products* nameand are based on geographic operations: a United States segment (“NSP UnitedStates”) and an international segment (“NSP International”). Our thirdoperating business segment is *Synergy Worldwide*,a division that was acquired in 2000. Synergy Worldwide offers products withformulations different from those of the Nature’s Sunshine Products offerings.In addition, Synergy Worldwide’s marketing and Distributor compensation plansare sufficiently different from those of Nature’s Sunshine Products.Information by business segment for each of our last three fiscal years forsales revenue and operating income, and information by business segment as ofthe end of our last two fiscal years for identifiable assets, are set forth inNote 14 of the Notes to Consolidated Financial Statements set forth in Item 8of this Report.

 

**Products and Manufacturing**

 

Our line ofover 700 products includes herbal products, vitamins and mineral supplements,personal care, nutritional drinks, and miscellaneous other products. Wepurchase herbs and other raw materials in bulk and, after quality controltesting, formulate, encapsulate, tablet or concentrate, and package them forshipment. Most of our products are manufactured at our facility in SpanishFork, Utah. Contract manufacturers produce some of our personal care and othermiscellaneous products for us in accordance with our specifications andstandards. We have implemented stringent quality control procedures to verifythat the contract manufacturers have complied with our specifications andstandards. Our product lines are described below.

 

*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 

 

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herbs and herb combinations in the form of liquid herbs and extracts.Liquid herbs are manufactured by concentrating herb constituents in a vegetableglycerin base. Extracts are created by dissolving powdered herbs into liquidsolvents that separate the key elements of the herbs from the fibrous plantmaterial. For the years ended December 31, 2007, 2006, and 2005, herbalproducts accounted for approximately 52.9, 54.0, and 53.7 percent of net salesrevenue, 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,homeopathic products, and powders. For the years ended December 31, 2007,2006, and 2005, other products accounted for approximately 3.2, 3.3, and 3.3percent of net sales revenue, respectively.

 

**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 thesponsorship of someone who is already a Distributor. Each Distributor isrequired to renew his/her distributorship on a yearly basis; our experienceindicates that approximately 45 percent of our Distributors renew annually.Many Distributors sell our products on a part-time basis to friends orassociates or use the products themselves. A Distributor interested in earningadditional income by committing more time and effort to selling our productsmay earn “Manager” status. Manager status is contingent upon attaining certainpurchase volume levels, recruiting additional Distributors, and demonstratingleadership abilities. 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.

 

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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’s Sunshine”, and the landscape logo for all of our Nature’s Sunshineproduct lines. We have also obtained trademark registrations for “Synergy” forall of our Synergy product lines. We hold trademark registrations in the UnitedStates and in many other countries. Our customers’ recognition and associationof our brands and trademarks with quality is an important element of ouroperating strategy.

 

**Seasonality**

 

Our business does not reflect significant seasonality.

 

**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 afterreceipt. As a result, we have not historically experienced significantbacklogs.

 

**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,

 

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Mannatech and Amway. The principal competitors in the retailencapsulated and tableted herbal products market include Nature’s Way, NOW,Rexall Sundown, and Nutraceuticals**.**We believethat the principal components of competition in the direct sales marketing ofnutritional and personal care products are quality, price, and brandrecognition. In addition, the recruitment, training, travel, and financialincentives for the independent sales 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 or competitiveposition.

 

**Regulation**

 

The formulation, manufacturing, packaging, labeling, advertising,distribution and sale of each of our major product groups are subject toregulation by one or more governmental agencies. The most active of these isthe Food and Drug Administration (“FDA”), which regulates our products underthe Federal Food, Drug and Cosmetic Act (“FDCA”) and regulations promulgatedthereunder. The FDCA defines the terms “food” and “dietary supplement” and setsforth various conditions that unless complied with may constitute adulterationor misbranding 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, Good Manufacturing Practices (“GMPs”) existfor both foods and dietary supplements. The GMPs for dietary supplements becameeffective August 27, 2007 with a phase-in compliance date of June 2008for companies with more than 500 employees.

 

Our products are also regulated by the Federal Trade Commission(“FTC”), the Consumer Product Safety Commission (“CPSC”), the United StatesDepartment of Agriculture (“USDA”), and the Environmental Protection Agency(“EPA”). Our activities, including our multi-level distribution activities, arealso regulated by various agencies of the states, localities, and foreigncountries in 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.

 

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| **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.

 

## ***Item 1A. 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. Ourbusiness prospects, financial condition, or results of operations could beadversely affected by any of the following risks. If we are adversely affectedby such risks, then the trading price of our common stock could decline.*

 

**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 the ExchangeAct;

·                  Limitations on access to public capitalmarkets;

 

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

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

·                  Impact of material weaknesses in internalcontrol over financial reporting;

·                  Potential changes in tax liabilities; and

·                  Outcome of civil litigation.

 

***We cannot register securities for a 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.

 

***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

 

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in our consolidated financial statements. If it is determined that wehave additional tax liabilities, there could be an adverse effect on ourfinancial 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 themarketing organization are based upon sales of the product. Failure to complywith these laws and regulations could result in significant penalties.Violations could result from misconduct by an associate, ambiguity in statutes,changes or new laws and regulations affecting our business, and court relateddecisions. Furthermore, we may be restricted or prohibited from using network marketingplans in some foreign countries.

 

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***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 and foreigngovernmental agencies and authorities. These include the FDA, the FTC, theCPSC, 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 alteredlabeling and/or scientific substantiation. Any or all such requirements couldhave a material negative impact on our financial position, results ofoperations, and liquidity.

 

***If we are unable to attract and 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.

 

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***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.

 

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***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 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 certain foreigntaxes 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 rapid changeand frequent reformulation of products make patent protection impractical. As aresult, we enter into confidentiality agreements with certain of our employeesin our research and development activities, our independent associates,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, whichcould result in our business being required to obtain licenses for such rights,payment of royalties, or the termination of our manufacturing of infringingproducts, all of which could have a material negative impact on our financialposition, 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 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. 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.

 

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***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 could result in interruptions in our day-to-daybusiness that could adversely affect our business. We have a disaster recoveryplan in place to mitigate the risk. Nevertheless, there can be no assurancethat a long-term failure or impairment of any of our information systems wouldnot adversely affect our ability to conduct our day-to-day business.

 

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

 

We sell ourproducts worldwide to a sales force of independent Distributors who use theproducts themselves or resell them to other Distributors or consumers. In theevent that local laws and regulations or the interpretation of locals laws andregulations change and require us to treat our independent Distributors asemployees, or if our Distributors are deemed by local regulatory authorities inone or more of the jurisdictions in which we operate to be our employees ratherthan independent contractors, under existing laws and interpretations, we maybe held responsible for a variety of obligations that are imposed uponemployers relating to their employees, including employment related taxes andpenalties. Our Distributors also operate in jurisdictions, where locallegislation and governmental agencies require us to collect and remit taxessuch as sales tax or value added taxes. In addition, there is the possibilitythat some jurisdictions could seek to hold the Company responsible for falseproduct claims or the negligent actions of an independent Distributor. If theCompany were 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 our productsis intensely competitive. Many of our competitors are significantly larger,have greater financial resources, and better name recognition than we do. Wealso rely on our independent Distributors to market and sell our productsthrough direct marketing techniques, as well as sponsoring other Distributors.Our ability to compete with other direct marketing companies depends greatly onour ability in attracting and retaining our Distributors. In addition, wecurrently do not have significant patent or other proprietary protection, andour competitors may introduce products with the same or similar ingredientsthat we use in our products. As a result, we may have difficultydifferentiating our products from our competitors’ products, and competing productsentering the nutritional market. There can be no assurance that our futureoperations would not be harmed as a result of changing market conditions andfuture competition.

 

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## ***Item 1B. 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 be filedconcurrently with this Report.

 

## ***Item 2. 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 ownapproximately 60,000 square feet of office and warehouse space in Mexico andapproximately 13,000 square feet of office and warehouse space in Venezuela.These facilities support our Nature’s Sunshine Products international segment.

 

We also ownapproximately 53 acres of undeveloped land in Springville, Utah andapproximately 8 acres of undeveloped land in Provo, Utah.

 

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 $5.2million, $5.3 million, and $3.7 million, respectively, for all of our leasedfacilities.

 

## ***Item 3. 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 and Cristianifor violation of Section 20(a) of the Exchange Act, alleging that theindividual defendants have “control person” liability for thepreviously-alleged violations by the Company. The Consolidated Complaint seeksan unspecified amount of compensatory damages, together with interest thereon,litigation costs and expenses, including attorneys’ fees and expert fees, andany such other and further relief as may be allowed by law.

 

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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.

 

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.

 

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**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.

 

## ***Item 4. Submission of Matters to a Vote of SecurityHolders***

 

None.

 

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**PART II**

** **

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

 

**Market andShare Prices**

 

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

 
| ** **     | ** ** | **Market Prices** | ** ** | ** **        | ** ** | **Market Prices**                    | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|-------------------------------------------|------------|
| **2007**       | ** ** | **Best Ask**      | ** ** | **Best Bid** | ** ** | **2006**                                  | ** ** | **High/Best  Ask** | ** ** | **Low/Best  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 |   |
|                |            |                        |            |                   |            |                                           |            |  |  |  |  |  |  |  |  |

 

The Pink Sheets quotations (provided for timeperiods after April 4, 2006) reflect inter-dealer prices, without retailmark-up, mark-down or commission and may not necessarily represent actualtransactions.

 

**RecentSales of Unregistered Securities**

 

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

 

On July 10,2006, we issued and sold 500 shares of common stock into the market on behalfof Karen Nichols pursuant to a net exercise of stock options granted under our1995 Stock Plan and payment to Ms. Nichols of cash proceeds in excess ofthe exercise price, less applicable tax withholdings. No exemption from theregistration requirements of Section 5 of the Securities Act is claimed.

 

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

 

On February 2,2007, we issued and sold 61,330 shares of common stock to Eugene L. Hughes, ourfounder and Director, for cash consideration in an aggregate amount of $471,505upon the exercise of stock options granted under our 1995 Stock Plan. This saleis exempt 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 and sold 5,340 shares of common stock to Kent Hastings, ourDirector of Export Markets, for cash consideration in an aggregate amount of$41,054 upon the exercise of stock options granted under our 1995 Stock Plan.This sale is exempt from the registration requirement of Section 5 of theSecurities Act pursuant to Section 4(2) of the Securities Act.

 

On July 27,2007, we issued and sold 500 shares of common stock to the estate of RobertSchaffer for cash consideration in an aggregate amount of $4,157 upon theexercise of stock options granted under our 1995 Stock Plan. 

 

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This sale is exempt from the registrationrequirement of Section 5 of the Securities Act pursuant to Section 4(2) ofthe Securities Act.

 

**Dividends**

 

There wereapproximately 842 shareholders of record as of June 30, 2008. During 2007and 2006, the Company paid quarterly cash dividends of $0.05 per common share.The Company expects to continue 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      |                                                                                                                                                                                                 | —     |   |

 

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**PerformanceGraph**

 

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.

 

 

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**Item 6. Selected Financial Data**

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

 

The selected consolidatedfinancial data presented below is summarized from our results of operations foreach of the four years in the period ended December 31, 2007, as well asselected consolidated balance sheet data as of December 31, 2007, 2006,2005, 2004, and 2003. In light of the substantial time, effort and expenseincurred to complete the restatement of our consolidated financial statementsfor 2004, we have determined that extensive additional efforts would berequired to restate 2003. In particular, turnover of relevant personnel andlimitations of systems and data all limit our ability to reconstruct additionalfinancial information for 2003. Previously published information for 2003should not be relied upon.

 

**IncomeStatement Data**

 
| ** ** | ** ** | **Net Sales  Revenue** | ** **  | **Cost of  Goods Sold** | ** ** | **Volume  Incentives** | ** ** | **Selling, General  and Administrative** | ** **  | **Operating  Income** | ** ** | **Income Before  Income Taxes** | ** ** | **Net (Loss)  Income** | ** ** |
|------------|------------|-----------------------------|-------------|-----------------------------------|------------|------------------------|------------|----------------------------------------------------|-------------|-----------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| **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                      |       |
|            |            |                             |             |                                   |            |                        |            |                                                    |             |                       |            |                                           |            |                             |            |  |  |  |  |  |  |  |

 

**BalanceSheet 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                         |       |
|            |            |                      |            |                    |            |                 |            |                                                        |            |                   |            |                            |            |                                |            |  |  |  |  |  |  |

 

**CommonShare Summary**

 
| ** ** | ** ** | **Cash Dividend  Per Share** | ** ** | **Basic Net (Loss)  Income Per Share** | ** ** | **Diluted Net (Loss)  Income Per Share** | ** ** | **Basic Weighted  Average Shares** | ** ** | **Diluted Weighted  Average Shares** | ** ** |
|------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| **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                                         |       |
|            |            |                                        |            |                                                            |            |                                                              |            |                                              |            |                                                |            |  |  |  |

 

Other relevantnonfinancial data is presented below:

 

**OtherInformation**

 
| ** ** | ** ** | **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                                      |       |

 

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

## ** **

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

 

**OVERVIEW**

 

*OurBusiness, Industry and Target Market*

 

Nature’s SunshineProducts, Inc. and its subsidiaries are primarily engaged in themanufacturing and marketing of herbal products, vitamin and mineralsupplements, personal care, and miscellaneous products. Nature’s SunshineProducts, Inc. is a Utah corporation with its principal place of businessin Provo, Utah. We sell our products to a sales force of independentDistributors and Managers who use the products themselves or resell them toother Distributors or consumers. The formulation, manufacturing, packaging,labeling, advertising, distribution and sale of each of our major productgroups are subject to regulation by one or more governmental agencies.

 

We market our products inthe United States, Mexico, Central America, Canada, Venezuela, the DominicanRepublic, Japan, Ecuador, the United Kingdom, Columbia, Peru, Israel, Russia, Ukraine,Latvia, Lithuania, Kazakhstan, Mongolia, Belarus, China, Poland, and Brazil. Wealso export our products to several other countries, including Argentina,Australia, Chile, New Zealand, and Norway.

 

We also sell our productsthrough a separate division and operating business segment, Synergy Worldwide,which was acquired in 2000. Synergy Worldwide offers products with formulationsdifferent from those of the Nature’s Sunshine Products offerings. In addition,Synergy Worldwide’s marketing and Distributor compensation plans aresufficiently different from those of Nature’s Sunshine Products. SynergyWorldwide sells products in Japan, the United States, South Korea, Singapore,Thailand, Taiwan, Malaysia, Hong Kong, the Philippines, Indonesia, the UnitedKingdom, Germany, Austria, the Netherlands, and Australia.

 

In 2007, we experiencedhealthy net sales revenue growth overseas in our Nature’s Sunshine ProductsInternational business segment of approximately 15%, while our domesticbusiness segment sales remained flat and our Synergy Worldwide business segmentexperienced a decline in net sales revenue of approximately 18% due primarilyto the loss of several key distributor networks. Over the same period, our costof goods sold remained constant as a percentage of net sales revenue, but ourselling, general and administrative expenses increased somewhat primarily as aresult of costs associated with increases in audit fees, the implementation ofnew internal 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 taxpositions of $25.9 million in accordance with FASB Financial Interpretation(“FIN”) 48, “Accounting for Uncertainly in Income Taxes,” and a correspondingdecrease in accrued liabilities of $15.8 million and an increase in otherassets of $10.1 million.

 

**CriticalAccounting Policies and Estimates**

 

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

 

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A summary of oursignificant accounting policies is provided in Note 1 of the Notes toConsolidated Financial Statements in Item 8 of this Report. We believe thecritical accounting policies and estimates described below reflect our moresignificant estimates and assumptions used in the preparation of ourconsolidated financial statements. The impact and any associated risks on ourbusiness that are related 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.

 

*RevenueRecognition*

 

Net sales revenue andrelated volume incentive expenses are recorded when persuasive evidence of anarrangement exists, collectability is reasonably assured, the amount is fixedand determinable, 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 atthe lower-of-cost-or-market, using the first-in, first-out method. Thecomponents of inventory cost include raw materials, labor, and overhead. Toestimate any necessary lower-of-cost-or-market adjustments, various assumptionsare made in regard to excess or slow-moving inventories, non-conforminginventories, expiration dates, current and future product demand, productionplanning, and market conditions.

 

*Self-insuranceLiabilities*

 

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

 

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

 

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*IncentiveTrip Accrual*

 

We accrue for expensesfor incentive trips associated with our direct sales marketing program, whichrewards independent Distributors and Managers with paid attendance at ourconventions and meetings. Expenses associated with incentive trips are accruedover qualification periods as they are earned. We specifically analyzeincentive trip accruals based on historical and current sales trends as well ascontractual obligations when evaluating the adequacy of the incentive tripaccrual. Actual results could result in liabilities being more or less than theamounts recorded. We have accrued convention and meeting costs of approximately$5.5 million and $3.8 million at December 31, 2007 and 2006, respectively.

 

*Impairmentof Long-Lived Assets*

 

The Company reviews itslong-lived assets, such as property, plant and equipment and intangible assetsfor impairment when events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable. The Company uses an estimateof future undiscounted net cash flows of the related assets or groups of assetsover their remaining lives in measuring whether the assets are recoverable. Animpairment loss is calculated by determining the difference between thecarrying values and the fair values of these assets. At December 31, 2007and 2006, the Company did not consider any of its long-lived assets to beimpaired.

 

*Contingencies*

 

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

 

*Income Taxes*

 

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

 

Deferred income taxesarise from temporary differences between the tax and financial statementrecognition of revenue and expense. In evaluating our ability to recover ourdeferred tax assets we consider all available positive and negative evidence,including scheduled reversals of deferred tax liabilities, projected futuretaxable income, tax planning strategies and recent financial operations. Inprojecting future taxable income, we develop assumptions including the amountof future state, federal and foreign pretax operating income, the reversal oftemporary differences, and the implementation of feasible and prudent taxplanning strategies. These assumptions require significant judgment about theforecasts of future taxable income and are consistent with the plans andestimates we are using to manage the underlying businesses.

 

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

 

We believe that it ismore likely than not that the benefit from certain deferred tax assets,including foreign net operating loss carryforwards and foreign tax credits,will not be realized. In recognition of this risk, we have provided a valuationallowance of $11.3 million for certain deferred tax assets, including foreignnet operating loss carryforwards and foreign tax credits. If our assumptionschange and we determine we will be able to realize these deferred tax assets,the tax benefits relating to any reversal of the valuation allowance ondeferred tax assets at December 31, 2007 will be accounted for as areduction of income tax expense.

 

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Changes in tax laws andrates could also affect recorded deferred tax assets and liabilities in thefuture. Management is not aware of any such changes that would have a materialeffect on the Company’s results of operations, cash flows or financialposition.

 

The calculation of ourtax liabilities involves dealing with uncertainties in the application ofcomplex tax laws and regulations in a multitude of jurisdictions across ourglobal operations.

 

In July 2006, theFASB issued Financial Interpretation (“FIN”) 48, “Accounting for Uncertainty inIncome Taxes,” which clarifies the accounting for uncertainty in income taxesrecognized in the financial statements in accordance with SFAS 109, “Accountingfor Income Taxes.” FIN 48 provides that a tax benefit from an uncertain taxposition may be recognized when it is more likely than not that the positionwill be sustained upon examination, including resolutions of any relatedappeals or litigation processes, based on the technical merits.

 

Income tax positions mustmeet a more-likely-than-not recognition threshold at the effective date to berecognized upon the adoption of FIN 48 and in subsequent periods. Thisinterpretation also provides guidance on measurement, derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. We adopted FIN 48 effective January 1, 2007.The adoption of FIN 48 did not have a material effect on our consolidatedfinancial statements.

 

**RESULTSOF OPERATIONS**

 

The following tablesummarizes our consolidated operating results as a percentage of net salesrevenue for the periods 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 | % |

 

***YearEnded December 31, 2007 as Compared to the Year Ended December 31,2006***

 

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

 

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*Net SalesRevenue*

 

Consolidated net salesrevenue for the year ended December 31, 2007, was $366.6 million comparedto $362.2 million in 2006, an increase of approximately 1.2 percent. During2007, the increase in net sales revenue is primarily due to continued growth inthe Company’s international business segment.

 

We distribute ourproducts to consumers through an independent sales force comprised of Managersand 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 theirbusinesses.

 

Net sales revenue relatedto the NSP United States business segment operations were $148.3 million and $148.4million for the years ended December 31, 2007 and 2006, respectively.

 

NSP International netsales revenue increased to $149.8 million in 2007 compared to $130.6 million in2006, an increase of approximately 14.7 percent. The increase in internationalnet sales revenue in 2007 compared to 2006 is primarily the result of continuedgrowth in our operations in Russia, Ukraine, Venezuela, and Japan. Priceincreases are planned in various international markets to compensate forforeign currency devaluations and increases in the cost of finished products.Management believes the price increases will be acceptable to its sales forceand will result in increased net sales revenue.

 

Synergy Worldwide netsales revenue decreased to $68.6 million in 2007 compared to $83.2 million in2006, a decrease of approximately 17.6 percent. The decrease in SynergyWorldwide net sales is primarily due to the loss of key distributor networks asa result of increased competition in the United States and Japanese marketswith growth remaining flat in the other markets in which Synergy Worldwideoperates. 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 apercent of net sales revenue increased slightly in 2007 compared to 2006primarily as a result of increased provisions for obsolete inventory.

 

*Volume Incentives*

 

Volume incentives are asignificant part of our direct sales marketing program and represent commissionpayments made to our independent Distributors and Managers. These payments aredesigned to provide incentives for reaching higher sales levels and forrecruiting additional Distributors. Volume incentives as a percent of net salesrevenue decreased slightly during 2007 as compared to 2006, primarily as aresult of the decreased sales revenue in our Synergy Worldwide business segmentwhere volume incentives are slightly higher than in the United States and ourother international operations, and as a result of sales in new markets wherelower levels of volume incentives were paid.

 

*Selling, General and Administrative*

 

Selling, general andadministrative expenses increased $9.1 million in 2007 compared to 2006, from$139.6 million to $148.7 million. Approximately $3.4 million is the result ofexpenses related to the continued growth of the Company’s international segments,as well as $1.1 of expenses related to new Synergy Worldwide markets. Professional fees increased $3.0 million as a result of continued work onbecoming current in our SEC filings.  In addition, bonuses to participantsin the Company’s discretionary bonus plan increased approximately $1.3 millionin 2007 compared to 2006. Selling, general and administrative expenses asa percent of net sales revenue increased to 40.6 percent in 2007 compared to38.5 percent in 2006. Selling, general and administrative expenses includesgeneral marketing and sales expenses, but not commissions, which are includedunder Volume Incentives, and also includes research and development expensesand 

 

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general administrativeexpenses. The amount, excluding capital expenditures, spent on research anddevelopment activities remained constant at $1.9 million for 2007 and 2006.

 

*IncomeTaxes*

 

The effective income taxrate was 285 percent for 2007, compared to 141 percent for 2006. The effectiverate for 2007 differed from the federal statutory rate of 35 percent primarilyrelated to (i) additional liabilities associated with uncertain taxpositions which increased the effective rate by 104 percent, (ii) additionaltax contingencies which increased the effective rate by approximately 16percent, (iii) change in deferred tax asset valuation allowances whichincreased the effective rate by approximately 61 percent, (iv) a taxablegain on the sale of intercompany assets eliminated for book purposes whichincreased the effective rate by approximately 25 percent, (v) anintercompany loan translation and instrument which increased the effective rateby 18 percent, and (vi) foreign and state tax rate differentials, as wellas permanent nondeductible or deductible items accounting for the remainingincrease.

 

The effective rate for2006 differed from the federal statutory rate of 35 percent primarily relatedto additional non-income tax contingencies which increased the effective rateby approximately 54 percent, and change in deferred tax asset valuationallowances which increased the effective rate by approximately 29 percent, ataxable gain on the sale of intercompany assets eliminated for book purposeswhich increased the effective rate by approximately 13 percent, a foreignexchange tax gain on an intercompany payable which increased the effective rateby 10 percent, and foreign and state tax rate differentials, as well aspermanent nondeductible or deductible items account for the remaining increase.

 

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

 

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

 

*Net SalesRevenue*

 

Consolidated net salesrevenue for the year ended December 31, 2006, was $362.2 million comparedto $351.7 million in 2005, an increase of approximately 3.0 percent. During2006, the increase in net sales revenue is primarily due to continued growth inthe Company’s international business segment.

 

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

 

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

 

NSP International netsales revenue increased to $130.6 million in 2006 compared to $120.0 million in2005, an increase of approximately 8.8 percent. The increase in internationalnet sales revenue in 2006 compared to 2005 is primarily the result of continuedgrowth in our operations in Russia, Venezuela, Canada, and Mexico. We implementprice increases 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.

 

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Synergy Worldwide netsales revenue decreased to $83.2 million in 2006 compared to $83.4 million in2005, a decrease of approximately 0.2 percent. The slight decrease in SynergyWorldwide net sales is primarily due to increased competition in the UnitedStates and Japanese markets, which have been offset by continued growth in theKorean and South Asian markets. Further information related to the NSP UnitedStates, NSP International and Synergy Worldwide business segments is set forthin Note 12 of Notes to Consolidated Financial Statements in Item 8 of thisReport.

 

*Cost ofGoods Sold*

 

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

 

*VolumeIncentives*

 

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

 

*Selling,General and Administrative*

 

Selling, general and administrativeexpenses increased $11.2 million in 2006 compared to 2005, from $128.4 millionto $139.6 million, as a result of expenses related to the continued growth ofthe Company’s international segment as well as costs related to the internalinvestigation previously mentioned of $6.9 million and $5.1 million related tonon-income tax contingencies. Selling, general and administrative expenses as apercent of net sales revenue increased to 38.5 percent in 2006 compared to 36.5percent in 2005. Selling, general and administrative expenses includes generalmarketing and sales expenses, but not commissions, which are included underVolume Incentives, and also includes research and development expenses andgeneral administrative expenses. The amount, excluding capital expenditures,spent on research and development activities increased slightly, from $1.8million in 2005 to $1.9 million in 2006.

 

*IncomeTaxes*

 

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

 

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

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our principal use of cashis to pay for operating expenses, including volume incentives, capital assets,inventory purchases, funding of international expansion, and the payment ofquarterly dividends. We have generally relied upon cash flows from operationsto fund operating activities, and have at times drawn on an operating line ofcredit in order 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.

 

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

 

Our netconsolidated 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 | ) |
|                       |            |                                            |            |  |  |  |  |  |  |  |

 

*Operating Activities*

 

For the year endedDecember 31, 2007, we generated cash from operating activities of $12.8million compared to $14.3 million in 2006. The decrease in cash generated fromoperating activities was primarily due to our net loss of $8.2 million for 2007compared to our net loss of $3.6 million the previous year, as well as adecrease in the collections of accounts receivable balances and the timing ofpayments and accruals for income taxes payable. This decrease was offset by a decreasein the use of cash for the purchasing of inventory, the timing of payments ofaccrued liabilities, and a decrease in deferred tax benefits. Cash flowsprovided by operating activities in 2005 were approximately $17.0 million.

 

*Investing Activities*

 

For the year endedDecember 31, 2007, net cash flow used in investing activities wasapproximately $5.7 million which included $4.3 million related to capitalexpenditures for equipment, computer systems, and software, and $1.0 millionfor the acquisition of intangibles related to the purchase of productformulations.

 

For the year endedDecember 31, 2006, net cash flow used in investing activities wasapproximately $4.0 million which included $2.7 million related to capitalexpenditures for equipment, computer systems, and software, and $0.8 millionfor the acquisition of intangibles related to the purchase of productformulations.

 

For the year endedDecember 31, 2005, net cash flow used in investing activities wasapproximately $3.7 million, which included $4.3 million of capital expendituresfor equipment, computer systems and software, as well as leasehold improvementsmade to enhance existing operations, as well as the expansion of internationalmarkets.

 

*Financing Activities*

 

For the years ended December 31, 2007, 2006, and2005, cash flows used for financing activities were approximately $1.6 million,$9.3 million, and $7.3 million, respectively.

 

In 2006, we used funds of $7.0 million to pay off ouroutstanding line of credit.

 

During 2005, we used cash of approximately $11.4million to purchase approximately 513,000 shares in a Dutch Auction tender of$22.15 per share. These Dutch Auction tenders were open to all shareholders ofthe Company, including employees. As of December 31, 2007, there were noplans approved by the Board of Directors 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 options of $1.3 million, $0.6million, and $7.7 million for the years ended December 31, 2007, 2006, and2005, respectively.

 

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

 

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

 

**CONTRACTUAL OBLIGATIONS**

 

The following tablesummarizes information about contractual obligations 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                       |       |
| Total                                                          |       | $         | 19,780     |                                | $          | 13,351             |       | $                  | 3,633      |                        | $          | 968 |   | $ | 1,828 |   |

 

----

(1)   Purchaseobligations include non-cancelable purchase agreements for both botanical andnon-botanical raw materials related to our forecasted 2008 productionestimates, as well as related packaging materials.

 

(2)   The Companyprovides a nonqualified deferred compensation plan for its officers and certainkey employees. Under this plan, participants may defer up to 100 percent oftheir annual salary and bonus (less the participant’s share of employmenttaxes). The deferrals become an obligation owed to the participant by theCompany under the plan. Upon separation of the participant from the service ofthe Company, the obligation owed to the participant under the plan will be paidas a lump sum or over a period of either three or five years. As we cannoteasily determine when our officers and key employees will separate from theCompany, we have classified the obligation greater than five years for payment.

 

**OFFBALANCE SHEET ARRANGEMENTS**

 

We have nooff-balance sheet arrangements other than operating leases. We do not believethat these operating leases are material to our current or future financialposition, results of operations, revenues or expenses, liquidity, capitalexpenditures, or capital resources.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

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

 

In June 2006,the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes by prescribinga recognition threshold and measurement attribute for the financial statementrecognition and measurement 

 

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of 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 Effectsof Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (“SAB 108”). SAB 108 provides guidance on how prior yearmisstatements should be considered when quantifying misstatements in thecurrent year financial statements. The SAB requires registrants to quantifymisstatements using both a balance sheet and an income statement approach andevaluate whether either approach results in quantifying a misstatement that,when all relevant quantitative and qualitative factors are considered, ismaterial. SAB 108 does not change the guidance in SAB 99, “Materiality”, whenevaluating the materiality of misstatements. SAB 108 is effective for fiscalyears ending after November 15, 2006. Upon initial application, SAB 108permits a one-time cumulative effect adjustment to beginning retained earnings.The adoption of SAB 108 did not have a material effect on our consolidatedfinancial statements.

 

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

 

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

 

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

 

## **Item 7A. Quantitativeand Qualitative Disclosures about Market Risk**

## ** **

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

 

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**ForeignCurrency Risk**

 

During the yearended December 31, 2007, approximately 58.3 percent of our net salesrevenue and approximately 55.2 percent of our operating expenses were realizedoutside of the United States. Inventory purchases are transacted primarily inU.S. dollars from vendors located in the United States. The local currency ofeach international subsidiary is considered the functional currency, and allrevenues and expenses are translated at average exchange rates for the periodsreported. Therefore, reported sales and expenses will be positively impacted bya weakening of the U.S. dollar and will be negatively impacted by astrengthening of the U.S. dollar. Given the uncertainty of exchange ratefluctuations, we cannot estimate the effect of these fluctuations on our futurebusiness, product pricing, results of operations, or financial condition.Changes in currency exchange rates affect the relative prices at which we sellour products. We regularly monitor our foreign currency risks and periodicallytake measures to reduce the impact of foreign exchange rate fluctuations on ouroperating results. We do not use derivative instruments for hedging, trading,or speculating on foreign exchange rate fluctuations.

 

The followingtable sets forth average currency exchange rates of one U.S. dollar into localcurrency for each of the currencies in which sales revenue exceeded $10.0million during any of the years presented.

 
| **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 functionalcurrency in highly inflationary economies is the U.S. dollar and transactionsdenominated in the local currency are re-measured as if the functional currencywere the U.S. dollar if they are considered material to the consolidatedfinancial statements. The remeasurement of local currencies into U.S. dollarscreates translation adjustments, which are included in the consolidatedstatements of operations. There were no countries considered to have a highlyinflationary economy during 2005, 2006, or 2007.

 

**Interest Rate Risk**

 

The primaryobjectives of our investment activities are to preserve principal whilemaximizing yields without significantly increasing risk. These objectives areaccomplished by purchasing investment grade securities, substantially all ofwhich either mature within the next 12 months or have characteristics ofmarketable securities. On December 31, 2007, we had investments of $4.8million of which $3.6 million were municipal obligations, which carry anaverage fixed interest rate of 4.9 percent and mature over a 5-year period. Ahypothetical 1.0 percent change in interest rates would not have had a materialeffect on our liquidity, financial position, or results of operations. Aportion of our long-term investments are auction rate securities. While therecent auction failures will limit our ability to liquidate these investmentsfor some period of time, we do not believe the auction failures will materiallyimpact our ability to fund our working capital needs, capital expenditures, orother business requirements.

 

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## **Item 8. FinancialStatements and Supplementary Data**

 

**INDEX TOFINANCIAL STATEMENTS**

 
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM                                                                                                |   | 35     |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                    |   |   |
| CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2007,  AND 2006                                                                                          |   | 36     |
|                                                                                                                                                    |   |   |
| CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS  ENDED DECEMBER 31, 2007, 2006, AND 2005                                                            |   | 37     |
|                                                                                                                                                    |   |   |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’  EQUITY AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2007,  2006, AND 2005 |   | 38     |
|                                                                                                                                                    |   |   |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS  ENDED DECEMBER 31, 2007, 2006, AND 2005                                                            |   | 39     |
|                                                                                                                                                    |   |   |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                              |   | 40     |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

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

 

We have audited the accompanyingconsolidated balance sheets of Nature’s Sunshine Products, Inc. andsubsidiaries (the “Company”) as of December 31, 2007 and 2006, and therelated consolidated statements of operations, changes in shareholders’ equityand comprehensive income (loss), and cash flows for each of the three years inthe period ended December 31, 2007. Our audits also included the financialstatement schedule listed in the Index at Item 15. These financial statementsand financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on the financialstatements and financial statement schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Nature’s Sunshine Products, Inc. and subsidiaries asof December 31, 2007 and 2006, and the results of their operations andtheir cash flows for each of the three years in the period ended December 31,2007, in conformity with accounting principles generally accepted in the UnitedStates of America. Also, in our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statementstaken as a whole, presents fairly, in all material respects, the informationset forth therein.

 

As discussed in Note 1 tothe consolidated financial statements, in 2007 the Company changed its methodof accounting for uncertain tax positions to conform with Financial AccountingInterpretation No. 48, “Accounting for Uncertainty in Income Taxes”.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31,2007, based on the criteria established in *Internal Control —Integrated Framework*issued by the Committee of Sponsoring Organizationsof the Treadway Commission and our report dated October 6, 2008 expressedan adverse opinion on the effectiveness of the Company’s internal control overfinancial reporting.

 

/s/ Deloitte &Touche LLP

 

Salt Lake City, Utah

October 6, 2008

 

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

 

**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 accompanyingnotes to consolidated financial statements.

 

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

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

***(Amounts in thousands, except pershare 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 accompanyingnotes to consolidated financial statements.

 

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**NATURE’S SUNSHINE 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 accompanyingnotes to consolidated financial statements.

 

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**NATURE’S SUNSHINE 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 accompanyingnotes to consolidated financial statements.

 

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

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

 

**Nature ofOperations**

 

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

 

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

 

**Principlesof Consolidation**

 

The accompanyingconsolidated financial statements include the accounts and transactions ofNature’s Sunshine Products, Inc. and its subsidiaries. At December 31,2007, 2006, and 2005, all of the Company’s subsidiaries were wholly owned.Intercompany balances and transactions have been eliminated in consolidation.

 

**Use ofEstimates**

 

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

 

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

 

**Cash andCash Equivalents**

 

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

 

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

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

 

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

 

**AccountsReceivable Allowances**

 

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

 

**InvestmentSecurities**

 

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

 

The Company alsohas certain investment securities classified as trading securities. The Companymaintains its trading securities portfolio to generate returns that are offsetby corresponding changes in certain liabilities related to the Company’sdeferred compensation plans (see Note 10). The trading securities portfolioconsists of marketable securities, which are recorded at fair value and areincluded in long-term investment securities on the consolidated balance sheetsbecause they remain assets of the Company until they are actually paid out tothe participants. The Company has established a rabbi trust to financeobligations under the plan. Both realized and unrealized gains and losses ontrading securities are included in interest and other income.

 

**RestrictedInvestments**

 

The Company’s restrictedinvestments include auction rate preferred investments totaling $2,075 withMerrill Lynch with investment grades of AAA (original date of purchase) as of December 31,2007. Auction rate preferred investments are similar in nature to auction ratessecurities in that they are long-term bonds or preferred stocks that act likeshort-term debt; however unlike auction rates securities, these investmentsrequire at least 200% collateral by the issuer. Interest rates for theseinvestments reset in Dutch auctions held weekly. These investments are carriedat par, which approximates fair value. The auction process for action rateinvestments historically provided a liquid market for these investments.However, in the second half of 2007, this process began to deteriorate. Whilethe Company’s portfolio was not affected by the auction rate process in 2007,the investments held by the Company experienced auction failures during thefirst quarter of 2008. An unsuccessful auction is an event when there are fewersecurities bid for than are available for sale. As a result, the Company hasreclassified these securities as long-term investments. Given that all of thesecurities experienced successful auctions prior to December 31, 2007 andthe Company has the ability and intent to hold the investments until asuccessful auction occurs, management does not believe that the current stateof the credit markets requires the Company to adjust the fair value of itsportfolio of auction rate securities. In addition, the Company has collectedall interest payable on the auction rate investments as they are due.

 

If the auction rateinvestments continue to experience unsuccessful auctions, or if the creditrating of the auction rate security issuer or the third party insurer of theissuers of the investments underlying the securities deteriorates, managementmay be required to adjust the carrying value of the auction rate securitythrough an impairment charge. While the recent auction failures will limit theCompany’s ability to liquidate these investments for some period of time,management does not believe the auction failures will impact the Company’sability to fund working capital needs, capital expenditures, or other businessrequirements. The Company will continue to monitor the state of the creditmarkets and its potential impact, if any, on the fair value and classificationof its portfolio of auction rate securities.

 

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

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

 

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

 

**FairValue of Financial Instruments**

 

The Company’s financialinstruments consist primarily of cash, cash equivalents, accounts receivable,investments, accounts payable, and line of credit. The carrying values of thesefinancial instruments approximate their fair values. The estimated fair valueshave been determined using appropriate market information and valuationmethodologies.

 

**Inventories**

 

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

 

**Property,Plant and Equipment**

 

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

 

**IntangibleAssets**

 

Intangible assetsconsist of purchased product formulations. Such intangible assets are amortizedusing the straight-line method over the estimated economic lives of the assetsof 15 years. Intangible assets, net of accumulated amortization, totaled $1,656and $755 at December 31, 2007 and 2006, respectively.

 

**Impairmentof Long-Lived Assets**

 

The Companyreviews its long-lived assets, such as property, plant and equipment andintangible assets for impairment when events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable. The Companyuses an estimate of future undiscounted net cash flows of the related assets orgroups of assets over their remaining lives in measuring whether the assets arerecoverable. An impairment loss is calculated by determining the differencebetween the carrying values and the fair values of these assets. At December 31,2007 and 2006, the Company did not consider any of its long-lived assets to beimpaired.

 

**ForeignCurrency Translation**

 

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

 

The functionalcurrency in highly inflationary economies is the U.S. dollar and transactionsdenominated in the local currency are remeasured as if the functional currencywere the U.S. dollar. The remeasurement of local currencies into U.S. dollarscreates translation adjustments, which are included in the consolidatedstatements of operations.  There were nocountries considered to have a highly inflationary economy during 2005, 2006,or 2007.

 

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

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

 

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

 

**RevenueRecognition**

 

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

 

Amounts billed tocustomers for shipping and handling are reported as a component of net salesrevenue. Shipping and handling revenues of approximately $9,453, $10,131, and$9,110 were reported as net sales revenue for the years ended December 31,2007, 2006, and 2005, respectively. The corresponding shipping and handlingexpenses are reported in selling, general and administrative expenses andapproximated the amounts reported as net sales revenue.

 

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

 

**AdvertisingCosts**

 

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

 

**Researchand Development**

 

All research anddevelopment costs are expensed as incurred and classified in selling, generaland administrative expense. Total research and development expenses wereapproximately $1,940, $1,920, and $1,754 in 2007, 2006, and 2005, respectively.

 

**IncomeTaxes**

 

Income taxes arerecorded using the asset and liability method. This method recognizes aliability or asset for the deferred income tax consequences of temporarydifferences between the tax basis of assets or liabilities and their reportedamounts in the consolidated financial statements. These temporary differenceswill result in taxable or deductible amounts in future years when the reportedamounts of the assets or liabilities are recovered or settled. Net deferred taxassets are reduced by a valuation allowance if it is more likely than not thatsome or all of the deferred tax assets will not be realized. In evaluating therealization of its deferred tax assets, the Company considers all availablepositive and negative evidence, including past operating results and forecastsof future taxable income, including tax planning strategies. These forecastsrequire significant judgment and assumptions to estimate future taxable incomeand are based on the plans and estimates that the Company uses to manage itsbusiness. The Company has established a valuation allowance against itsdeferred tax assets in each jurisdiction where it cannot conclude that it ismore likely than not that such assets will be realized. In the event thatactual results differ from the forecasts or the Company adjusts the forecastsor assumptions in the future, the resulting change in the valuation allowancecould have a significant impact on future income tax expense (see Note 8).

 

The Company issubject to income taxes in the United States and numerous foreignjurisdictions. In the ordinary course of the Company’s business there arecalculations and transactions, including transfer pricing, where the ultimate 

 

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

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

 

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

 

tax determinationis uncertain. In addition, changes in tax laws and regulations as well asadverse judicial rulings could adversely affect the income tax provision. TheCompany believes that it has adequately provided for income tax issues not yetresolved with federal, state, local and foreign tax authorities. However, ifthese provided amounts prove to be more than what is necessary, the reversal ofthe reserves would result in tax benefits being recognized in the period inwhich the Company determines that provision for the liabilities is no longernecessary. If an ultimate tax assessment exceeds the Company’s estimate of taxliabilities, an additional charge to expense would be required.

 

In July 2006,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48(“FIN 48”), “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.

 

**NetIncome Per Common Share**

 

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

 

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

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

 

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

 

Following is a reconciliation of thenumerator and denominator of Basic EPS to the numerator and denominator ofDiluted EPS for all years:

 
| ** **                         | ** ** | **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 inthe years ended December 31, 2007 and 2006, common stock options were notincluded in the computation of diluted earnings per share because the effect onnet loss per share would be antidilutive. For the year ended December 31,2005, 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, theCompany adopted Statements of Financial Accounting Standards (“SFAS”) No. 123(R),“Share-Based Payment” (“SFAS No. 123(R)”), which requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the statement of operations based on their fair values. Thisaccounting utilizes a “modified grant-date” approach in which the fair value ofan equity award is estimated on the grant date without regard to service orperformance 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, theCompany accounted for stock option compensation under the recognition andmeasurement 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 common sharewould have been reduced to the following pro forma amounts for the years ended December 31,2005:

 

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

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

 

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

 
| **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 frominvestments by, and distributions to, shareholders. Accordingly, the Company’scomprehensive income (loss) includes net income (loss), net unrealized gains(losses) on investment securities, reclassifications of realized gains, andforeign currency adjustments that arise from the translation of the financialstatements of the Company’s foreign subsidiaries.

 

**Recent Accounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, “FairValue Measurements” (“SFAS No. 157”), which became effective forthe Company on January 1, 2008. This statement defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. SFAS No. 157 does not require any new fair valuemeasurements, but applies to assets and liabilities that are required to berecorded at fair value under other accounting standards. 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, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).The fair value option established by this statement permits all entities tochoose to measure eligible items at fair value at specified election dates. Abusiness entity shall report unrealized gains and losses on items for which thefair value option has been elected in earnings (or another performanceindicator if the business entity does not report earnings) at each subsequentreporting date. Although this statement is voluntary, it is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007. The Company adopted SFAS No. 159 on January 1, 2008. Theadoption of the standard did not have a material effect on the Company’sconsolidated financial statements.

 

In September 2006,the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” (“SAB 108”). SAB 108 provides guidance on how prior yearmisstatements should be considered when quantifying misstatements in thecurrent year financial statements. The SAB requires registrants to quantifymisstatements using both a balance sheet and an income statement approach andevaluate whether either approach results in quantifying a misstatement that,when all relevant quantitative and qualitative factors are considered, ismaterial. SAB 108 does not change the guidance in SAB 99, “Materiality”, whenevaluating the materiality of misstatements. SAB 108 is effective for fiscalyears ending after 

 

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

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

 

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

 

November 15, 2006.Upon initial application, SAB 108 permits a one-time cumulative effectadjustment to beginning retained earnings. The adoption of SAB 108 did not havea material effect on our consolidated financial statements.

 

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

 

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

 

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

 

**NOTE 2: INVENTORIES**

 

The composition of inventories is asfollows:

 
| **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 |   |

 

**NOTE 3: PROPERTY, PLANT ANDEQUIPMENT**

 

The composition of property, plant and equipment is asfollows:

** **
| **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 $5,959for the years ended December 31, 2007, 2006, and 2005, respectively.

 

**NOTE 4: INTANGIBLE ASSETS**

 

The Company acquired certain product formulationsduring the years ended December 31, 2007 and 2006. At December 31,2007 and 2006, the product formulations had a carrying amount of $1,763 and$763, accumulated 

 

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

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

 

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

 

amortization of $107 and$8, and a net amount of $1,656 and $755, respectively. The estimated usefullife of the product formulations is estimated to be 15 years.

 

Amortization expense for intangible assets for theyears ended December 31, 2007 and 2006 was $99 and $8, respectively.Estimated amortization expense for the five succeeding fiscal years andthereafter 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      |   |

 

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

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

 

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

 

**NOTE 5: INVESTMENT SECURITIES**

 

The amortized cost and estimated fairvalues of available-for-sale securities by balance sheet classification are asfollows:

 
| **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 |   |

 
| **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 |   |

 

Contractualmaturities of municipal obligations fair value at December 31, 2007, areas 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 thesales of available-for-sale securities were $1,432, $1,396, and $1,718,respectively. The gross realized gains on sales of available-for-salesecurities (net of tax) were $0, $14, and $23 for the years ended December 31,2007, 2006, and 2005, 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 at December 31, 2007 and 2006, respectively, andgenerated gains of $171 and $148 for the years ended December 31, 2007 and2006, respectively, and a loss of $88 for the year ended December 31,2005.

 

As of December 31, 2007 and 2006, the Company hadunrealized losses of $6 and $31, respectively, in its municipal obligationsinvestments. These losses are due to the interest rate sensitivity of theseinvestments.

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

 

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

 

**NOTE 6:  ACCRUED LIABILITIES**

 

The composition ofaccrued 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 OTHERCOMPREHENSIVE LOSS**

 

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

 
| ** **                            | ** ** | **Foreign Currency  Translation  Adjustments** | ** ** | **Net Unrealized  Gains (Losses) On  Available-For-Sale  Securities** | ** ** | **Total  Accumulated Other  Comprehensive Loss** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Balance  as of January 1, 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 | ) |

 

**NOTE 8:  INCOME TAXES**

 

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

 
| **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 |   |

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

Components of theprovision (benefit) for income taxes for each of the three years in the periodended 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 |   |

 

The income tax benefitsassociated with employee exercises of options under the nonqualified stockoption plan decreased the income taxes payable by $246, $215, and $3,426 in2007, 2006, and 2005, respectively. These benefits were recorded as an increaseto common stock.

 

The provision for incometaxes, as a percentage of income before provision for income taxes, differsfrom the statutory U.S. federal income tax rate due to the 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     | %          |

 

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

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

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

 
| **As of December 31**                    | ** ** | **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 |   |

 

The components ofdeferred 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 taxliabilities are included in accrued liabilities and net non-current deferredtax liabilities are included in other liabilities in the consolidated balancesheets.

 

Management has provided avaluation allowance of $11,290 and $7,822 as of December 31, 2007 and2006, respectively, for certain deferred tax assets, including foreign netoperating losses and foreign tax credits, for which management cannot concludeit is more likely than not that they will be realized. The Company reviewed itstax positions and increased its valuation allowance by approximately $3,468 and$2,525 for 2007 and 2006, respectively, and decreased its valuation allowanceby $259 for 2005.

 

At December 31,2007, foreign subsidiaries had unused operating loss carryovers ofapproximately $7,705. Generally, the tax net operating losses will expire atvarious dates from 2008 through 2012. For financial reporting purposes, therelease of these valuation allowances would reduce income tax expenses. TheCompany has approximately $3,348 of foreign tax credits which begin to expire atvarious times starting in 2012.

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

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

 

The Company’s federalincome tax returns for 2002 through 2007 are open to examination for federaltax purposes. The Company has several foreign tax jurisdictions which have opentax years from 2000 through 2007. The IRS is currently conducting an audit ofthe Company’s U.S. federal income tax returns for the 2003 through 2005 taxyears. The Company believes the outcome of these matters will not have amaterial adverse effect on the consolidated results of operations orconsolidated financial position.

 

The Company adopted theprovisions of FIN 48 on January 1, 2007, which did not result in acumulative-effect adjustment. The total liability for unrecognized tax benefitsat January 1, 2007, including accrued interest and penalties ofapproximately $2,501, was approximately $11,156 all of which would favorablyimpact the Company’s effective tax rate if recognized. The Company accounts forinterest expense and penalties for unrecognized tax benefits as part of itsincome tax provision. The Company anticipates that unrecognized tax benefitswill increase approximately $2,000 to $3,600 within the next twelve months dueto additional transactions related to commissions and transfer pricing.

 

During the twelve-monthperiod ended December 31, 2007, the Company added approximately $4,728 toits liability for unrecognized tax benefits all of which would favorably impactits effective tax rate if recognized. Included in this amount is approximately$1,773 for the twelve-month period ended December 31, 2007, related tointerest expense and penalties. In addition, the Company recorded anunrecognized tax benefit related to the lapse of applicable statue oflimitations of approximately $64 all of which favorably impacted its effectivetax rate. The total outstanding balance for liabilities related to unrecognizedtax benefits at December 31, 2007 was $15,820, which is included theliability related to unrecognized tax positions in the consolidated financialstatements.

 

Prior to the adoption ofFIN 48 in 2007, the company has historically recorded uncertain tax positionsin accordance with SFAS No. 5, and has included such amounts in accruedliabilities. In conjunction with the adoption of FIN 48, as of December 31,2007, the Company has reclassified such tax uncertainties out of accruedliabilities in accordance with FIN 48 as follows:

 

1)     Reductionin accrued liabilities of approximately $15,820

2)     Increasein other assets (due to competent authority and royalty benefits) ofapproximately $10,068

3)     Increasein liability related to unrecognized tax positions of approximately $25,888

 

Although the Companybelieves its estimates are reasonable, the Company can make no assurance thatthe final tax outcome of these matters will not be different from that which ithas reflected in its historical income tax provisions and accruals. Such differencecould have a material impact on the Company’s income tax provision andoperating results in the period in which the Company makes such determination.

 

A reconciliation of thebeginning and ending amount of liabilities associated with uncertain tax positionsis 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     |   |

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

**NOTE 9:  CAPITAL TRANSACTIONS**

 

**Common Stock**

 

During 2007and 2006, the Company did not repurchase any shares of common stock. During2005, the Company repurchased 513 shares of common stock for a total of $11,363upon the completion of Dutch Auction tender offers. The Dutch Auction tenderoffers were open to all shareholders of the Company including employees.Employees were required to tender outstanding shares and be at risk consistentwith all shareholders. The repurchased shares have beenaccounted for as retired shares.

 

**Share-Based Compensation**

 

The Company maintained astock option plan, which expired in 2005 (“the Plan”). The Plan provided forthe granting or awarding of certain nonqualified stock options to officers,directors and other employees. The term, not to exceed 10 years, and thevesting and exercise period of each stock option awarded under the Plan weredetermined by the Company’s Board of Directors. All grants were made at thequoted fair market value of the stock at the date of grant.

 

Stock option activityfor 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      |   |

 

The weighted averagegrant date fair value of options granted was $3.85 for the year ended December 31,2007. The aggregate intrinsic values on the dates of exercise of optionsexercised during the years ended December 31, 2007, 2006, and 2005 were$623, $567, and $9,981, respectively. Intrinsic value is defined as thedifference between the current market value of the underlying common stock andthe grant price for options with exercise prices less than the market values onsuch dates.

 

During the year ended December 31,2007, the Company issued 140 nonqualified stock options outside the stockoption plan. The fair value of each option grant was estimated on the date ofthe grant using the Black-Scholes option-pricing model with the followingweighted-average assumptions for the year 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     | %          |

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

Expected option livesand volatilities are based on historical data of the Company. Our risk freeinterest rate is calculated as the average U.S. Treasury bill rate that correspondswith the option life. The Company has paid cash dividends totaling $3,102,$3,069, and $3,053 for the years ended December 31, 2007, 2006, and 2005,respectively.

 

Share-based compensationexpense 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-based compensationcost related to grants described above that will be recognized over aweighted-average period of 0.25 years.

 

The following tablesummarizes information about options outstanding and exercisable at December 31,2007.

 
| ** **                                                | ** ** | **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 intrinsicvalue of options outstanding and exercisable at December 31, 2007 was $36.

 

**NOTE 10:  EMPLOYEE BENEFIT PLANS**

 

**DeferredCompensation Plans**

 

The Company sponsors aqualified 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 anonqualified deferred compensation plan for its officers and certain keyemployees. Under this plan, participants may defer up to 100 percent of theirannual salary and bonus. Although participants direct the investment of thesefunds, they are classified as trading securities 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 trust to finance obligations under the Plan. At theend of each year and at other times provided under the plan, the Companyadjusts its obligation to a participant by the investment return or loss on thefunds selected by the participant under rules established in the plan.Upon separation of employment of the participant with the Company, theobligation owed to the participant under the plan will be paid as a lump sum orover a period of either three or five years (and will continue to be adjustedby the applicable investment return or loss during the period of pay-out). TheCompany had deferred compensation plan assets of approximately $1,674 and$1,594 as of December 31, 2007 and December 31, 2006, respectively.The change in the liability associated with the deferred compensation plan isrecorded in the deferred compensation payable.

 

**Management and Employee BonusPlan**

 

The Company has adiscretionary bonus plan that provides for participants to receive paymentsbased upon the achievement of specified annual increases in net sales revenueand operating income, as well as individual objectives. The expense related tothe bonus plan was approximately $3,580, $2,325, and $2,449 for the years endedDecember 31,

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

 

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

 

2007, 2006, and2005, respectively. These amounts were accrued as liabilities in the respectiveyear-end consolidated balance sheets. All United States employees as well askey international employees participate in the bonus plan.

 

**NOTE11:  COMMITMENTS AND CONTINGENCIES**

** **

**Contractual Obligations**

** **

The Company leasescertain facilities and equipment used in its operations and accounts for leaseswith escalating payments using the straight-line method. The Company incurredexpenses of approximately $5,358, $5,496, and $3,863 in connection withoperating leases during 2007, 2006, and 2005, respectively. The approximateaggregate commitments under non-cancelable operating leases in effect 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      |   |

 

The Company enters intocontracts with suppliers to ensure the availability of both botanical andnon-botanical raw materials, as well as packing materials, in advance of itsannual requirements. As of December 31, 2007, the Company has entered intonon-cancelable purchase agreements for $9,206 related to fiscal year 2008production needs.

 

**Legal Proceedings**

** **

Currently, the Companyis a party to various legal proceedings, including those noted below.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 lawsuitswere filed against the Company and certain of its present and former officersand directors in the United States District Court for the District of Utah.These matters were consolidated and on November 3, 2006, the plaintiffsfiled a Consolidated Complaint against the Company, the Company’s ChiefExecutive Officer and former director, Douglas Faggioli, the Company’s formerChief Financial Officer, Craig D. Huff, and a former director and former Chairof the Company’s Audit Committee, Franz L. Cristiani. The ConsolidatedComplaint asserts three separate claims on behalf of purchasers of the Company’scommon stock: (1) a claim against Mr. Faggioli and the Company forviolation of Section 10(b) of the Exchange Act and Rule 10b-5promulgated thereunder, alleging that Mr. Faggioli made a series ofalleged material misrepresentations to the investing public; (2) a claimagainst Mr. Faggioli and the Company for violation of Section 10(b) andRule 10b-5, alleging that Mr. Faggioli made a series ofmisrepresentations to the Company’s then independent auditor, KPMG, LLP (“KPMG”),for the purpose of obtaining unqualified or “clean” audit opinions and reviewopinions from KPMG concerning certain of the Company’s annual and quarterlyfinancial statements; and (3) a claim against Messrs. Faggioli,

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

Huff and Cristiani forviolation of Section 20(a) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), alleging that the individual defendants have “controlperson” liability for the previously-alleged violations by the Company. TheConsolidated Complaint seeks an unspecified amount of compensatory damages, togetherwith interest thereon, litigation costs and expenses, including attorneys’ feesand expert fees, and any such other and further relief as may be allowed bylaw.

 

On January 5, 2007,the Company and Messrs. Faggioli, Huff and Cristiani moved to dismiss theConsolidated Complaint in its entirety. On May 21, 2007, the court issuedits decision denying the motion in large part, but shortening the proposedclass period on one of the plaintiffs’ claims. On June 6, 2007, theCompany and the other defendants answered the Consolidated Complaint, whereinthey denied all allegations of wrongdoing and raised a number of affirmativedefenses. On November 1, 2007, the plaintiffs filed their motion for classcertification, which the Company opposed. On September 25, 2008, the courtgranted the plaintiffs’ motion for class certification in part, establishingthe class as all persons who purchased or otherwise acquired the Company’scommon 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 inthe early stages of discovery. The trial is not scheduled to commence until April 19,2010. Although the Company and the other defendants are vigorously defendingagainst the allegations in the lawsuit, and the Company intends to continuedoing so, the Company is not able at this time 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.

 

The Company maintainsinsurance that may provide coverage for the potential consequences of anegative outcome of the litigation described above. The Company has givennotice to its insurers of the claims and 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 the Company’s restatementof its financial statements. There can be no assurance that the insurers willnot seek to deny coverage or rescind the policies; that some or all of theclaims will not be covered by such policies; or that, even if covered, theCompany’s ultimate liability will exceed the available insurance.

 

**Threatened Derivative Lawsuits**

** **

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

 

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

 

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

 

Although the Company andthe other defendants are vigorously defending against the allegations in thethreatened derivative lawsuit above, management believes that it is notpossible at this time to predict the outcome of this litigation 

 

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** **

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

** **

or whether the Companywill incur any liability associated to the litigation, or to estimate theeffect such outcome would have on the financial condition of the Company.

** **

**SEC and DOJ Investigations**

** **

In March 2006, theCompany voluntarily disclosed to the SEC certain information related to theindependent investigation by the Company’s Audit Committee. Since that time,the SEC has subpoenaed certain documents and voluntarily requested otherinformation in connection with its subsequent investigation related to theseevents. 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.

 

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

 

**SEC Section 12(j) Proceeding**

** **

On July 12, 2007,the Company announced that the SEC had instituted administrative proceedingspursuant to Section 12(j). On November 8, 2007, an administrative lawjudge in the administrative proceeding issued an Initial Decision to revoke theregistration of the Company’s common stock. Shortly thereafter, the Companyfiled a petition for review with the SEC. On December 5, 2007, the SECgranted our petition for review. The SEC had scheduled oral argument regardingthe Company’s petition on October 1, 2008. The SEC has now rescheduled theoral argument for an unspecified future date. The Company cannot predict theoutcome of such review at this time. The Initial Decision of the administrativelaw judge will not become effective pending the review. The Company cannotpresently predict what, if any, impact the SEC’s ultimate determination mayhave on our financial statements or the materiality of such impact, if any. Ifa 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 the Company files a new registration with the SECunder the Exchange Act and that registration is made effective.

 

**Self-Insurance Liabilities**

** **

Similar to othermanufacturers and distributors of products that are ingested, the Company facesan inherent risk of exposure to product liability claims in the event that,among other things, the use of its products results in injury. Effective April 12,2004, the Company complied with the FDA’s ban on the ingredient ephedra. TheCompany carries insurance in the types and amounts it considers reasonablyadequate to cover the risks associated with its business. On June 1, 2003,the Company established a wholly owned captive insurance company to provide itwith product liability insurance coverage. The Company has accrued an amountthat it believes is sufficient to cover probable and reasonably estimableliabilities related to product liability claims based on the Company’s historyof such claims. However, there can be no assurance that these estimates willprove to be sufficient nor can there be any assurance that the ultimate outcomeof any litigation for product liability will not have a material negativeimpact on the Company’s business prospects, financial position, results ofoperations, or liquidity.

 

The Company self-insuresfor certain employee medical benefits. The recorded liabilities forself-insured risks are calculated using actuarial methods and are notdiscounted. The liabilities include amounts for actual claims and claimsincurred but not reported. Actual experience, including claim frequency andseverity as well as health care inflation, could result in actual liabilities beingmore or less than the amounts currently recorded.

 

The Company has accrued$2,306 and $1,503 for product liability and employee medical claims at December 31,2007 and 2006, respectively, and such amounts are included in accruedliabilities on the Company’s consolidated balance sheets.

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

**Employee-Related Litigation**

 

One of the Company’sforeign subsidiaries is a defendant in litigation regarding primarilyemployee-related matters. The Company has recorded accruals of approximately$600 and $836 related to this litigation at December 31, 2007 and 2006,respectively, which is included in accrued liabilities.

 

**Tax Contingencies**

 

The Company has reservedfor uncertain tax positions and certain state sales and use tax contingenciesbased on the likelihood of an obligation in accordance with SFAS No. 5,“Accounting for Contingencies.” Under SFAS No. 5, loss contingency provisionsare recorded for probable losses at management’s best estimate of a loss, orwhen a best estimate cannot be made, a minimum loss contingency amount isrecorded.  The Company providesprovisions for potential payments of income and other tax to various taxauthorities for contingencies related to uncertain tax position and otherissues.  The Company also providesprovisions for state sales taxes in each of the states where the Company haspotential nexus. At December 31, 2006, the Company accrued $21,093 (includingestimated interest and penalties) in accrued liabilities in the accompanying consolidatedbalance sheets for such uncertain tax positions and various other taxcontingencies. During 2007, in conjunction with the adoption of FIN 48, theCompany reclassified all uncertain tax contingencies (including interest andpenalties) out of accrued liabilities as discussed in Note 8. As of December31, 2007, accrued liabilities includes $14,393 related to non-income taxcontingencies. While management believes that the assumptions and estimatesused to determine this liability are reasonable, the ultimate outcome of thosematters cannot presently be determined. The Company is not able at this time topredict the ultimate outcomes of those matters or to estimate the effect theultimate outcomes, if greater than the amounts accrued, would have on thefinancial condition of the Company.

 

**Government Regulations**

** **

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

 

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

** **

The Company has threeoperating business segments. These operating segments are components of theCompany for which separate information is available that is evaluated regularlyby the chief operating decision maker in deciding how to allocate resources andin assessing performance.

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

The Company has twooperating business segments based on geographic operations that include aUnited States segment and an international segment that operate under theNature’s Sunshine Products name. The Company’s third operating business segmentis Synergy Worldwide, which 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. 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.

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

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 |   |

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 
| **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 |   |

 

From an individualcountry perspective, only the United States, Japan, and Russia compriseapproximately 10 percent or more of consolidated net sales revenue for any ofthe 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 individualcountry perspective, only the United States comprises 10 percent or more ofconsolidated long-lived assets, consisting of property, plant and equipment andintangible assets, as follows:

 
| **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 PARTY TRANSACTIONS**

** **

The Company maintainssplit-dollar life insurance policies on certain executives. The cash surrendervalue of $294 and $313 related to such policies is recorded in other assets asof 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.

 

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** **

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (continued)**

** **

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

 

**NOTE 15:  SUMMARY OF QUARTERLY OPERATIONS (SEE NOTE 1) –UNAUDITED**

 

The following tabledisplays the unaudited interim consolidated statements of operations for thequarters ended March 31, 2007, June 30, 2007, September 30,2007, and December 31, 2007.

 
| ** **                           | ** ** | **For the Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **March 31,  2007**                 | ** ** | **June 30,  2007** | ** ** | **September  30, 2007** | ** ** | **December  31, 2007** | ** ** |
| Net  sales revenue                   |       | $                                        | 91,986     |   | $ | 89,831 |   | $ | 86,574 |   | $ | 98,256 |   |
| Cost  of goods sold                  |       | 19,106                                   |       | 17,934 |   | 15,744 |   | 18,212 |   |
| Volume  incentives                   |       | 37,809                                   |       | 35,385 |   | 34,346 |   | 36,344 |   |
| Selling,  general and administrative |       | 36,305                                   |       | 34,720 |   | 39,056 |   | 38,625 |   |
| Operating  income (loss)             |       | (1,234                                   | )          | 1,792 |   | (2,572 | ) | 5,075 |   |
| Other  income (expense)              |       | 949                                      |       | 160 |   | 426 |   | (131 | ) |
| Income  (loss) before income taxes   |       | (285                                     | )          | 1,952 |   | (2,146 | ) | 4,944 |   |
| Taxes                                |       | 2,622                                    |       | 3,506 |   | 1,887 |   | 4,687 |   |
| Net  income (loss)                   |       | (2,907                                   | )          | (1,554 | ) | (4,033 | ) | 257 |   |
| Basic  net income (loss) per share   |       | (0.19                                    | )          | (0.10 | ) | (0.26 | ) | 0.02 |   |
| Diluted  net income (loss) per share |       | (0.19                                    | )          | (0.10 | ) | (0.26 | ) | 0.02 |   |
|                                      |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

The following tabledisplays the unaudited interim consolidated statements of operations for thequarters 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 netincome (loss) per share are computed independently for each of the quarterspresented. Therefore, the sum of the quarterly earnings per share may not equalthe total computed for the year.

 

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**Item 9.Change In and Disagreements with Accountants on Accounting and FinancialDisclosure**

 

**NONE**

 

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**Item 9A.Controls and Procedures**

 

This Reportincludes the certifications of our Chief Executive Officer and Chief FinancialOfficer required by Rule 13a-14 of the Securities Exchange Act of 1934(the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 9A includesinformation concerning the controls and control evaluations referred to inthose certifications.

 

OVERVIEW

 

Managementidentified certain material weaknesses which are described in the 2006 10-K.During 2007 and through the date of this filing, management has been focused onremediating these material weaknesses. This overview provides a summary of thestatus of each of the previously identified material weaknesses, followed by adiscussion of management’s evaluation of disclosure controls and procedures,management’s report on internal control over financial reporting, andmanagement’s efforts to remediate the material weaknesses, as set forth in thetable below.

 

As shown below,one material weakness reported as of December 31, 2006 was remediated asof December 31, 2007.  Othermaterial weaknesses reported as of December 31, 2006 remain materialweaknesses as of December 31, 2007, for which management continues toremediate.

 
| **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                    |

 

**Evaluationof Disclosure Controls and Procedures**

 

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

 

In connection withthe preparation of this report, the Company’s management, under the supervisionand with the participation of the Chief Executive Officer and Chief FinancialOfficer, assessed the effectiveness of the design and operation of ourdisclosure controls and procedures. Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures were not effective as of December 31,2007, as a result of the existence of material weaknesses in our internalcontrol over financial reporting.

 

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

 

We continue tostrive to improve our processes to enable us to provide complete and accuratepublic disclosure on a timely basis. Management believes that we will not beable to conclude that our disclosure controls and procedures are effectiveuntil the material weaknesses have been fully remediated and we are able tofile required reports with the SEC on a timely basis.

 

Nevertheless,based on management’s internal review of our processes and procedures, effortsto remediate the material weaknesses in internal control over financial reportingdescribed below and the performance of additional procedures by managementdesigned to ensure the reliability of our financial reporting, we believe thatthe consolidated financial statements included in this Annual Report on Form 10-Kfairly present, in all material respects, our financial position, results ofoperations and cash flows as of the dates, and for the periods, presented.

 

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

 

*Overview*

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. 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 theinherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis. Also, projections of any evaluation of effectiveness of theinternal control over financial reporting to future periods are subject to therisk that the controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

*Definitionof Material Weakness*

 

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

 

*Management’s Assessment of Internal Control overFinancial Reporting*

 

Management, withthe participation of our CEO and our CFO, assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2007.Management’s assessment of internal control over financial reporting

 

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was conducted using thecriteria in *Internal Control — Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Management hasconcluded that the Company did not maintain effective internal control overfinancial reporting as of December 31, 2007, based on the criteria establishedin COSO**because of the continued existence ofmaterial weaknesses related to the control environment, application ofgenerally accepted accounting principles (“GAAP”), accounting for income taxes,the financial reporting process, monitoring of a service provider, andinformation technology systems. Certain of these material weaknesses haveresulted in adjustments to the Company’s consolidated financial statements forthe year ended December 31, 2007. A description of the material weaknessesrelating to each of these areas as of December 31, 2007 is included below.

 

ControlEnvironment**—**TheCompany did not maintain an effective control environment for internal controlover financial reporting. Specifically, we concluded that we did not haveappropriate controls in the following area:

 

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

 

Application ofGAAP*—*****TheCompany did not maintain effective internal controls relating to theapplication of generally accepted accounting principles, including revenuerecognition for certain items, the proper recording of certain accruals andcontingencies, and the proper classification of certain balance sheet andincome statement accounts.

 

Accounting forIncome 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, we did not (i) analyze and reconcile certain deferred incomeand tax payable accounts, (ii) appropriately consider the need to recordor disclose contingencies for certain income tax positions in accordance withgenerally accepted accounting principles*,* and (iii) filetax returns in certain foreign jurisdictions. Additionally, we had insufficientpersonnel with appropriate qualifications and training in accounting for incometaxes.

 

FinancialReporting Process*—*TheCompany did not maintain an effective financial reporting process to preparefinancial statements in accordance with generally accepted accountingprinciples. Specifically, our process lacked timely and complete financialstatement reviews, effective journal entry controls, and appropriatereconciliation processes.  Further, wewere unable to complete regulatory filings as required by the rules of theSEC.

 

Monitoring of aService Provider*—*TheCompany did not effectively monitor a service provider responsible for managingthe entire operations for one of our foreign locations in terms of anout-sourced arrangement. Transactions are recorded in the Company’s systembased on monthly reporting from the service provider.  The Company 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 TechnologySystems**—**The Company did not maintain effectiveinternal control over financial reporting related to certain informationtechnology applications and general computer controls which are considered tohave an impact on financial reporting and which resulted in a more thanreasonable possibility that material misstatements in our financial statementswould not be prevented or detected. Specifically, we lacked effective controlsin 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. |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| · | * * | *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’s independent registered public accounting firm, issuedits attestation report on the effectiveness of our internal control over financialreporting as of December 31, 2007, and expressed an adverse opinion.

 

**Changesin Internal Control Over Financial Reporting**

 

Management hasevaluated whether any changes in our internal control over financial reportingthat occurred during the period from January 1, 2007 through the date ofthis filing have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. We anticipate that thesechanges and other ongoing enhancements and remediation activities, which aredescribed in the “Remediation Activities Related to Material Weaknesses”section below, will continue to have a material impact on our internal controlover financial reporting in future periods.

 
| · |   | 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  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, theCompany has taken, or anticipates taking, the following additional actions toremediate the specific material weaknesses described above.

 

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

 

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

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*Applicationof GAAP**—*We haveimplemented procedures to address revenue recognition issues. With respect toother non-income tax accruals and contingencies, in 2007 and 2008 ourmanagement performed an analysis with the assistance of outside legal counselto assess and estimate the exposure related to such positions. To addressincome statement and balance sheet classification issues, we have enhanced ourclose processes and procedures as described in the financial reporting processremediation activities below.

 

*Accountingfor Income Taxes**—*In2007, we hired a new Tax Director and Tax Accountant and have utilized variousout-sourced service providers for tax consulting services to assist in ouraccounting for income taxes. We continue to evaluate our tax process and taxresource 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.

 

*FinancialReporting Process**—*During2007, we redesigned and implemented improved procedures to provide for enhancedretention 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 willnot have fully remediated this material weakness until we are able to filerequired reports with the SEC on a timely basis.

 

*Monitoringof a Service Provider**—*We arein the process of redesigning our procedures to more effectively monitor theservice provider responsible for the management of the operations of one of ourforeign locations. In particular, we are improving our monitoring process toensure that the commissions expense recalculations and other reconciliationsprocesses (based on information reported by the outside service provider) areperformed on a regular basis, documented and reviewed. In addition, inconjunction with our 2007 assessment of internal controls, our out-sourced internalauditor performed a site visit to the foreign location to observe the facility,interview on site employees of the service provider, and evaluate the internalcontrol procedures of the service provider. Additional visits to the locationwill be conducted as part of internal audit’s overall plan.

 

*InformationTechnology Systems**—*During2007, we implemented the following procedures to enhance our informationtechnology processes and controls:

 

*AccessControls***–** In 2007, management performed a broadand detailed analysis of user access for the applications we have determined tohave a material impact on our financial reporting for our domestic locations.We are continuing to remediate segregation of duties conflicts. Our managementis evaluating the level of risk at material international locations, and willperform additional access reviews at additional international locations as considerednecessary. The Company is in the process of redesigning user security withinour financial reporting systems.

 

During 2007, we improvedphysical access controls including limiting access to certain check printersand our main data center. In addition, management performed an evaluation ofthe password requirements for certain key financial reporting applications, andimplemented strengthened passwords in 2007 to improve length, aging, andcomplexity for our passwords in certain key systems. We are currentlyevaluating enhancements to password requirements for our remainingapplications.

 

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*ChangeManagement***–** During2007, our management implemented enhanced procedures to control changes to theproduction environment, and we continue to evaluate additional measures toensure that adequate documentation is retained. In addition, during 2007 ourmanagement redesigned job descriptions within the change control process ofcertain of the Company’s application systems to improve segregation of duties,including removing the ability of the Information Technology Director toperform code changes and increasing his responsibilities to conduct codereview. In addition, an additional developer’s job responsibilities werechanged to assist in reviewing code before it is placed 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 ourfinancial reporting. In conjunction with the assessment of internal controlsfor 2007, management performed detailed testing at locations that have amaterial impact on our financial reporting around security and changemanagement for spreadsheets. Management intends to further enhance the designof our controls over spreadsheets by establishing procedures for benchmarkingcritical spreadsheets to ensure that formulas are appropriate and protected,and that the logic and design of the spreadsheets is appropriate andconsistent. Management is also implementing enhanced review procedures and wewill extend any or all of our enhanced procedures to additional internationallocations as considered necessary.

 

 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-widestandardization of the general ledger system. Management has developed atimeline for implementation of this application.

 

**Conclusion**

 

We believe themeasures described above will facilitate remediation of the material weaknesseswe have identified and will continue to strengthen our internal control overfinancial reporting. We are committed to continually improving our internalcontrol processes and will diligently and vigorously review our financialreporting controls and procedures. As we continue to evaluate and work toimprove our internal control over financial reporting, we may determine thatadditional measures are necessary to address control deficiencies. Moreover, wemay decide to modify, or in appropriate circumstances not to complete, certainof the remediation measures described above.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

To theBoard of Directors and Shareholders of

Nature’sSunshine Products, Inc.:

 

Wehave audited Nature’s Sunshine Products, Inc. and subsidiaries (the “Company”)internal control over financial reporting as of December 31, 2007, basedon criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Management’s Report on Internal Controlover Financial Reporting. Our responsibility is to express an opinion on theCompany’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on that risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

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

 

A material weakness is adeficiency, or combination of deficiencies, in internal control over financialreporting, such that there is a reasonable possibility that a materialmisstatement of the Company’s annual or interim financial statements will notbe prevented or detected on a timely basis. The following material weaknesseshave been identified and included in management’s assessment:

 

·                  *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.

 

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·                  *Application of GAAP* – The Companydid not maintain 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.

 

·                  *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 positions in accordance withgenerally accepted accounting principles*,* and (iii) filetax returns in certain foreign jurisdictions. Additionally, they hadinsufficient personnel with appropriate qualifications and training inaccounting for income taxes.

 

·                  *Financial Reporting Process –*TheCompany did not maintain an effective financial reporting process to preparefinancial statements in accordance with generally accepted accountingprinciples. Specifically, 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 inventory shipmentreconciliation procedures. These monitoring processes and procedures were notperformed on a regular basis, and were not adequately documented or reviewed,which increased the likelihood of material misstatements in their financialstatements.

 

·                  *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 weaknesseswere considered in determining the nature, timing, and extent of audit testsapplied in our audit of the consolidated financial statements and financialstatement schedule as of and for the year ended December 31, 2007, of theCompany and this report does not affect our report on such financial statementsand financial statement schedule.

 

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In our opinion, becauseof the effect of the material weaknesses identified above on the achievement ofthe objectives of the control criteria, the Company has not maintainedeffective internal control over financial reporting as of December 31, 2007,based on the criteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule as of and for the year ended December 31, 2007, of the Companyand our report dated October 6, 2008 expressed an unqualified opinion onthose financial statements and financial statement schedule.

 

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

 

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

 

None.

 

**PART III**

 

## **Item 10. Directors, Executive Officers andCorporate 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. 

 

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Mr. Deppe is currently an AssociateProfessor of Accounting in the School of Accountancy at Weber State University,Ogden, Utah. Prior to embarking on an academic career, Mr. Deppe for eightyears held various accounting posts with Intermountain Health Care, the Officeof 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 Hughes DevelopmentCorporation, a predecessor of our Company, in 1972. He has served as an officeror 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 1972 of Hughes DevelopmentCorporation, a predecessor of the Company, and has acted as a consultant fromtime to time to our 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

 

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Chemistry and Microbiology from BowlingGreen State University and her M.B.A. with an emphasis on Quality Managementfrom the University of Cincinnati. Mrs. Hammons is also a CertifiedQuality Engineer, a Certified Quality Technician and a Certified QualityAuditor–American Society for Quality.

 

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.

 

**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. Bowen areboth an “Independent Director” as discussed in Item 13,****“CertainRelationships and Related Transactions, and Director Independence.”

 

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

 

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

 

**Code of Ethics**

 

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.

 

## **Item 11. Executive Compensation**

## ** **

**Compensation Discussion 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.

 

***CompensationPolicy for Executive Officers****.* We havedesigned the various elements comprising the compensation packages of ourexecutive officers to achieve the following 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.

 

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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.

 

***Elementsof Compensation****.* Each ofthe major elements comprising the compensation package for executive officers(salary, bonus and equity) is (i) designed to reflect individualaccomplishments and contributions to the Company as well as overall Companyperformance, (ii) align the executive’s interests with those of ourshareholders and (iii) attract and retain qualified executives who willhelp the Company meet its goals. The manner in which each element ofcompensation has been structured may be explained as follows.

 

*Salary**.* The base salary level of each executive officer isreviewed in the last quarter of each year, with any salary adjustments for theupcoming year to be effective on or about January 1 of that year. TheCompany targets base salaries to be in the range of 80% to 90% of market.  However, the Company may also consider theperformance of the executive, contributions by the executive towards theCompany’s mission/goals and tenure at the Company.  The Company believes that this component ofcompensation should provide a level of security and stability from year to yearand not be dependent to any material extent on the Company’s financial performance. The Compensation Committee approved asalary increase of 6% for our chief executive officer for 2007.  The salary level for Mr. Yates was increased39% 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 Company foundthat, on average, our officers’ base salaries for 2007 were approximately 23%below the base salaries of officers at those companies.

 

*Incentive Compensation*. Thebonus structure is generally designed to bring the total cash compensation forour executives up to market in a typical year and to exceed market whenjustified by Company performance. For Messrs. Bunker, DeWyze, Halliday andYates, our chief executive officer had established bonuses of up to 75% oftheir respective base salaries for 2007 based on the Company’s performance. Theactual bonuses paid to Messrs. Bunker, DeWyze and Halliday were below theseamounts. The reduction was based on the weighted average bonuses actually paidto the employees in the Company’s U.S. Sales, International, and Synergydivisions. The actual bonus paid to Mr. Yates was above 75% of his base salarydue to performance in the Company’s International division only. Accordingly,Messrs. Bunker, DeWyze, Halliday and Yates received bonuses equal 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 a bonusfor 2007.  Cash bonuses paid to our othernamed executive officers (excluding our chief executive officer) in 2007 were 81%above the market average for companies with similar annual revenues, resultingin the total cash compensation of our officers being 18% below such marketaverages.

 

*Long-TermIncentives**.*In prioryears, we have structured our long-term incentive program for executiveofficers in the form of option grants under our 1995 Stock Option Plan whichwas administered by our Compensation Committee. Each option grant has beendesigned to align the interests of the executive officer with those of theshareholders and to provide him with a significant incentive to manage thecompany from the perspective of an owner with an equity stake in the business.Each option grant allows the officer to acquire shares of our common stock at afixed price per share over a specified period, usually ten years. Optionsgranted in past years have generally vested and become

 

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exercisable in a series of installments over a periodof one to three years measured from the grant date, contingent upon the officer’scontinued employment. All outstanding options are fully vested at this time.Our 1995 Stock Option Plan terminated in 2005 and no options have been grantedunder this 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 to 20,000, 3,000,and 15,000 shares of common stock, respectively. The options have a maximumterm of six years and become exercisable on the later of (i) one year from thedate of grant or (ii) the date upon which the Company registers the underlyingshares on a Form S-8 registration statement. These options were granted as aresult of (i) the arrival at new officers in 2006 and 2007, (ii) the promotionof certain officers and directors, (iii) and the expiration of certain optionspreviously granted.

 

***ExecutiveOfficer Perquisites****.* It is notour practice to provide our executive officers with any meaningful perquisites.However, in 2007 we paid premiums on $250,000 key person life insurancepolicies for our named executive officers and provided our named executiveofficers the opportunity to receive up to $2,500 for tuition assistance;however, none of our executive officers elected to receive tuition assistance.We believe these perquisites are an important factor in retaining our executiveofficers.

 

***OtherPrograms****.* Our executiveofficers are eligible to participate in our 401(k) employee savings planon the same basis as all other regular U.S. employees.

 

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

 

***Officer EmploymentAgreements.***We have entered into employment agreementswith each of our named executive officers. We believe that the employmentagreements with our executive officers achieve two important goals crucial toour long-term financial success; namely, the long-term retention of our seniorexecutives and their commitment to the attainment of our strategic objectives.The agreements will allow our participating executive officers to continue tofocus their attention on our business operations and strategic plans withoutundue concern over their own financial situations during periods whensubstantial disruptions and distractions might otherwise prevail. Eachemployment agreement provides for an initial term of twelve months whichautomatically renews for additional twelve month periods provided neither partyterminates the employment relationship. Upon the cessation of a named executiveofficer’s employment due to termination by the Company without cause, theCompany’s non-renewal of the employment term, death or incapacity, the namedexecutive officer will receive severance benefits in an amount equal to his orher base salary for the year of termination and continued medical and lifeinsurance coverage for 12 months (3 months 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.”

 

***Compliance with Internal Revenue Code Section 162(m)****.* Section 162(m) of the Internal Revenue Codedisallows a tax deduction to publicly held companies for compensation paid tocertain of their executive officers to the extent such compensation exceeds$1.0 million per covered officer in any year. The limitation applies only tocompensation that is not considered to be performance-based under the terms of Section 162(m).The stock options granted to Mr. Bunker, Mr. Yates, and Mr.Halliday on March 15, 2007 will not quality as performance-based compensation.Accordingly the compensation deemed paid when these options are exercised willbe subject to Section 162(m) limitations on deductions.  Non-performance-based compensation paid to ourexecutive officers for 2007 did not exceed the $1.0 million limit per officer.However, as we continue to increase salaries and bonuses for our executiveofficers and the amount recognized from equity awards, it is possible that thenon-performance-based compensation payable to our executive officers willexceed the $1.0 million limit in one or more future years. We believe that inestablishing the cash and equity incentive compensation programs for ourexecutive officers, the potential deductibility of the compensation payableunder those programs should be only one of a number of relevant factors takeninto consideration, and not the sole governing factor. For that reason, we maydeem it appropriate to provide one or more executive officers with theopportunity to earn incentive compensation, whether through cash bonus programstied to our financial performance or through equity awards, which together withbase salary in the aggregate may be in excess of the amount deductible byreason of Section 162(m) or other provisions of the Internal RevenueCode. We believe it is important to maintain cash and equity incentivecompensation at the levels needed to

 

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attract and retain the executive officers essential toour success, even if all or part of that compensation may not be deductible byreason 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

 

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**ExecutiveCompensation**

 

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.”

 

**SummaryCompensation 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            |       |

 

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(1)  Amounts for 2007 include amounts that weredeferred into the Company’s Supplemental Elective Deferral Plan (“SEDP”) for2007, 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 selectedemployees and non-employee directors with the ability to defer compensation tofuture dates specified by the participant with a return based on investmentalternatives selected by the participant. The SEDP is more fully described inthe section following the Nonqualified Deferred Compensation Plans table below.

 

(2)  Option awards are calculated in the samemanner as the expense of these awards that is recognized in our consolidatedfinancial statements. Option awards are valued under FAS 123R and thenamortized to expense during the vesting period of the award. See Note 10 to theNotes to Consolidated Financial Statements contained herein for a descriptionof the assumptions used in valuing stock awards and stock options. For thispurpose, the estimate of forfeitures relating to vesting conditions isdisregarded. The full amount of the FAS 123R value of the 2007 stockoptions is reported under “Equity Compensation Plan” on page 88.

 

(3)  “All Other Compensation” includes thefollowing amounts paid by the Company for the fiscal year ended December 31,2007. The amounts disclosed are the actual costs to the Company of providingthese benefits.

 

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| **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 followingtable provides certain summary information concerning each grant of an awardmade to named executive officers in 2007 under 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 |   |

 

**OutstandingEquity Awards at Fiscal Year-End**

 

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

 

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**Option Exercisesand Stock Vested**

 

Thefollowing table presents options exercised by named executive officers during2007. No named executive officer held shares of stock 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 Companydoes not have a pension plan in which the named executive officers canparticipate to receive payments or other benefits at, following, or inconnection with retirement.

 

**Nonqualified DeferredCompensation Plans**

 

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

 

SupplementalElective Deferral Plan. The Company has adopted the Nature’s Sunshine Products, Inc.Supplemental Elective Deferral Plan (the “SEDP”). The following table setsforth information relating to the SEDP for 2007 for the named executiveofficers:

 
| **Name & Principal Position** | ** ** | **Executive   Contributions in   Last FY ($)(1)** | ** ** | **Registrant   Contributions in   Last FY ($)** | ** ** | **Aggregate Earnings   in Last FY ($)(2)** | ** ** | **Aggregate   Withdrawals/   Distributions ($)** | ** ** | **Aggregate Balance at   Last FYE ($)** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(a)**                                          | ** ** | **(b)**                                                                    | ** ** | **(c)**                                                                  | ** ** | **(d)**                                                             | ** ** | **(e)**                                                         | ** ** | **(f)**                                                          | ** ** |
| Douglas Faggioli                                 |       | 52,000                                                                     |       | —                                                                   |       | 47,780                                                              |       | —                                                          |       | 677,772                                                          |       |
| Stephen Bunker                                   |       | —                                                                     |       | —                                                                   |       | —                                                              |       | —                                                          |       | —                                                           |       |
| John DeWyze                                      |       | 19,128                                                                     |       | —                                                                   |       | 19,138                                                              |       | —                                                          |       | 187,079                                                          |       |
| Greg Halliday                                    |       | 5,801                                                                      |       | —                                                                   |       | 993                                                                 |       | —                                                          |       | 15,058                                                           |       |
| Bryant Yates                                     |       | —                                                                     |       | —                                                                   |       | —                                                              |       | —                                                          |       | —                                                           |       |

 

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

 

(2)  Earnings is defined to reflect thedifference in the account balance between the beginning and end of the year,less any executive or Company contributions and any amounts withdrawn ordistributed. Earnings include realized and unrealized gains, capital gains anddividends paid.

 

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

 

**PotentialPayments Upon Termination or Change in Control**

 

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

 

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

 

Thefollowing table sets forth the estimated payments and benefits that would havebeen payable to the named executive officers under their agreements in thetermination circumstances indicated below had their employment terminated on December 31,2007. All cash payments are assumed to be made in a lump sum and would be paidby the Company. The amounts set forth in this table represent estimates andforward-looking information that is subject to substantial variation, based onthe timing of the triggering event. The Company cautions the reader to considerthese limitations in reviewing the following table.

 

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

 
| ** **                                            | ** ** | **Mr. Faggioli** | ** ** | **Mr. Bunker** | ** ** | **Mr. DeWyze** | ** ** | **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 |   |

 

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**DirectorCompensation**

 

Thefollowing table sets forth certain information regarding the compensation ofeach individual who served as a member of our Board of Directors during the2007 fiscal year. Except with respect to Mr. Eugene Hughes, thecompensation disclosed is for services rendered as a Board member during thatyear. Mr. Eugene Hughes is also our employee, and the compensationdisclosed for him below reflects his compensation he received in his capacityas an employee. He did not receive any additional compensation for his Boardservice.

 
| **Name**                | ** ** | **Fees Earned  or Paid in  Cash ($) (1)** | ** ** | **Stock   Awards ($)** | ** ** | **Option  Awards ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension Value  and   Nonqualified  Deferred  Compensation  Earnings ($)** | ** ** | **All Other  Compensation   ($)(2)** | ** ** | **Total ($)** | ** ** |
|-------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------|------------|
| **(a)**                 | ** ** | **(b)**                                                            | ** ** | **(c)**                          | ** ** | **(d)**                     | ** ** | **(e)**                                                | ** ** | **(f)**                                                                                                    | ** ** | **(g)**                                        | ** ** | **(h)**            | ** ** |
| Kristine F.  Hughes     |       | 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            |       |

 

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(1)  Consists of retainer fees for service as amember of the Board with respect to Kristine Hughes, Pauline Hughes Francis andMessrs. Cristiani, Bowen and Deppe; 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 to Kristine Hughes and Pauline Hughes Franciswere paid on a monthly basis; retainers paid to Messrs. Cristiani, Bowenand Deppe were paid on a quarterly basis. The aggregate payments include thefollowing categories of payments:

 
| **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           |       | —                |       | —                                                                  |       |                             |       | —             |       |

 

Retainer Fees. Retainers were paid on a monthly basisto Ms. Kristine Hughes and Ms. Pauline Hughes Francis and on aquarterly basis to Messrs. Cristiani, Bowen and Deppe. Mr. Deppereceived an additional $3,000 retainer for serving as Chair of the Audit Committeefor the second, third and fourth quarters of 2007. Ms. Pauline HughesFrancis received an additional $1,000 retainer for serving as the Chair of theCompensation Committee for 2007.

 

(2)  “All Other Compensation” includes thefollowing amounts paid by the Company for the 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             |       |

 

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

 

Meeting Fees. Our directors do not receive fees forattendance at Board or Committee meetings.

 

Expenses. Board members were reimbursed for travel andother expenses incurred in connection with their duties as directors to theextent such expenses were submitted to the Company for reimbursement.

 

Equity. No stock options or other equity awards weregranted to our directors during 2007.

 

Nonqualified Deferred Compensation. None of ournon-employee directors participated in the SEDP. Mr. Hughes elected todefer under the SEDP $13,000 of the compensation he received in 2007 in his capacityas an employee. The SEDP is more fully described above in the section followingthe Nonqualified Deferred Compensation Plans table.

 

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## **Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

## ** **

The followingtable sets forth information regarding beneficial ownership of our Common Stockas of June 30, 2008 by (1) each person who is known by us tobeneficially own more than five percent of the outstanding shares of our CommonStock, (2) each of our directors, (3) each of our executive officersand (4) all directors and executive officers of the Company as a group. Toour knowledge and except as otherwise indicated, the persons named in the tablehave sole voting and investment power with respect to all shares shown asbeneficially owned by them, subject to community property laws whereapplicable. Unless we indicate otherwise, each holder’s address is c/o Nature’sSunshine Products, Inc., 75 East 1700 South, Provo, Utah 84606.

 
| **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                                      | %          |

 

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*                                         Lessthan one percent.

 

(1)                                  Allentries exclude beneficial ownership of shares that are issuable pursuant tooptions that have not vested or that are not other wise exercisable as of thedate hereof and which will not become vested or exercisable within 60 days of June 30,2008.

 

(2)                                  Calculatedbased on 15,510,159 shares of our Common Stock outstanding on the June 30,2008, with percentages rounded to the nearest one-tenth of one percent. Sharesof Common Stock subject to options that are presently exercisable orexercisable within 60 days are deemed to be beneficially owned by the personholding the option for the purpose of computing the percentage ownership ofthat person but not treated as outstanding for computing the percentage of anyother person.

 

(3)                                  Reflectsthe number of shares held at June 30, 2008 per Schedule 13F filing.

 

(4)                                  Reflectsthe number of shares held at February 12, 2007 per Schedule 13D/A filing.

 

(5)                                  Reflectsthe number of shares held at December 31, 2007 per Schedule 13G filing.

 

**EquityCompensation Plans**

 

The followingtable contains information regarding the Company’s equity compensation plans asof 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 Relationships and RelatedTransactions, and Director Independence**

## ** **

The Board’s AuditCommittee is responsible for review, approval, or ratification of “related-persontransactions” involving the Company or its subsidiaries and relatedpersons.  Under SEC rules, a relatedperson is a director, officer, nominee for director, or 5% stockholder of theCompany since the beginning of the previous fiscal year, and their immediatefamily members.  We have adopted writtenpolicies and procedures that apply to any transaction or series of transactionsin which the Company or a subsidiary is a participant, the amount involvedexceeds $120,000, and a related person has a direct or indirect materialinterest.  If the Audit Committeedetermines a related person has a material interest in a transaction, the AuditCommittee may approve, ratify, rescind, or take other action with respect tothe transaction in its discretion.

 

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

 

**DirectorIndependence**

 

The Board ofDirectors has determined that each of the following directors is an “independentdirector” under applicable NASDAQ standards:

 

Robert K. Bowen

Larry A. Deppe

Pauline HughesFrancis

 

In this report,these three directors are referred to individually as an “Independent Director”and collectively as the “Independent Directors.”

 

## **Item 14. Principal Accountant Fees and Services.**

## ** **

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

 

**AuditFees**

 

During the fiscalyear ended December 31, 2007 and through October 6, 2008, Deloitte &Touche LLP billed the Company approximately $3,582,000 for professionalservices rendered for the audit of the Company’s consolidated financialstatements for the fiscal year ended December 31, 2007 and $9,608,000 forprofessional services rendered for the audit of the Company’s consolidatedfinancial statements for the years ended December 31, 2006, 2005, and 2004. 

 

**Tax Fees**

 

The aggregate feesbilled for tax services rendered by Deloitte & Touche LLP for the yearsended December 31, 2007 and 2006 were approximately $713,000 and $665,000respectively.

 

**AuditRelated Fees and All Other Fees**

 

During the fiscalyear ended December 31, 2007, Deloitte & Touche LLP did notprovide any services to the Company other than those identified above.

 

All of the feesabove were approved by the Audit Committee. The Audit Committee has consideredwhether the provision of non-audit services is compatible with maintaining theprincipal accountant’s independence and has concluded that it is.

 

**Pre-ApprovalPolicies and Procedures**

 

The Companypre-approves a schedule of audit and non-audit services expected to beperformed by the Company’s registered public accountant in a given fiscal year.In addition, the Audit Committee delegates authority to its Chairman topre-approve certain additional audit and non-audit services rendered by Company’sregistered public accountant (other than services that have been generallypre-approved by the Audit Committee) during the period

 

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between meetingsof the Audit Committee. The Chairman must report any such pre-approvaldecisions to the Audit Committee at its next scheduled meeting. During the yearended December 31, 2007, 100 percent of the aggregate amounts set forthabove under the captions “Audit-Related Fees,” “Tax Fees,” and “All Other Fees”were pre-approved by the Chairman of the Audit Committee and subsequentlyreported to the Audit Committee in accordance with the procedures set forthabove. Deloitte & Touche LLP did not perform any services for theCompany during the fiscal year ended December 31, 2006.

 

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**PART IV**

** **

## **Item 15. Financial Statement Schedules, Exhibitsand Reports on Form 8-K**

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

 

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**SIGNATURES**

** **

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

 

**Nature’sSunshine Products, Inc.**

(Registrant)

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

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

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

 

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**NATURE’SSUNSHINE PRODUCTS, INC.**

**SCHEDULEII — VALUATION AND QUALIFYING ACCOUNTS**

**FOR THEYEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**

*(Amountsin 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                                      |       |

 

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**LIST OFEXHIBITS**

 
|         |                                                 |        |                                                                                                                        | **Located At**    |
|--------------|------------------------------------------------------|-------------|-----------------------------------------------------------------------------------------------------------------------------|-------------------|
|         |                                                 |        |                                                                                                                        | **Sequentially**  |
| **Item No.** |                                                 | **Exhibit** |                                                                                                                        | **Numbered Page** |
|         |                                                 |        |                                                                                                                        |              |   |
|         |   3.11   -                            |        | Restated Articles of  Incorporation                                                                                         |              |   |
|         |   3.21   -                            |        | By-laws, as amended                                                                                                         |              |   |
|         | 10.11*                                               |        | Nature’s Sunshine  Products, Inc. Tax Deferred Retirement Plan, restated March 1, 2008                       |              |   |
|         | 10.21*                                               |        | Nature’s Sunshine  Products, Inc. Supplemental Elective Deferral Plan as restated effective  January 1, 2008 |              |   |
|         | 10.31*                                               |        | Employment Agreement  between the Registrant and Douglas Faggioli dated November 1, 1994                               |              |   |
|         | 10.42*                                               |        | Employment Agreement  between the Registrant and Stephen M. Bunker dated December 21, 2007                             |              | XX |
|         | 10.52*                                               |        | Employment Agreement  between the Registrant and Bryant J. Yates dated December 21, 2007                                    |              |   |
|         | 10.61*                                               |        | Employment Agreement  between the Registrant and John DeWyze dated September 20, 1999                                  |              | XX |
|         | 10.71*                                               |        | Employment Agreement  between the Registrant and Gregory R. Halliday dated June 1, 2001                                |              | XX |
|         | 10.81* -                                             |        | 1995 Stock Option Plan,  as amended                                                                                         |              | XX |
|         | 10.91* -                                             |        | Form of Stock  Option Agreement (1995 Stock Option Plan)                                                               |              | XX |
|         | 141                                                  |        | Nature’s Sunshine  Products, Inc. Code of Conduct                                                                 |              | XX |
|         | 21         - |        | List of Subsidiaries of  Registrant                                                                                         |              | XX |
|         | 23.1      -                 |        | Consent of Independent  Registered Public Accounting Firm                                                                   |              | XX |
|         | 31.1      -                 |        | Certification Pursuant  to Rules 13a-14(a) under the Securities Exchange Act of 1934 as  amended                  |              | XX |
|         | 31.2      -                 |        | Certification Pursuant  to Rules 13a-14(a) under the Securities Exchange Act of 1934 as  amended                  |              | XX |
|         | 32.1      -                 |        | Certification pursuant  to 18 U.S.C. § 1350                                                                            |              | XX |
|         | 32.2      -                 |        | Certification pursuant  to 18 U.S.C. § 1350                                                                            |              | XX |

 

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[1]                      Previouslyfiled with the Commission as an exhibit to the Annual Report on Form 10-K forthe year ended December 31, 2006 and is incorporated herein by reference.

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

[*]                     Managementcontract or compensatory plan.

 

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