Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**x****Annual report pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934 for the fiscal year ended********December 31, 2008**

 

**OR**

 

**o****Transition report under Section 13 or15(d) of the Securities 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 xNo o.

 

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 December 31, 2008 was approximately$70,979,309 based on the closing price of $6.10 as quoted by the NationalQuotation Bureau’s Pink Sheets on December 31, 2008.

 

The number of shares of Common Stock, no par value,outstanding on December 31, 2008 is 15,510,159 shares.

 

 

 

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**NATURE’SSUNSHINE PRODUCTS, INC.**

**FORM 10-K**

 

**For theFiscal Year Ended December 31, 2008**

** **

**Table ofContents**

 
| **Part I.**   |     |                                                                                                               |
|--------------------|----------|--------------------------------------------------------------------------------------------------------------------|
| ** **         |     |                                                                                                               |   |   |
|               | Item 1.  | Business                                                                                                           |   | 4 |
|               | Item 1A. | Risk Factors                                                                                                       |   | 8 |
|               | Item 1B. | Unresolved Staff Comments                                                                                          |   | 14 |
|               | Item 2.  | Properties                                                                                                         |   | 15 |
|               | Item 3.  | Legal Proceedings                                                                                                  |   | 16 |
|               | Item 4.  | Submission of Matters to a Vote of Security  Holders                                                               |   | 17 |
|               |     |                                                                                                               |   |   |
| **Part II.**  |     |                                                                                                               |
| ** **         |     |                                                                                                               |   |   |
|               | Item 5.  | Market for Registrant’s Common Equity,  Related Shareholder Matters and Issuer Purchases of Equity Securities |   | 18 |
|               | Item 6.  | Selected Financial Data                                                                                            |   | 20 |
|               | Item 7.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        |   | 21 |
|               | Item 7A. | Quantitative and Qualitative Disclosures  about Market Risk                                                        |   | 33 |
|               | Item 8.  | Financial Statements and Supplementary Data                                                                        |   | 37 |
|               | Item 9.  | Change in and Disagreements with Accountants  on Accounting and Financial Disclosure                               |   | 64 |
|               | Item 9A. | Controls and Procedures                                                                                            |   | 64 |
|               | Item 9B. | Other Information                                                                                                  |   | 74 |
|               |     |                                                                                                               |   |   |
| **Part III.** |     |                                                                                                               |
| ** **         |     |                                                                                                               |   |   |
|               | 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 Shareholder Matters                    |   | 84 |
|               | Item 13. | Certain Relationships and Related  Transactions, and Director Independence                                         |   | 85 |
|               | Item 14. | Principal Accountant Fees and Services                                                                             |   | 85 |
|               |     |                                                                                                               |   |   |
| **Part IV.**  |     |                                                                                                               |
| ** **         |     |                                                                                                               |   |   |
|               | Item 15. | Exhibits and Financial Statement Schedules                                                                         |   | 87 |
|               |     |                                                                                                               |   |   |
| **Signatures**     |     | 88                                                                                                                 |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Certain information included or incorporated herein by reference inthis report may be deemed to be “forward-looking statements” within the meaningof the 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 byterminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,”“plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” andsimilar expressions, and are based on assumptions and assessments made bymanagement in light of their experience and their perception of historicaltrends, current conditions, expected future developments and other factors theybelieve to be appropriate. Forward-looking statements are not guarantees offuture performance and are subject to risks and uncertainties. Importantfactors that could cause actual results, developments and business decisions todiffer materially from forward-looking statements are described in this report,including the risks set forth under “Risk Factors” in Item 1A.

 

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

 

**EXPLANATORY NOTES**

 

On July 12, 2007, we announced that the Securities and ExchangeCommission (“SEC”) had instituted an administrative proceeding pursuant to Section 12(j) ofthe Securities Exchange Act of 1934, as amended (“the Exchange Act”), tosuspend or revoke the registration of our common stock under Section 12 ofthe Exchange Act.  On November 8,2007, an administrative law judge in 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.

 

On January 21,2009, in a proceeding commenced under Section 12(j) of the ExchangeAct, the SEC revoked the registration of Nature’s Sunshine Products, Inc.’scommon stock.  See Securities ExchangeAct of 1934 Release No. 59268 (January 21, 2009) (Admin. Proc. FileNo 3-12684).  As a result of this order,broker-dealers are not permitted to effect transactions in the Company’ssecurities until the Company has filed a registration statement on Form 10pursuant to Section 12(g) of the Exchange Act and such registrationstatement has become effective.

 

The order was issued despite our extensive and continuing efforts toresolve our past delinquencies and our recent filings of financial informationin order to comply with the SEC’s reporting requirements.  As previously reported, on October 7,2008, the Company filed with the SEC its Annual Report on Form 10-K forfiscal years 2006 and 2007.  On December 31,2008, the Company filed with the SEC its Quarterly Reports on Form 10-Qfor the first, second and third fiscal quarters of 2008.  Simultaneously with the filing of theQuarterly Reports, the Company amended its previously filed Form 10-K forfiscal year 2007.

 

On February 12, 2009, the Company filed with the SEC aregistration statement on Form 10 to re-register its common stock underthe Exchange Act. The registration statement does not contemplate a publicoffering of the Company’s common stock to raise funds or capital, but insteadseeks registration under the Exchange Act of the issued and currentlyoutstanding shares of the Company’s common stock.  The Company’s goal remains to return, asquickly as practicable, such shares to the public markets, although the Companyis not able to predict when the registration statement will becomeeffective.  The securities beingregistered have not been approved or disapproved by any regulatory authority,nor has any such authority passed upon the accuracy or adequacy of theinformation contained therein.  A copy ofthe registration statement can be obtained from the SEC website or the Company,by writing Investor Relations, Nature’s Sunshine Products, Inc., 75 East 1700 South, Provo, Utah 84606, or byvisiting the Company’s website at *www.natr.com*.

 

We cannot predict if any, what outcome therevocation of our registration of our common stock will have on our futureoperating results.  However, we donot intend to alter our business operations as a result of the revocationorder.

 

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**PART 1**

 

## ***Item1. Business***

## *** ***

**The Company**

 

Nature’s Sunshine Products, Inc.,founded in 1972 and incorporated in Utah in 1976, together with our subsidiaries,is primarily engaged in the manufacturing and marketing of nutritional andpersonal care products. We sell our products worldwide to a sales force ofindependent Distributors (as defined below) who use the products themselves orresell 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 several othercountries, including Argentina, Australia, Chile, New Zealand and Norway.

 

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

 

Our principal executive office is located at 75 East 1700 South, Provo,Utah 84606. Our telephone number is (801) 342-4300 and our Internet websiteaddress is *http://www.natr.com*. We make availablefree of charge on our website our Annual Reports on Form 10-K, ourQuarterly Reports on Form 10-Q, our Current Reports on Form 8-K, andamendments to those reports, filed or furnished pursuant to Section 13(a) orSection 15(d) of the Exchange Act as soon as practicable after weelectronically file these documents with, or furnish them to, the SEC.

 

**Business Segments**

 

We are principally engaged in one line ofbusiness; the manufacturing and marketing of nutritional and personal careproducts. We conduct our business through three reportable business segments.Two of the reportable business segments operate under the *Nature’sSunshine Products* name and are divided based on geographicoperations: a United States segment (“NSP United States”) and an internationalsegment (“NSP International”). Our third reportable business segment operatesunder the *Synergy Worldwide*name, a division thatwas acquired by us 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. Information bybusiness segment for each of our last three fiscal years regarding net salesrevenue and operating income, and information by business segment as of the endof our last two fiscal years regarding identifiable assets, are set forth inNote 12 of the Notes to Consolidated Financial Statements set forth in Item 8of this report.

 

**Products and Manufacturing**

 

Our line of over 700 products includesherbal products, vitamins and mineral supplements, personal care products,nutritional drinks, and miscellaneous other products. We purchase herbs andother raw materials in bulk and, after quality control testing, we formulate,encapsulate, tablate or concentrate them, and package them for shipment. Mostof our products are manufactured at our facility in Spanish Fork, 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 our 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 herbsand herb combinations in the form of liquid herbs and extracts. Liquid herbsare manufactured by concentrating herb constituents in a vegetable glycerinbase. Extracts are created by dissolving powdered herbs into liquid solventsthat separate the key elements of the herbs from the fibrous plant material.For the years ended December 31, 2008, 2007 and 2006, herbal productsaccounted for approximately 49.6, 52.9 and 54.0 percent of net sales revenuefor NSP United States, respectively.  Webelieve these percentages reasonably reflect the proportions experienced by theCompany on a consolidated basis.

 

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*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 31,2008, 2007, and 2006, vitamins and mineral supplements accounted forapproximately 44.4, 41.6, and 40.3 percent of net sales revenue for NSP United States, respectively. We believe thesepercentages reasonably reflect the proportions experienced by the Company on aconsolidated basis.

 

*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, 2008, 2007, and 2006, personalcare products accounted for approximately 2.8, 2.3, and 2.4 percent of netsales revenue for NSP United States, respectively. We believe these percentagesreasonably reflect the proportions experienced by the Company on a consolidatedbasis.

 

*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, 2008,2007, and 2006, other products accounted for approximately 3.2, 3.2, and 3.3 percentof net sales revenue for NSP United States, respectively. We believe thesepercentages reasonably reflect the proportions experienced by the Company on aconsolidated basis.

 

**Distribution and Marketing**

 

Our independent Distributors market our products to consumers throughdirect-selling techniques, as well as sponsor other Distributors. We seek tomotivate and provide incentives to our independent Distributors by offeringhigh quality products and providing our Distributors with product support, trainingseminars, sales conventions, travel programs, 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 December 31, 2008, we had approximately 729,600 activeDistributors worldwide, which included approximately 225,000 Distributors inthe United States. A person who joins our independent sales force begins as a “Distributor.”An individual can become a Distributor by signing up under the sponsorship ofsomeone who is already a Distributor. Each Distributor is required to renew hisor her distributorship on a yearly basis; our experience indicates that, onaverage, approximately 45 percent of our Distributors renew annually. ManyDistributors sell our products on a part-time basis to friends or associates oruse the products themselves. A Distributor interested in earning additionalincome by committing more time and effort to selling our products may earn “Manager”status. Manager status is contingent upon attaining certain purchase volumelevels, recruiting additional Distributors, and demonstrating leadershipabilities. As of December 31, 2008, we had approximately 26,000 Managersworldwide, including approximately 6,200 Managers in the United States.Managers resell our products to Distributors within their sales group, sell ourproducts directly to consumers, or use the products themselves. Historically,on average, approximately 60 percent of Distributors appointed as Managers havecontinued to 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 that are generally consistent with industry standards within eachrespective country.

 

We pay sales commissions (“Volume Incentives”) to our Managers andDistributors based upon the amount of sales group product purchases. Generally,a portion of these Volume Incentives are paid to the applicable Manager as arebate for product purchases made by the Manager and the Manager’s down-lineDistributors. Volume Incentives are recorded as an expense in the year earned.The remaining portion of these Volume Incentives is paid in the form ofcommissions for purchases made by the Manager’s down-line Distributors. Theamounts of Volume Incentives that we paid during the years ended December 31,2008, 2007, and 2006 are set forth in our Consolidated Financial Statements inItem 8 of this report. In addition to the opportunity to 

 

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receive Volume Incentives, Managers who qualify by attaining certainlevels of monthly product purchases are eligible for additional incentiveprograms including automobile allowances, sales convention privileges, andtravel awards.

 

**Source and Availability of Raw Materials**

 

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

 

**Trademarks and Trade Names**

 

We have obtained trademark registrations of our basic trademark, Nature’sSunshine®, and the landscape logo for all of our Nature’s Sunshine Productsproduct lines. We have also obtained trademark registrations for Synergy® forall of our Synergy Worldwide product lines. We hold trademark registrations inthe United States and in many other countries. Our customers’ recognition andassociation of our brands and trademarks with quality is an important elementof our operating 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 sellbrands that are, through advertising and promotions, better known to consumers.We compete in the nutritional and personal care industry against companies thatsell through retail stores as well as against other direct selling companies.For example, we compete against manufacturers and retailers of nutritional andpersonal care products, which are distributed through supermarkets, drugstores, health food stores, discount stores, etc. In addition to competitionwith these manufacturers and retailers, we compete for product sales andindependent distributors with many other direct sales companies, includingHerbalife, Pharmanex (NuSkin), USANA, Shaklee, Mannatech and Amway. Theprincipal competitors in the retail encapsulated and tableted herbal productsmarket include Nature’s Way, NOW, Rexall Sundown, and Nutraceuticals**.**We believe that the principal components of competition inthe direct sales marketing of nutritional and personal care products arequality, price, and brand recognition. In addition, the recruitment, training,travel, and financial incentives for the independent sales force are importantfactors.

 

**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 $2.0 million in2008, 

 

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and $1.9 million in each of 2007 and 2006. During the three years inthe period ended December 31, 2008, we did not contract for anythird-party research and development.

 

**Compliance with Environmental Laws and Regulations**

 

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

 

**Regulation**

 

The formulation, manufacturing, packaging, labeling, advertising,distribution and sale of each of our major product groups are subject 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 constituteadulteration or misbranding of such products. The FDCA has been amended severaltimes with respect to dietary supplements, most recently by the NutritionLabeling and Education Act of 1990 (the “NLEA”) and the Dietary SupplementHealth and Education Act of 1994 (the “DSHEA”).

 

FDA regulations relatingspecifically to foods and dietary supplements for human use are set forth inTitle 21 of the Code of Federal Regulations. These regulations include basiclabeling requirements for both foods and dietary supplements. Additionally, FDAregulations require us to meet relevant good manufacturing practice regulationsfor the preparation, packaging and storage of our food and dietary supplements.

 

Ourproducts are also regulated by the Federal Trade Commission (“FTC”), theConsumer Product Safety Commission (“CPSC”), the United States Department ofAgriculture (“USDA”), and the Environmental Protection Agency (“EPA”). Ouractivities, including our multi-level distribution activities, are alsoregulated by various agencies of the states, localities, and foreign countriesin which our products are sold.

 

In foreign markets, priorto commencing operations and prior to making or permitting sales of ourproducts in the market, we may be required to obtain an approval, license orcertification from the country’s ministry of health or comparable agency.  Prior to entering a new market in which aformal approval, license or certificate is required, we work extensively withlocal authorities in order to obtain the requisite approvals.  We must also comply with product labeling andpackaging regulations that vary from country to country.  Our failure to comply with these regulationscan result in a product being removed from sale in a particular market, eithertemporarily or permanently.

 

**Employees**

 

The number of individuals we employed as of December 31, 2008 was1,183. 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 39.7 percent of net sales in 2008. Outside ofthe United States, Russia is now our largest market, representing 11.7 percentof net sales during 2008, while Japan and Ukraine follow close behind,representing 10.2 and 9.6 percent of net sales during 2008, respectively. As wecontinue to expand internationally, our operating results will likely becomemore sensitive to economic and political conditions in foreign markets, as wellas to foreign currency fluctuations.  Abreakdown of net sales revenue by region in 2008, 2007, and 2006 is set forthbelow.

 

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(Dollar amounts in thousands)

 
| **Year Ended December 31,** | ** ** | **2008**    | ** **  | **2007**   | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|-------------|-------------|------------|------------|----------|------------|
| Net Sales Revenue:                         |       |        |        |       | ** ** |     |       |   |   |   |   |   |   |
| United States                              | ** ** | **$**       | **151,332** | ** ** | **39.7**   | **%**    | $          | 152,943 |   | 41.7 | % | $ | 157,132 |   | 43.4 | % |
| Foreign                                    |       |        |        |       | ** ** |     |       |   |   |   |   |   |   |
| Japan                                      | ** ** | **38,972**  | ** **  | **10.2**   | ** ** | 45,554   |       | 12.4 |   | 52,301 |   | 14.4 |   |
| Russia                                     | ** ** | **44,768**  | ** **  | **11.7**   | ** ** | 34,314   |       | 9.4 |   | 28,394 |   | 7.8 |   |
| Ukraine                                    | ** ** | **36,398**  | ** **  | **9.6**    | ** ** | 24,251   |       | 6.6 |   | 12,224 |   | 3.4 |   |
| Other                                      | ** ** | **109,829** | ** **  | **28.8**   | ** ** | 109,585  |       | 29.9 |   | 112,171 |   | 31.0 |   |
| Total Foreign                              | ** ** | **229,967** | ** **  | **60.3**   | ** ** | 213,704  |       | 58.3 |   | 205,090 |   | 56.6 |   |
| ** **                                 | ** ** | **$**       | **381,299** | ** ** | **100.0**  | **%**    | $          | 366,647 |   | 100.0 | % | $ | 362,222 |   | 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, the Philippines,Hong Kong, China, Poland, Russia, Ukraine, Latvia, Lithuania, Kazakhstan,Mongolia, Belarus, Germany, the Netherlands, Austria, and Australia. We alsoexport our products 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 often exist in the productsand in 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. Information by region for each of our last two fiscal years regardingour long-lived assets is set forth in Note 12 of the Notes to the ConsolidatedFinancial Statements set forth in Item 8 of this report.

 

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

## *** ***

*You should carefully consider the followingrisks in evaluating our Company and our business. The risks described below arethe risks that we currently believe are material to our business. However,additional risks not presently known to us, or risks that we currently believeare not material, may also impair our business operations. You should alsorefer to the other information set forth in this report, including theinformation set forth in “Business” and “Management’s Discussion and Analysisof Financial Condition and Results of Operations” as well as our consolidatedfinancial statements and the related notes. Our business prospects, financialcondition, or results of operations could be adversely affected by any of thefollowing risks. If we are adversely affected by such risks, then the tradingprice of our common stock could decline.*

 

**Risk Factors Related to Delayed FinancialReporting and Revocation of the Registration of Our Common Stock under theSecurities Exchange Act**

 

***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 were unableto timely file our required periodic reports with the SEC since March 2006.  Prior to December 31, 2008, we had notfiled any Quarterly Reports on Form 10-Q since November 2005.  We did not timely file our Annual Reports on Form 10-Kfor the years ended December 31, 2007, 2006, or 2005 or our QuarterlyReports on Form 10-Q for the quarters ended March 31, 2008, June 30,2008, and September 30, 2008.  As aresult of these events, the registration of our common stock under the ExchangeAct was revoked on January 21, 2009. We have become subject to significant risks and occurrences relating tothe following matters:

 

·                  Illiquidity of our common stock;

·                  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 internalcontrols over financial reporting;

·                  Potential changes in tax liabilities; and

·                  Outcome of civil litigation.

 

***The revocation ofthe registration of our common stock could continue to adversely affect theliquidity of our common stock.***

 

OnJanuary 21, 2009, the SEC revoked the registration of Nature’s SunshineProducts, Inc.’s common stock.  SeeSecurities Exchange Act of 1934 Release No. 59268 (January 21, 2009)(Admin. Proc. File No. 3-12684). Given that broker-dealers are not permitted to effect transactions inshares of our common stock until the Company files a new registration with theSEC under the Exchange Act that becomes effective, the liquidity of our commonstock could continue to be adversely affected.

 

OnFebruary 12, 2009, the Company filed with the SEC a registration statementon Form 10 to re-register its common stock under the Exchange Act.  Once the common stock has been registered,the liquidity will depend on the extent to which brokers apply to make a marketin our stock.  There can be no assuranceas to if or when an active market will exist. It is our intention to apply to list the common stock on a recognizedsecurities exchange.  However, there canbe no assurance that this effort will be successful or when such a listingmight be effective.

 

***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 the supervision and with theparticipation of our chief executive officer and chief financial officer,conducted an evaluation of the effectiveness of the design and operation of ourinternal controls. Management concluded that the Company did not maintaineffective internal control over financial reporting as of December 31,2008, because of the continued existence of material weaknesses related toaccounting for taxes, the financial reporting process, and informationtechnology systems.  A “material weakness”is defined under auditing 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.

 

The Company has taken, or anticipates taking, various steps toremediate all of these material weaknesses. For example, with respect to our accounting for income taxes, we havehired a new Tax Director and have utilized various outsourced service providersfor tax consulting services to assist in our accounting for income taxes.  Although we have made and are continuing tomake improvements in our internal controls, if we are unsuccessful in ourfocused effort to effectively remediate the weaknesses in our internal controlsover financial reporting over time, it may adversely impact our ability toreport our financial condition and results of operations in the futureaccurately and in a timely manner, and may potentially adversely impact ourreputation 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 a previously disclosed independent investigation by theCompany’s Audit Committee. Since that time, the SEC has subpoenaed certaindocuments and voluntarily requested other information in connection with itssubsequent investigation related to these events, which the Company hasprovided. We are cooperating fully with this investigation. We cannot predictwhat impact, if any, and the materiality of such impact, if any, the conclusionof this matter may have on our financial statements.

 

In March 2006, the Company voluntarily disclosed to the 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 

 

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effects of the restatement, liabilities for taxes could differ fromthose which have been recorded in our consolidated financial statements. If itis determined that we have additional tax liabilities, there could be anadverse effect on our financial condition, results of operations and cashflows.

 

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, results of operations, or cash flows.***

 

As of December 31, 2008, we had one securities class-actionlawsuit pending against us, former members of our Board of Directors andpresent and former members of management that relate to the internalinvestigation and the restatement of our financial statements. The lawsuit andother legal matters in which we have become involved following the announcementof the restatement are described in Item 3, “Legal Proceedings.”  The securities class-action lawsuit iscurrently in the early stages of discovery. The court granted in part the plaintiffs’ motion to certify the class onSeptember 25, 2008. The trial is not scheduled to commence until April 19,2010. We are not able to predict the outcome of the litigation; however, if weare unsuccessful in our efforts to defend against the allegations raised in thelitigation, our business and financial condition would likely be negativelyimpacted. Among other consequences of a negative outcome of the litigation, wecould become obligated to pay damages in an amount that would adversely affectour financial condition, results of operations, or cash flows.

 

The Company has also received a demand from a shareholder seeking torequire the Company to take action against current and former officers anddirectors of the Company to recover all damages sustained by the Company as aresult of their alleged misconduct, and threatening to commence a derivativeaction if the Company fails to act.  TheCompany is vigorously defending against these allegations, but there can be noassurances that these defenses will be successful.

 

In addition to the possibility that we could become subject to damagesresulting from the matter described above, the current lawsuit and other legalmatters could have a disruptive effect upon the operation of our business andconsume the time and attention of our senior management. In addition, we arelikely to incur 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 will notbe covered by such policies; or that, even if covered, our ultimate liabilitywill 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 previously announced, in October 2005, our Audit Committeeconducted an internal investigation, which initially focused on certain of ourforeign operations, but subsequently expanded to include other matters relatedto our financial statements and financial reporting. The internal investigationand related activities have required us to incur substantial expenses forlegal, accounting, tax and other professional services, and has divertedmanagement’s attention from our business. If the Company incurs substantialexpenses related to the internal investigation in the future, it could have anadverse effect on our financial condition, results of operations, or cash flowsin future periods.

 

**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, 

 

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and court related decisions. Furthermore, wemay be restricted or prohibited from using network marketing plans in someforeign countries.

 

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

 

The formulation, manufacturing, packaging, labeling, advertising,distribution and sales of each of our major product groups are subject toregulation by numerous domestic andforeign governmental agencies and authorities. These include the FDA, the FTC,the CPSC, the USDA, and 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 governmental regulations oradministrative orders, when and if promulgated, would have on our business.They could, however, require reformulation of certain products to meet newstandards, recall or discontinuance of certain products not able to bereformulated, imposition of additional record-keeping requirements, expandeddocumentation of the properties of certain products, expanded or alteredlabeling and/or scientific substantiation. Any or all such requirements couldhave a material negative impact on our financial position, results ofoperations, or cash flows.

 

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

 

We rely on our independentDistributors to market and sell our products through direct marketingtechniques, as well as sponsoring other Distributors. Many Distributors sellour product on a part-time basis to friends or associates or use the productsfor themselves. Our Distributors may terminate their service at any time, and,like most direct selling companies, we experience high turnover amongDistributors from year to year. Each Distributor is required to renew his orher distributorship on a yearly basis; our experience indicates that, on average,approximately 45 percent of our Distributors renew annually. As a result, weneed to continue to retain existing Distributors and recruit additionalDistributors in order to maintain and/or increase sales in the future.

 

Several factors affect our ability to 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.

 

***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 economic conditions,levels of employment, fuel prices, salaries and wages, the availability ofconsumer credit, consumer confidence and consumer perception of economicconditions. For instance, in the first fiscal quarter of 2009, we began to seechanges in our 

 

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consumer spending habits in the UnitedStates, Russia, Asian and Latin American markets due to the current generaleconomic slowdown, which has resulted in lower net sales of our products. Thecurrent general economic slowdown in the markets in which we do business and anuncertain economic outlook may continue to adversely affect consumer spendinghabits and customer traffic, which may result in lower net sales of ourproducts.  A prolonged global economicdownturn could have a material negative impact on our financial position,results of operation, or cash flows.

 

***Currency exchange rate fluctuations couldlower our revenue and net income.***

 

In 2008, we recognized approximately 60.3percent of our revenue in markets outside the United States, and we recognize35.9 percent of our revenue in each market’s respective local currency (otherthan the U.S. dollar). We purchase inventory primarily in the United States inU.S. dollars. In preparing our financial statements, we translate revenues andexpenses 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. These fluctuations had a generally positive effecton our revenue in 2008 as compared to 2007. However, during the fourth quarter for the year ended December 31,2008, we began to see a decline in our global net sales of our products ofapproximately 4.7 percent as result of changes in global economic conditions inthe markets in which our business segments operate.  The decline is primarily driven bystrengthening of the U.S. dollar against most major currencies. In the firstfiscal quarter of 2009, we have experienced a continuing decline in our globalnet sales as a result of the U.S. dollar continuing to strengthen against mostmajor currencies, which is a reversal of the trend for prior years.  For instance, the U.S. dollar has increasedapproximately 5.7 percent through February 2009 against the Mexican pesocompared to the year ended December 31, 2008 and 33.5 percent against theMexican peso compared to the same period last year. If exchange rates were to change in future periods relative to thoseexperienced in 2008, it could have a disproportionate impact on our revenue inthese future periods. As operations expand in countries where foreign currencytransactions may be made, our operating results will increasingly be subject tothe risks of exchange rate fluctuations and we may not be able to accuratelyestimate the impact that these changes may have on our future results ofoperations 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, or cash flows.

 

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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 certainforeign taxes actually paid abroad. In the event any audits or assessments areconcluded adversely to us, we may not be able to offset the consolidated effectof foreign income tax assessments through the use of U.S. foreign tax credits.Because the laws and regulations governing U.S. foreign tax credits are complexand subject to periodic legislative amendment, we cannot be sure that we wouldin fact be able to take advantage of any foreign tax credits in the future. Thevarious customs, exchange control and transfer pricing laws are continuallychanging and are subject to the interpretation of governmental agencies.

 

We collect and remit sales tax in states inwhich we have determined that nexus exists, which results in the collection ofsales tax.  Other states may, from time to time, claim we havestate-related activities constituting a sufficient nexus to require suchcollection.  A successful assertion by one or more states that we shouldcollect sales tax on the sale of merchandise could result in substantial taxliabilities related 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, or cash flows.

 

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

 

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

 

***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 results ininjury to consumers due to tampering by unauthorized third parties or productcontamination. We have historically had a very limited number of product claimsor reports from individuals who have asserted that they have suffered adverseconsequences as a result of using our products. We have established awholly-owned captive insurance company to provide us with product liabilityinsurance coverage and have accrued an amount that we believe is sufficient tocover probable and reasonably estimable liabilities related to productliability claims based upon our history. There can be no assurance that theseestimates will prove to be sufficient nor can there be any assurance that theultimate outcome of any litigation for product liability will not have a materialnegative impact on our business prospects, financial position, results ofoperations, orcash flows.

 

  ***Inventory obsolescence due to finite shelf lives couldadversely 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, or cash flows.

 

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

 

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

 

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

 

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

 

***Changes in key management could materiallyadversely affect the Company.***

 

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 have entered into employment agreements with each of our namedexecutive officers, which we believe achieves two important goals crucial toour long-term financial success: the long-term retention of oursenior executives and their commitment to the attainment of our strategic objectives.However, 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, or cash flows. We do notcarry key man insurance on the lives of any of our executive officers.

 

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

 

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

 

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

## *** ***

None.

 

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## ***Item2. Properties***

## *** ***

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

 

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

 

We own approximately 60,000 square feetof office and warehouse space in Mexico and approximately 13,000 square feet ofoffice and warehouse space in Venezuela. These facilities support NSPInternational.

 

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

 

Welease properties used primarily as distribution warehouses located in Columbus,Ohio; Dallas, Texas; Atlanta, Georgia; and Spanish Fork, Utah; as well asoffices and distribution warehouses in Pleasant Grove, Utah; Japan; Mexico;Central America; Canada; Venezuela; South Korea; the Dominican Republic;Ecuador; the United Kingdom; Colombia; Thailand; Peru; Singapore; Israel;Brazil; Taiwan; Indonesia; Malaysia; the Philippines; Poland; China; andAustralia. We believe these facilities are suitable for their respective usesand are, in general, adequate for our present and near-term future needs.During our fiscal years 2008, 2007, and 2006, we spent approximately $5.9million, $5.2 million, and $5.3 million, respectively, for all of our leasedfacilities.

 

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

## *** ***

The Company is party to various legal proceedings, including thosenoted below.  Management cannot predictthe ultimate outcome of these proceedings, individually or in the aggregate, ortheir resulting effect on the Company’s business, financial position, resultsof operations or cash flows as litigation and related matters are subject toinherent uncertainties, and unfavorable rulings could occur.  Were an unfavorable outcome to occur, thereexists the possibility of a material adverse impact on our business, financialposition, results of operations, cash flows or prospects for the period inwhich the ruling occurs or future periods. The Company maintains directors’ and officers’ liability, productliability, general liability and excess liability insurance coverage.  However, no assurances can be given that suchinsurance will continue to be available at an acceptable cost to the Company,that such coverage will be sufficient to cover one or more large claims, orthat the insurers will not successfully disclaim coverage as to a pending orfuture claim.

 

**Class-Action Litigation**

 

Between April 3, 2006 and June 2, 2006, five separate shareholderclass-action lawsuits were filed against the Company and certain of its presentand former officers and directors in the United States District Court for theDistrict of Utah. These matters were consolidated and on November 3, 2006,the plaintiffs filed a consolidated complaint (the “Consolidated Complaint”)against the Company, the Company’s Chief Executive Officer and former director,Douglas Faggioli, the Company’s former Chief Financial Officer, Craig D. Huff,and a former director and former Chair of the Company’s Audit Committee, FranzL. Cristiani. The Consolidated Complaint asserts three separate claims onbehalf of purchasers of the Company’s common stock: (1) a claim against Mr. Faggioliand the Company for violation of Section 10(b) of the 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 (“KPMG”),for the purpose of obtaining unqualified or “clean” audit opinions and reviewopinions from KPMG concerning certain of the Company’s annual and quarterlyfinancial statements; and (3) a claim against Messrs. Faggioli, Huffand Cristiani for violation of Section 20(a) of the Exchange Act,alleging that the individual defendants have “control person” liability for thepreviously-alleged violations by the Company. The Consolidated Complaint seeksan unspecified amount of compensatory damages, together with interest thereon,litigation costs and expenses, including attorneys’ fees and expert fees, andany such other and further relief as may be allowed by law.

 

On January 5, 2007, the Company and Messrs. Faggioli, Huffand Cristiani moved to dismiss the Consolidated Complaint in its entirety. On May 21,2007, the Court issued its decision denying the motion in large part, butshortening the proposed class period on one of the plaintiffs’ claims. On June 6,2007, the Company and the other defendants answered the Consolidated Complaint,wherein they denied all allegations of wrongdoing and raised a number ofaffirmative defenses. On November 1, 2007, the plaintiffs filed theirmotion for class certification, which the Company opposed. On September 25,2008, the Court granted the plaintiffs’ motion for class certification in part,establishing the class as all persons who purchased or otherwise acquired theCompany’s common stock, and were damaged thereby, from March 16, 2005 to March 20,2006. On May 9, 2008, at the invitation of the Court based upon recentcase law developments, the Company filed a motion to dismiss the plaintiffs’second cause of action (a 10b-5 claim based on non-public representations toKPMG).  The plaintiffs opposed this motion.  On September 23,2008, the Court granted the Company’s motion and dismissed the plaintiffs’second cause of action.

 

The case is currently in the early stages of discovery. The trial isnot scheduled to commence until April 19, 2010. Although the Company andthe other defendants are vigorously defending against the allegations in thelawsuit, and the Company intends to continue doing so, the Company is not ableat this time to predict the outcome of this litigation or whether the Companywill incur any liability associated with the litigation, or to estimate theeffect such outcome would have on the financial condition, results ofoperations, or cash flows of the Company.

 

The Company maintains insurance that may provide coverage for thepotential consequences of a negative outcome of the litigation described above.The Company has given notice to its insurers of the claims and the insurershave responded by requesting additional information and by reserving theirrights under the policies, including the rights to deny coverage under variouspolicy exclusions or to rescind the policies in question as a result of theCompany’s restatement of its financial statements. There can be no assurancethat the insurers will not seek to deny coverage or rescind the policies; thatsome or all of the claims will not be covered by such policies; or that, evenif covered, the Company’s ultimate liability will exceed the availableinsurance.  Moreover, there can be noassurance as to our ability to obtain insurance coverage in the future, or asto the cost of such insurance.

 

**Threatened Derivative Lawsuits**

 

By letter dated October 4, 2007, a shareholder of the Company allegedthat a number of the current and former officers and directors of the Companybreached their fiduciary duties to the Company by supposedly engaging in thesame alleged wrongdoing that is the subject of the class-action lawsuit. Theshareholder demanded that the Company take action to recover from the specifiedofficers and directors all damages sustained by the Company as a result of thealleged misconduct, and threatened to commence a derivative action if theCompany failed to act on the shareholder’s demand within a reasonable period oftime.

 

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.

 

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On May 21, 2008, the 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, managementbelieves that it is not possible 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, results of operations, or cash flows of the Company.

 

**SEC and DOJ Investigations**

 

In March 2006, the Company voluntarily disclosed to the SECcertain information related to the independent investigation by the Company’sAudit Committee. Since that time, the SEC has subpoenaed certain informationand requested that the Company voluntarily provide other information inconnection with its subsequent investigation related to these events, which theCompany has provided. The Company is cooperating fully with this investigation.The Company cannot predict what impact, if any, and the materiality of suchimpact, 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 the financial condition, results ofoperations, or cash flows of the Company.

 

**SEC Section 12(j) Proceeding**

 

On July 12, 2007, the Company announced that the SEC hadinstituted administrative proceedings pursuant to Section 12(j) ofthe Exchange Act to suspend or revoke the registration of its 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, the Company filed a petition for review with the SEC. On December 5,2007, the SEC granted the Company’s petition for review. The SEC heard oralargument from both the Company and the SEC staff on January 7, 2009. On January 21, 2009, the SEC issued a final order revoking theregistration of its common stock.  As a result of this order,broker-dealers are not permitted to effect transactions in the Company’ssecurities until the Company’s registration statement on Form 10, whichwas filed with the SEC on February 12, 2009, becomes effective. Although the Company’s goal remains to return, as quickly as practicable, itscommon stock to the public markets, the Company cannot predict when theregistration statement will be come effective.

 

**Other Litigation**

 

One of the Company’s foreign subsidiaries is a defendant in litigationregarding primarily employee-related matters. The Company has recorded accrualsof approximately $0.1 million related to this litigation, which is included inaccrued liabilities.

 

TheCompany is party to various other legal proceedings in several foreign jurisdictionsrelated to VAT assessments and other civil litigation.  While there is a reasonable possibility thata material loss may be incurred, the Company cannot at this time estimate theloss, if any, therefore, no provision for losses has been provided.  The Company believes future payments relatedto these matters could range from $0 to approximately $1.1 million.

 

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

## *** ***

None.

 

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** **

**PART II**

** **

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

## *** ***

**Market and Share Prices**

 

Our common stock was traded on the NasdaqNational Market System (symbol “NATR”) until April 5, 2006, the date thatthe Nasdaq Listing Qualifications Panel determined to delist our common stockfrom The Nasdaq National Market. Since the delisting of our stock from NasdaqNational Market, our stock was traded on the Pink Sheets (symbol NATR.PK) until the revocation of our common stockregistration on January 21, 2009. The information in the table belowreflects the high and low bid information of our stock from January 1,2007 through December 31, 2008.

 
| ** **     | ** ** | **Market Prices** | ** ** | ** **        | ** ** | **Market Prices** | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|------------------------|------------|
| **2008**       | ** ** | **Best Ask**      | ** ** | **Best Bid** | ** ** | **2007**               | ** ** | **Best Ask** | ** ** | **Best Bid** | ** ** |
| First Quarter  |       | $                      | 11.00      |              | $          | 7.01                   |       | First  Quarter |   | $ | 12.60 |   | $ | 11.45 |   |
| Second Quarter |       | 9.25                   |       | 6.60              |       | Second  Quarter        |       | 12.35 |   | 10.20 |   |
| Third Quarter  |       | 9.00                   |       | 6.35              |       | Third  Quarter         |       | 14.45 |   | 11.50 |   |
| Fourth Quarter |       | 8.40                   |       | 4.00              |       | Fourth  Quarter        |       | 12.50 |   | 8.10 |   |
|                |            |                        |            |                   |            |                        |            |  |  |  |  |  |  |  |  |

 

ThePink Sheets quotations reflect inter-dealer prices, without retail mark-up,mark-down or commission and may not necessarily represent actual transactions.

 

**Recent Sales of Unregistered Securities**

 

Since January 1, 2006, we haveissued and sold the following unregistered securities:

 

On July 10, 2006, we issued and sold500 shares of common stock into the market on behalf of Karen Nichols pursuant toa net exercise of stock options granted under our 1995 Stock Plan and paymentto Ms. Nichols of cash proceeds in excess of the exercise price, lessapplicable tax withholdings. No exemption from the registration requirements ofSection 5 of the Securities Act is claimed.

 

On February 1, 2007, we issued andsold 95,690 shares of common stock to Douglas Faggioli, our Chief ExecutiveOfficer, for cash consideration in an aggregate amount of $735,665 upon theexercise of stock options granted under our 1995 Stock Plan. This sale isexempt from the registration requirement of Section 5 of the SecuritiesAct pursuant to Section 4(2) of the Securities Act.

 

On February 2, 2007, we issued andsold 61,330 shares of common stock to Eugene L. Hughes, our founder andDirector, for cash consideration in an aggregate amount of $471,505 upon theexercise of stock options granted under our 1995 Stock Plan. This sale isexempt from the registration requirement of Section 5 of the SecuritiesAct pursuant to Section 4(2) of the Securities Act.

 

On February 6, 2007, we issued andsold 5,340 shares of common stock to Kent Hastings, our Director of ExportMarkets, for cash consideration in an aggregate amount of $41,054 upon theexercise of stock options granted under our 1995 Stock Plan. This sale isexempt from the registration requirement of Section 5 of the SecuritiesAct pursuant to Section 4(2) of the Securities Act.

 

On July 27, 2007, we issued and sold500 shares of common stock to the estate of Robert Schaffer for cash considerationin an aggregate amount of $4,157 upon the exercise of stock options grantedunder our 1995 Stock Plan. This sale is exempt from the registrationrequirement of Section 5 of the Securities Act pursuant to Section 4(2) ofthe Securities Act.

 

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**Dividends**

 

There were 1,069 shareholders of recordas of December 31, 2008. During the fiscal years 2008 and 2007, theCompany paid quarterly cash dividends of $0.05 per common share. On February 19,2009, the Company declared quarterly cash dividends of $0.05 per common share.

 

**Securities Authorized for Issuance Under Equity Compensation Plans**

 

The following table contains informationregarding the Company’s equity compensation plans as of December 31, 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  issuance under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                              | ** ** |
| **Equity compensation plans approved by  security holders**     |       | 127,840                                                                                                                                              |       | $                                                                                                           | 11.69      |                                                                                                                                                                                                 | —     |   |
| **Equity compensation plans not approved by  security holders** |       | 135,300                                                                                                                                              |       | 11.85                                                                                                       |       | —                                                                                                                                                                                               |       |
| **Total**                                                       |       | 263,140                                                                                                                                              |       | $                                                                                                           | 11.77      |                                                                                                                                                                                                 | —     |   |

 

**Performance Graph**

 

The graph below depicts our common stock as an index, assuming $100.00was invested on December 31, 2003 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.

 

 
| ** **                                     | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** | **12/31/07** | ** ** | **12/31/08** | ** ** |
|------------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| **Nature’s Sunshine Products, Inc.** |       | $            | 100.00     |         | $          | 244.99       |       | $            | 219.95     |         | $          | 143.02       |       | $ | 119.70 |   | $ | 78.94 |   |
| **Nasdaq Index**                               |       | 100.00       |       | 108.41       |       | 110.79       |       | 122.16       |       | 134.29       |       | 79.25        |       |
| **Peer Group**                                 |       | 100.00       |       | 143.28       |       | 115.16       |       | 137.45       |       | 124.26       |       | 76.92        |       |
|                                                |            |              |            |              |            |              |            |              |            |              |            |              |            |  |  |  |  |  |  |

 

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**Item6. Selected Financial Data**

 

The selected consolidated financial datapresented below is summarized from our results of operations for each of thefive years in the period ended December 31, 2008, as well as selectedconsolidated balance sheet data as of December 31, 2008, 2007, 2006, 2005,and 2004.

 

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

 

**Income Statement Data**

 
| ** ** | ** ** | **Net Sales  Revenue** | ** **  | **Cost of  Goods Sold** | ** ** | **Volume  Incentives** | ** ** | **Selling, General  and Administrative** | ** **  | **Operating  Income** | ** ** | **Income Before  Income Taxes** | ** ** | **Net Income  (Loss)** | ** ** |
|------------|------------|-----------------------------|-------------|-----------------------------------|------------|------------------------|------------|----------------------------------------------------|-------------|-----------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| **2008**   | ** ** | **$**                       | **381,299** | ** **                        | **$**      | **71,874**             | ** ** | **$**                                              | **148,139** | ** **            | **$**      | **155,688**                               | ** ** | **$**                       | **5,598**  | ** ** | **$** | **6,468** | ** ** | **$** | **(1,838** | **)** |
| 2007       |       | 366,647                     |        | 70,996                            |       | 143,884                |       | 148,706                                            |        | 3,061                 |       | 4,465                                     |       | (8,237                      | )          |
| 2006       |       | 362,222                     |        | 68,745                            |       | 145,827                |       | 139,645                                            |        | 8,005                 |       | 8,629                                     |       | (3,565                      | )          |
| 2005       |       | 351,684                     |        | 67,593                            |       | 144,125                |       | 128,381                                            |        | 11,585                |       | 11,423                                    |       | 3,504                       |       |
| 2004       |       | 325,324                     |        | 61,263                            |       | 129,752                |       | 115,299                                            |        | 19,010                |       | 20,702                                    |       | 11,772                      |       |
|            |            |                             |             |                                   |            |                        |            |                                                    |             |                       |            |                                           |            |                             |            |  |  |  |  |  |  |  |

 

**Balance Sheet Data**

 
| ** ** | ** ** | **Working  Capital** | ** ** | **Current  Ratio** | ** ** | **Inventories** | ** ** | **Property, Plant and  Equipment, Net** | ** ** | **Total  Assets** | ** ** | **Long-Term  Liabilities** | ** ** | **Shareholders’  Equity** | ** ** |
|------------|------------|----------------------|------------|--------------------|------------|-----------------|------------|--------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------|------------|
| **2008**   | ** ** | **$**                | **30,200** | ** **         | **1.39**   | ** **      | **$**      | **39,558**                                             | ** ** | **$**             | **30,224** | ** **                 | **$**      | **164,276**                    | ** ** | **$** | **32,679** | ** ** | **$** | **53,677** | ** ** |
| 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                         |       |
|            |            |                      |            |                    |            |                 |            |                                                        |            |                   |            |                            |            |                                |            |  |  |  |  |  |  |

 

**Common Share Summary**

 
| ** ** | ** ** | **Cash Dividend  Per Share** | ** ** | **Basic Net (Loss)  Income Per Share** | ** ** | **Diluted Net (Loss)  Income Per Share** | ** ** | **Basic Weighted  Average Shares** | ** ** | **Diluted Weighted  Average Shares** | ** ** |
|------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------|------------|
| **2008**   | ** ** | **$**                                  | **0.20**   | ** **                                                 | **$**      | **(0.12**                                                    | **)**      | **$**                                        | **(0.12**  | **)**                                          | **15,510** | ** ** | **15,510** | ** ** |
| 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 Information**

 
| ** ** | ** ** | **Number of  Independent Managers** | ** ** | **Square Footage of  Property in Use** | ** ** | **Number of Employees** | ** ** |
|------------|------------|-----------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------|------------|
| **2008**   | ** ** | **26,002**                                    | ** ** | **731,277**                                                | ** ** | **1,183**                         | ** ** |
| 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                             |       |

 

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

## *** ***

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

 

**OVERVIEW**

 

*Our Business, Industry and Target Market*

 

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

 

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

 

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

 

In 2008, we experienced net sales revenuegrowth overseas in our NSP International business segment of approximately 16.2percent, while our domestic business segment net sales increased approximately1.2 percent and our Synergy Worldwide business segment experienced a decline innet sales revenue of approximately 16.8 percent due primarily to the loss ofseveral key distributor networks. Over the same period, our cost of goods solddecreased as a percentage of net sales revenue as a result of decreasedimportation and purchasing costs in some of our markets, while our selling,general and administrative expenses increased somewhat primarily as a result ofcosts associated with expanding our infrastructure in Russia and Eastern Europeto support our continued growth, as well as costs to enter new markets in Chinaand Europe. 

 

During the fourth quarter for the year ended December 31, 2008, webegan to see a decline in our global net sales of our products of approximately4.7 percent as a result of changes in global economic conditions in the marketsin which our business segments operate. The decline is primarily driven by strengthening of the U.S. dollaragainst most major currencies. In the first fiscal quarter of 2009, we haveexperienced a continuing decline in our global net sales as a result of theU.S. dollar continuing to strengthen against most major currencies, which is areversal of the trend for prior years. For instance, the U.S. dollar has increased approximately 5.7 percentthrough February 2009 against the Mexican peso compared to the year ended December 31,2008 and 33.5 percent against the Mexican peso compared to the same period lastyear.  In addition, we began to seechanges in consumer spending habits in the United States, Russian, Asian andLatin American markets due to the current general economic slowdown, which hasresulted and may continue to result in lower net sales of our products.  Aprolonged global economic downturn could have a material adverse effect on ourfinancial position, results of operation, or cash flows.

 

**Critical Accounting Policies and Estimates**

 

Our consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America (“GAAP”) and form the basis for the followingdiscussion and analysis on critical accounting policies and estimates. Thepreparation of these financial statements requires us to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities. On aregular basis we evaluate our estimates and assumptions. We base our estimateson historical experience and on various other assumptions that 

 

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are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results could differ from theseestimates and those differences could have a material effect on our financialposition and results of operations. Management has discussed the development,selection and disclosure of these estimates with the Board of Directors and itsAudit Committee.

 

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

 

*Revenue Recognition*

 

Net sales revenue and related volume incentiveexpenses are recorded when persuasive evidence of an arrangement exists,collectability is reasonably assured, the amount is fixed and determinable, andtitle and risk of loss have passed, generally when the merchandise has beendelivered. The amount of the volume incentive is determined based upon theamount of qualifying purchases in a given month. It is necessary for theCompany to make estimates about the timing of when merchandise has beendelivered.  These estimates are basedupon the Company’s historical experience related to time in transit, timing ofwhen shipments occurred, and shipping volumes. Amounts received for undeliveredmerchandise are recorded as deferred revenue. From time to time, the Company’sUnited States operation extends short-term credit associated with productpromotions. In addition, for certain of the Company’s international operations,the Company offers credit terms consistent with industry standards within thecountry of operation. Payments to Distributors and Managers for salesincentives or rebates are recorded as a reduction of revenue. Payments forsales incentives and rebates are calculated monthly based upon qualifyingsales. Membership fees are recorded as revenue over the life of the membership,primarily one year. Prepaid event registration fees are deferred and recognizedas revenues when the related event is held.

 

A reserve for productreturns is recorded based upon historical experience.  The Company allows Distributors or Managersto return the unused portion of products within ninety days of purchase if theyare not satisfied with the product.  Insome of our markets, the requirements to return product are morerestrictive.   Sales returns for theyears 2008, 2007, and 2006, were approximately $0.1 million, $0.1 million, and$0.1 million, respectively.  

 

*Investments*

 

The Company’s available-for-sale investment portfolio is recorded atfair value and consists of various fixed income securities such as U.S.government and state and municipal bonds, mutual funds, and equitysecurities.  These investments are valuedusing (a) quoted prices for identical assets in active markets or (b) fromsignificant inputs that are observable or can be derived from or corroboratedby observable market data for substantially the full term of the asset.  The Company’s trading portfolio is recordedat fair value and consists of various mutual funds that are valued using quotedprices in active markets.

 

The Company’s restricted investments include auction rate preferredinvestments that have failed at auction during the first quarter of 2008 andare recorded at fair value.  Theauction-rate securities consist primarily of AAA securities.  In determining the fair value of the Company’srestricted investments at December 31, 2008, the Company has taken intoconsideration fair values determined by the financial institutions, currentcredit rating of the underlying securities, insurance provisions, discountedcash flow analysis, as deemed appropriate, and its current liquidity position.  In January 2009, the Company redeemedthese securities at par value.

 

If any of our investments experience a decline in fair value that isdetermined to be other-than-temporary, based on analysis of relevant factors,we record a realized loss in our consolidated statements of operations.Management judgment is involved in evaluating whether a decline in aninvestment’s fair value is other-than-temporary. We analyze relevant factorsindividually and in combination including the length of time and extent towhich market value has been less than cost, the financial condition andnear-term prospects of the issuer as well as specific events or circumstancesthat may influence the operations of the issuer, and our intent and ability tohold the investment for a sufficient time in order to enable recovery of ourcost. New information and the passage of time can change these judgments. Werevise impairment judgments when new information becomes known or when we donot anticipate holding the investment until recovery and record any resultingimpairment charges at that time.  As of December 31,2008, our investments did not have significant gross unrealized losses.

 

*Inventories*

 

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

 

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*Self-insurance Liabilities*

 

As amanufacturer and distributor of products that are ingested, we face an inherentrisk of exposure to product liability claims in the event that, among otherthings, the use of our products results in injury to consumers due to tamperingby unauthorized third parties or product contamination. We have historically had a very 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 andreasonably 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, or cashflows.

 

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

 

*Incentive Trip Accrual*

 

We accrue for expenses for incentive tripsassociated with our direct sales marketing program, which rewards independentDistributors and Managers with paid attendance at our conventions and meetings.Expenses associated with incentive trips are accrued over qualification periodsas they are earned. We specifically analyze incentive trip accruals based onhistorical and current sales trends as well as contractual obligations whenevaluating the adequacy of the incentive trip accrual. Actual results couldresult in liabilities being more or less than the amounts recorded. We haveaccrued convention and meeting costs of approximately $4.5 million and $5.5million at December 31, 2008 and 2007, respectively.

 

*Impairment of Long-Lived Assets*

 

The Company reviews its long-lived assets,such as property, plant and equipment and intangible assets for impairment whenevents or changes in circumstances indicate that the carrying value of an assetmay not be recoverable. The Company uses an estimate of future undiscounted netcash flows of the related assets or groups of assets over their remaining livesin measuring whether the assets are recoverable. An impairment loss iscalculated by determining the difference between the carrying values and thefair values of these assets. At December 31, 2008 and 2007, the Companydid not consider any of its long-lived assets to be impaired.

 

*Contingencies*

 

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

 

*IncomeTaxes*

 

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

 

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

 

As of December 31, 2008, we had foreignincome tax net operating loss carryforwards of $6.8 million that will expire atvarious dates from 2009 through 2012. TheCompany had approximately $3.5 million of foreign tax credits, which begin toexpire at various times starting in 2012.

 

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We believe that it is more likely than not thatthe benefit from certain deferred tax assets, including foreign net operatingloss carryforwards and foreign tax credits, will not be realized. Inrecognition of this risk, we have provided a valuation allowance of $14.0million for certain deferred tax assets at December 31, 2008, includingforeign net operating loss carryforwards and foreign tax credits. If ourassumptions change and we determine we will be able to realize these deferredtax assets, the tax benefits relating to any reversal of the valuationallowance on deferred tax assets at December 31, 2008 will be accountedfor as a reduction of income tax expense.

 

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

 

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

 

In July 2006, the Financial AccountingStandards Board (“FASB”) issued Financial Interpretation 48 (“FIN 48”), “Accountingfor Uncertainty in Income Taxes,” which clarifies the accounting for uncertaintyin income taxes recognized in the financial statements in accordance with SFAS109, “Accounting for Income Taxes.” FIN 48 provides that a tax benefit from anuncertain tax position may be recognized when it is more likely than not thatthe position will be sustained upon examination, including resolutions of anyrelated appeals or litigation processes, based on the technical merits.

 

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

 

**RESULTS OF OPERATIONS**

 

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

 
| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales revenue                        | ** ** | **100.0**                                  | **%**      | **100.0** | **%** | 100.0 | % |
|                                     |       |                                       |       |   |   |   |   |
| Costs and Expenses:                      |       |                                       |       |   |   |   |   |
| Cost of goods sold                       | ** ** | **18.8**                                   | ** ** | **19.4** |   | 19.0 |   |
| Volume incentives                        | ** ** | **38.9**                                   | ** ** | **39.2** |   | 40.3 |   |
| Selling, general and administrative      | ** ** | **40.8**                                   | ** ** | **40.6** |   | 38.5 |   |
| ** **                               | ** ** | **98.5**                                   | ** ** | **99.2** |   | 97.8 |   |
|                                     |       |                                       |       |   |   |   |   |
| Operating Income                         | ** ** | **1.5**                                    | ** ** | **0.8** |   | 2.2 |   |
|                                     |       |                                       |       |   |   |   |   |
| Other Income (Expense):                  |       |                                       |       |   |   |   |   |
| Interest and other income, net           | ** ** | **0.5**                                    | ** ** | **0.4** |   | 0.4 |   |
| Interest expense                         | ** ** | **—**                                 | ** ** | **—** |   | (0.2 | ) |
| Foreign exchange losses, net             | ** ** | **(0.3**                                   | **)**      | **—** |   | — |   |
| ** **                               | ** ** | **0.2**                                    | ** ** | **0.4** |   | 0.2 |   |
|                                     |       |                                       |       |   |   |   |   |
| Income Before Provision for Income Taxes | ** ** | **1.7**                                    | ** ** | **1.2** |   | 2.4 |   |
| Provision for Income Taxes               | ** ** | **2.2**                                    | ** ** | **3.5** |   | 3.4 |   |
|                                     |       |                                       |       |   |   |   |   |
| Net Loss                                 | ** ** | **(0.5**                                   | **)%**     | **(2.3** | **)%** | (1.0 | )% |

 

24

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*** Year Ended December 31, 2008 as Comparedto the Year Ended December 31, 2007***

 

*Net SalesRevenue*

 

Consolidatednet sales revenue for the year ended December 31, 2008 was $381.3 millioncompared to $366.6 million in 2007, an increase of approximately 4.0 percent.During 2008, the increase in net sales revenue is primarily due to continuedgrowth in NSP International.

 

We distribute our products to consumersthrough an independent sales force comprised of Managers and Distributors.Active Managers totaled approximately 26,000 and 24,100 at December 31,2008 and 2007, respectively. Active Distributors totaled approximately 729,600and 698,700 at December 31, 2008 and 2007, respectively. We anticipate thenumber of active Distributors to increase as we expand our existing operations,enter new international markets, and as current Distributors grow theirbusinesses.

 

Net sales revenue related to the NSP UnitedStates business segment operations were $150.1 million and $148.3 million forthe years ended December 31, 2008 and 2007, respectively, or an increaseof 1.2 percent in 2008 compared to 2007. This growth is partially due to a reduction of some of the rebatesprovided to Distributors associated with some of our products, as well asincrease in shipping charges to customers as a result of fuel surcharges duringthe current year as a result of increasing fuel costs.

 

NSP International net sales revenue increasedto $174.1 million in 2008 compared to $149.8 million in 2007, an increase ofapproximately 16.2 percent. The increase in international net sales revenue in2008 compared to 2007 is primarily the result of continued growth in ouroperations in Russia and Ukraine.  Theincrease in net sales revenue reflects the continued increase in Distributorsand Managers in the Company’s international operations as well as foreigncurrency exchange rate fluctuations which positively impacted revenues by $1.8million or 1.2 percent compared to the prior year.   Approximately $1.3 million of the benefit isthe result of positive currency fluctuations in Japan, as the yen strengthenedsignificantly in relation to the U.S. dollar in 2008. The effects of currencyfluctuations on sales are immaterial in the aggregate for the remaining marketsof NSP International.

 

Synergy Worldwide net sales revenue decreasedto $57.1 million in 2008 compared to $68.6 million in 2007, a decrease ofapproximately 16.8 percent. The decrease in Synergy Worldwide net sales isprimarily due to the loss of key Distributor networks as a result of increasedcompetition in the United States and Japanese markets.  We do not expect significant future declinesin the United States and Japanese markets as a result of the loss of these keyDistributors networks.  This decrease waspartially offset by foreign currency exchange rate fluctuations thatcontributed $2.6 million for the year ended 2008 compared to the prior year.The strengthening of the Japanese yen contributed to $3.7 million of thisincrease, which is offset by a $1.1 million decrease in sales as a result ofthe Korean won weakening in relation to the U.S. dollar.    The effects of currency fluctuations onsales are immaterial in the aggregate for the remaining markets of SynergyWorldwide.

 

Further information related to the NSP UnitedStates, NSP International and Synergy Worldwide is set forth in Note 12 ofNotes to Consolidated Financial Statements in Item 8 of this report.

 

*Cost of Goods Sold*

 

Cost of goods sold as a percent of net salesrevenue decreased to 18.8 percent in 2008 compared to 19.4 percent in2007.   This improvement is primarily asa result of decreased importation and purchasing costs in some of our foreignmarkets, as a result of their currencies strengthening in relation to the U.S.dollar.  In particular, these marketsinclude Japan and Mexico, which account for a significant portion ofconsolidated net sales.  In addition, wewere able to raise prices, while maintaining level inventory costs in ourRussian, Ukraine, and other eastern European markets.

 

*Volume Incentives*

 

Volume Incentives are a significant part ofour direct sales marketing program and represent commission payments made toour independent Distributors and Managers. These payments are designed toprovide incentives for reaching higher sales levels and for recruitingadditional Distributors.  VolumeIncentives vary slightly, on a percentage basis, by product due to our pricingpolicies and commission plans in place in our international operations.  Volume Incentives as a percent of net salesrevenue decreased to 38.9 percent in 2008 compared to 39.2 percent in2007.  The decrease is partially due tochanges in Volume Incentive programs for some products sold within the UnitedStates as well as the result of fuel surcharges included in net sales revenuewithin the United States for which there is no Volume Incentive.

 

*Selling, General and Administrative*

 

Selling,general and administrative expenses increased to 40.8 percent of net salesrevenue in 2008 compared to 40.6 

 

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percent in 2007.  In absolute terms, our selling, general andadministrative expenses increased by $7.0 million in 2008 compared to 2007,from $148.7 million to $155.7 million. The increase in selling, general and administrative expenses isprimarily as a result of increased spending of approximately $7.6 million inour Russian and Eastern European markets for infrastructure to support ourcontinued growth and costs of approximately $2.1 million for entering newmarkets in China and Europe (of which $1.1 million is related to SynergyWorldwide).  Foreign currencyfluctuations negatively impacted general and administrative expenses byapproximately $1.5 million, of which $0.7 million was related to SynergyWorldwide. These costs were offset by decreases of approximately $3.4 millionin our Synergy Worldwide operations (excluding costs for entering new marketsand the effect of foreign currency fluctuations) as a result of cost cuttinginitiatives to help bring operating costs more in line with the division’sreduced net sales revenue. These initiatives include reducing the division’sconsulting fees, professional fees, travel, personnel, office and warehouserent expense through the termination and renegotiation of leases, as well asother selling expenses.  We continue toevaluate and explore ways to reduce costs for Synergy Worldwide.

 

*Operating Income*

 

Operating income increased $2.5 million in2008 compared to 2007, from $3.1 million to $5.6 million.  The operating loss for NSP United Statesincreased $0.6 million to $5.9 million compared to $5.3 million in the prioryear.  This increase is primarily relatedto the Company’s interest in the losses of a variable interest entity of $0.9million for which the Company is the primary beneficiary (see Note 1 of Notesto the Consolidated Financial Statements set forth in Item 8 of thisreport).  This entity is involved in thedevelopment of nutritional supplements. Operating income for NSP International increased $4.2 million from $12.7million in 2007 to $16.9 million as a result of continued growth in our Russian,Ukrainian, and Eastern European markets. The operating loss in Synergy Worldwide increased $1.0 million to $5.4million in 2008 compared to $4.4 million in 2007.  This is primarily due to the loss of keyDistributor networks as a result of increasing competition within the UnitedStates and Japanese markets.  This lossresulted in a significant decrease in sales in relation to the operating costsin these markets.  The net impact offoreign currency fluctuations on operating income included in the operatingresults of NSP International and Synergy Worldwide is $0.2 million.

 

*Income Taxes*

 

The effective income taxrate was 128 percent for 2008, compared to 285 percent for 2007. The effectiverate for 2008 differed from the federal statutory rate of 35 percent primarily dueto:

 

(i)            Additional liabilities associated withuncertain tax positions increased the effective rate by 60 percent. Thesereserves related primarily to our exposure to transfer pricing on intercompanysales to foreign subsidiaries, to the withholding on sales commissions withincertain foreign jurisdictions, and to the deductibility of volume incentivepayments within certain foreign jurisdictions. The increase recognized in 2008 is related to items that arose orincreased during 2008.  The Company isundertaking initiatives to reduce or eliminate transfer pricing exposures infuture years. Likewise, steps are being taken to reduce or eliminate uncertaintax positions relating to the foreign subsidiaries, but because of the taxcomplexities in the United States and certain foreign jurisdictions in which wedo business, there will likely be impacts on our effective tax rate in thefuture.

 

(ii)           Changes in the deferred tax asset valuation allowance increased theeffective rate by approximately 68 percent. The increase in the deferred taxasset valuation allowance is primarily the result of establishing reservesagainst certain foreign subsidiary deferred tax assets that are not likely tobe realized due to the recurring losses within the respective tax jurisdictions.  The increase is offset by a reversal of thevaluation allowance in one of our Japanese subsidiaries due to improvedoperating results.  Changes to theeffective rate due to valuation allowances will be recurring.  If we determine that we will be able torealize these deferred tax assets in the future, the tax benefits relating tothe reversal will positively impact our effective rate.

 

(iii)          The amortization of a prepaid tax resulting from a taxable gain on thesale of intercompany assets eliminated for reporting purposes, but recognizedfor the calculation of the consolidated income tax provision, increased theeffective rate by approximately 17 percent. The prepaid tax is being amortizedover the respective life of the asset, and it is anticipated to impact theeffective rate through 2010.

 

(iv)          Adjustments relating to the U.S. tax impact of foreign operationsdecreased the effective tax rate by 34 percent. Included were adjustments for dividends received from foreign subsidiaries,adjustments for foreign tax credits, and adjustments relating to outside basiscalculations under Accounting Principles Board Opinion No. 23 (“APB 23”)“Accounting for Income Taxes.” Changes to the effective rate due to dividendsreceived from foreign subsidiaries, adjustments for foreign tax credits, andoutside basis calculations under APB 23 will be recurring.

 

(v)           A foreign exchange tax loss on a U.S. dollar denominated intercompanypayable decreased the effective tax rate by 17 percent.  The related foreign book loss is eliminatedin consolidation, however, it is still taxable in the respective foreignjurisdictions.  The gain or loss on thetranslation of the intercompany payable will continue to fluctuate with changesin exchange rates and may impact our effective rate in the future. 

 

(vi)          Foreign and state tax rate differentials that incrementally impact the federalstatutory rate, as well as permanent nondeductible or deductible items accountfor the remaining change. Some of these items may be recurring.

 

As a result of these differences, tax expense for2008 was greater than income before taxes for the year ended December 31,2008.

 

The effective income tax rate was 285 percent for2007, compared to 141 percent for 2006. The effective rate for 2007 differedfrom the federal statutory rate of 35 percent primarily due to:

 
| (i)    | Additional liabilities  associated with uncertain tax positions increased the effective rate by 104  percent and related primarily to our exposure to transfer pricing on intercompany  sales to foreign subsidiaries, to the withholding on sales commissions within  certain foreign jurisdictions, and to the deductibility of volume incentive  payments within certain foreign jurisdictions.                                                                                 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (ii)   | Additional tax  contingencies which increased the effective rate by approximately 16  percent.  The increase in tax  contingencies primarily relates to foreign non-income tax related expenses which  reduce the pretax income but are non-deductible for income tax purposes  consequently increasing the effective rate. The items primarily relate to tax  contingencies for VAT transactions.   Some of these items may be recurring.                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (iii)  | Changes in the deferred  tax asset valuation allowance increased the effective rate by approximately  61 percent. The increase in the deferred tax asset valuation allowance is primarily  the result of establishing reserves against certain foreign subsidiary  deferred tax assets that are not likely to be realized due to the recurring  losses within the respective tax jurisdiction.  Changes to the effective rate due to  valuation allowances will be recurring. |

 

26

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| (iv)   | The amortization of a  prepaid tax resulting from a taxable gain on the sale of intercompany assets eliminated  for reporting purposes, but recognized for the calculation of the  consolidated income tax provision, increased the effective rate by  approximately 25 percent. The prepaid tax is anticipated to impact the  effective tax rate for 2008 through 2010.                                                                                                                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (v)    | A foreign exchange tax  gain on a U.S. dollar denominated intercompany payable increased the  effective tax rate by 17 percent.  The  related foreign book gain is eliminated in consolidation, however, it is  still taxable in the respective foreign jurisdictions.  The gain or loss on the translation of the  intercompany payable will continue to fluctuate with changes in exchange  rates.                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (vi)   | An 11 percent increase for  state income taxes represents the incremental impact on the statutory rate for  state income taxes deducted according to the expected blended state income  tax rate, net of the federal benefit. The change to the state rate related to  state income taxes will be a recurring item.                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (vii)  | Adjustments relating to  the U.S. tax impact of foreign operations increased the effective tax rate by  17 percent.  Included were adjustments  for dividends received from foreign subsidiaries, adjustments for deduction  of foreign taxes, and adjustments relating to outside basis calculations  under APB 23. Changes to the effective rate due to dividends received from  foreign subsidiaries, adjustments for foreign tax credits, and outside basis  calculations under APB 23 will be recurring. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (viii) | Foreign tax rate  differentials, due to higher tax rates in some foreign jurisdictions, as well  as permanent nondeductible or deductible items account for the remaining change.  Some of these items may be recurring.                                                                                                                                                                                                                                                                                           |

 

As a result of these differences, tax expense for2007 was greater than income before taxes for the year ended December 31,2007.

 

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

 

*Net Sales Revenue*

 

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

 

           We distribute our products toconsumers through an independent sales force comprised of Managers andDistributors. 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 related to the NSP UnitedStates business segment operations were $148.3 million and $148.4 million forthe years ended December 31, 2007 and 2006, respectively.

 

NSP International net sales revenue increasedto $149.8 million in 2007 compared to $130.6 million in 2006, an increase of 

 

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approximately 14.7 percent. Theincrease in international net sales revenue in 2007 compared to 2006 isprimarily the result of continued growth in our operations in Russia, Ukraine,Venezuela, and Japan. Price increases are planned in various internationalmarkets to compensate for foreign currency devaluations and increases in thecost of finished products. Management believes the price increases will beacceptable to its sales force and will result in increased net sales revenue.

 

Synergy Worldwide net sales revenue decreasedto $68.6 million in 2007 compared to $83.2 million in 2006, a decrease ofapproximately 17.6 percent. The decrease in Synergy Worldwide net sales isprimarily due to the loss of key Distributor networks as a result of increasedcompetition in the United States and Japanese markets with growth remainingflat in the other markets in which Synergy Worldwide operates. Furtherinformation related to the NSP United States, NSP International and SynergyWorldwide is set forth in Note 12 of Notes to Consolidated Financial Statementsin Item 8 of this report.

 

*Cost of Goods Sold*

 

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

 

*Volume Incentives*

 

Volume Incentives are a significant part ofour direct sales marketing program and represent commission payments made toour independent Distributors and Managers. These payments are designed toprovide incentives for reaching higher sales levels and for recruitingadditional Distributors. Volume Incentives as a percent of net sales revenuedecreased slightly during 2007 as compared to 2006, primarily as a result ofthe decreased sales revenue in Synergy Worldwide where Volume Incentives areslightly higher than in the United States and our other internationaloperations, and as a result of sales in new markets where lower levels ofVolume Incentives were paid.

 

*Selling, General and Administrative*

 

Selling, general and administrative expensesincreased $9.1 million in 2007 compared to 2006, from $139.6 million to $148.7million. Approximately $3.4 million is the result of expenses related to thecontinued growth of the Company’s international segments, as well as $1.1million 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 general administrative expenses. The amount, excluding capitalexpenditures, spent on research and development activities remained constant at$1.9 million for 2007 and 2006.

 

*Operating Income*

 

Operating income decreased $4.9 million in2007 compared to 2006, from $8.0 million to $3.1 million.  The operating loss for NSP United Statesincreased $1.2 million as a result of flat sales and increasing costs primarilyrelated to professional costs related to work on becoming current with theCompany’s SEC filings.  This decrease inconsolidated operating income was offset by an increase in NSP International’soperating income of $1.1 million as a result of continued growth in thesemarkets.  The primary cause of thedecrease in operating income was a decrease in operating income of $4.8 millionfor Synergy Worldwide, primarily due to the loss of key Distributor networks asa result of increasing competition within the United States and Japanesemarkets.  This loss resulted insignificant decrease in sales in relation to the operating costs in thesemarkets.

 

*Income Taxes*

 

The effective income tax rate was 285 percent for2007, compared to 141 percent for 2006. The effective rate for 2007 differedfrom the federal statutory rate of 35 percent primarily due to:

 
| (i)    | Additional liabilities  associated with uncertain tax positions increased the effective rate by 104  percent and related primarily to our exposure to transfer pricing on  intercompany sales to foreign subsidiaries, to the withholding on sales  commissions within certain foreign jurisdictions, and to the deductibility of  volume incentive payments within certain foreign jurisdictions.                                                                                                                 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (ii)   | Additional tax  contingencies which increased the effective rate by approximately 16  percent.  The increase in tax  contingencies primarily relates to foreign non-income tax related expenses which  reduce the pretax income but are non-deductible for income tax purposes  consequently increasing the effective rate.   The items primarily relate to tax contingencies for VAT transactions.  Some of these items may be recurring.                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (iii)  | Changes in the deferred tax  asset valuation allowance increased the effective rate by approximately 61  percent. The increase in the deferred tax asset valuation allowance is  primarily the result of establishing reserves against certain foreign  subsidiary deferred tax assets that are not likely to be realized due to the  recurring losses within the respective tax jurisdictions.  Changes to the effective rate due to  valuation allowances will be recurring.                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (iv)   | The amortization of a  prepaid tax resulting from a taxable gain on the sale of intercompany assets  eliminated for reporting purposes, but recognized for the calculation of the  consolidated income tax provision, increased the effective rate by  approximately 25 percent. This item is anticipated to impact the effective  tax rate 2008 through 2010.                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (v)    | A foreign exchange tax  gain on a U.S. dollar denominated intercompany payable increased the  effective tax rate by 17 percent.  The  related foreign book gain is eliminated in consolidation.  However, it is still taxable in the  respective foreign jurisdictions.  The  gain or loss on the translation of the intercompany payable will continue to  fluctuate with changes in exchange rates.                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (vi)   | The 11 percent increase  for state income taxes represents the incremental impact on the statutory  rate for state income taxes deducted according to the expected blended state  income tax rate, net of the federal benefit. The change to the state rate  related to state income taxes will be a recurring item.                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (vii)  | Adjustments relating to  the U.S. tax impact of foreign operations increased the effective tax rate by  17 percent.  Included were adjustments for  dividends received from foreign subsidiaries, adjustments for deduction of  foreign taxes, and adjustments relating to outside basis calculations under  APB 23. Changes to the effective rate due to dividends received from foreign  subsidiaries, adjustments for foreign tax credits, and outside basis  calculations under APB 23 will be recurring. |

 

28

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| (viii) | Foreign tax rate  differentials, due to higher tax rates in some foreign jurisdictions, as well  as permanent nondeductible or deductible items account for the remaining  increase. Some of these items may be recurring. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As a result of these differences, tax expense for2007 was greater than income before taxes for the year ended December 31,2007.

 

The effective rate for 2006differed from the federal statutory rate of 35 percent primarily due to:

 
| (i)    | Additional tax  contingencies which increased the effective rate by approximately 54  percent.  The increase in tax  contingencies relates to a) foreign non-income tax expenses which are non-deductible  for tax purposes (primarily VAT that is not recoverable from other parties)  and b) the impact from exposure to transfer pricing on intercompany sales to  foreign subsidiaries and to the deductibility of volume incentive payments in  certain foreign jurisdictions (prior to adoption of FIN 48).  Some of these items may be recurring. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (ii)   | Changes in the deferred tax  asset valuation allowance increased the effective rate by approximately 29  percent. The increase in the deferred tax asset valuation allowance is  primarily the result of establishing reserves against certain foreign  subsidiary deferred tax assets that are not likely to be realized due to the  recurring losses within the respective tax jurisdiction.  Changes to the effective rate due to  valuation allowances will be recurring.                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (iii)  | The amortization of a  prepaid tax resulting from a taxable gain on the sale of intercompany assets which  is eliminated for reporting purposes, but recognized for the calculation of  the consolidated income tax provision, increased the effective rate by  approximately 13 percent.  The prepaid  tax is being amortized over the respective life of the asset.                                                                                                                                                                                         |
|   |
| (iv)   | A foreign exchange tax  gain on a U.S. dollar denominated intercompany payable increased the  effective tax rate by 10 percent.  The  related foreign book gain is eliminated in consolidation.  However, it is still taxable in the  respective foreign jurisdictions.  The  gain or loss on the translation of the intercompany payable will continue to  fluctuate with changes in exchange rates.                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (v)    | Foreign and state tax rate  differentials that incrementally impact the federal statutory tax rate, as  well as permanent nondeductible or deductible items account for the remaining  change. Some of these items may be recurring.                                                                                                                                                                                                                                                                                                                               |

 

As a result of these differences, tax expense for2006 was greater than income before taxes for the year ended December 31,2006.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our principal use of cash is to pay for operatingexpenses, including volume incentives, capital assets, inventory purchases,funding of international expansion, and the payment of quarterly dividends. Wehave generally relied upon cash flows from operations to fund operatingactivities, and have at times drawn on an operating line of credit in order tofund stock repurchases and other strategic transactions. At December 31,2008, we had $34.9 million in cash and cash equivalents and $3.9 million inunrestricted short-term investments, which were available to be used along withour normal cash flows from operations to fund any unanticipated shortfalls infuture cash flows.

 

As of December 31, 2008, working capital was $30.2 million,compared to $32.0 million as of December 31, 2007.  Our net consolidated cash inflows (outflows)are as follows (*in thousands*):

 
| ** **           | ** ** | **Year Ended December 31,** | ** ** |
|----------------------|------------|--------------------------------------------|------------|
| ** **           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating activities | ** ** | **$**                                      | **772**    |   | $ | 12,832 |   | $ | 14,252 |   |
| Investing activities | ** ** | **(6,759**                                 | **)**      | (5,701 | ) | (3,959 | ) |
| Financing activities | ** ** | **(3,102**                                 | **)**      | (1,604 | ) | (9,303 | ) |
|                      |            |                                            |            |  |  |  |  |  |  |  |

 

*OperatingActivities*

 

For the year ended December 31, 2008, we generated cash fromoperating activities of $0.8 million compared to $12.8 million in 2007. Thedecrease in cash generated from operating activities is primarily due to thetiming of payments on accounts receivable and increased use of funds topurchase inventory compared to decreases in our overall inventory balances inthe prior year.  Our supply of inventoryon hand has increased to 201 days as of December 31, 2008 compared to 181days in the prior year.  The increase inour inventory on hand is the result of building inventory for our new marketsin Europe and China, as well as new product launches in South Eastern Asia. Inaddition, operating cash flow decreased significantly as a result of the timingof payments of accrued liabilities.

 

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

 

*InvestingActivities*

 

For the year ended December 31, 2008, net cash flow used in investingactivities was approximately $6.8 million, of which $4.0 million is related tothe purchase of a warehouse and land in Venezuela using cash balances fromVenezuela, and $3.5 million is related to other capital expenditures forequipment, facility improvements, computer systems, and software, the majorityof which was for NSP United States.

 

For the year ended December 31, 2007, net cash flow used ininvesting activities was approximately $5.7 million which included $4.5 millionrelated to capital expenditures for equipment, computer systems, and software,and $1.0 million for the acquisition of intangibles related to the purchase ofproduct formulations.  In addition, wepurchased approximately $2.1 million of auction-rate securities, which weclassified as long-term restricted investments as they failed at auctionsubsequent to purchase.  See Note 1 ofthe Notes to the Consolidated Financial Statements set forth in Item 8 of thisreport for additional information regarding the accounting and valuation ofthese securities.  In December 2008,we received an offer from a registered broker and redeemed these securities atpar value in January 2009.

 

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

 

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* *

*FinancingActivities*

 

For the yearsended December 31, 2008, 2007, and 2006, cash flows used for financingactivities were approximately $3.1 million, $1.6 million, and $9.3 million,respectively.

 

During2008, 2007, and 2006, we used cash of $3.1 million, $3.1 million, and $3.1million to pay quarterly cash dividend payments, respectively.

 

Theuses of cash for financing activities above were partially offset by proceedsreceived from option holders exercising their options of $1.3 million and $0.6million for the years ended December 31, 2007 and 2006, respectively.  There were no proceeds related to theexercise of stock options for the year ended December 31, 2008.

 

In 2006, weused funds of $7.0 million to pay off our outstanding line of credit.  This line of credit was terminated July 1,2006.

 

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

 

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

 

**CONTRACTUALOBLIGATIONS**

 

The following table summarizes informationabout contractual obligations as of December 31, 2008 (*in thousands*):

 
| ** **                                                               | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
|--------------------------------------------------------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| Operating lease obligations                                              |       | $         | 10,904     |                                | $          | 4,743              |       | $                  | 4,267      |                        | $          | 1,760 |   | $ | 134 |   |
| Purchase obligations(1)                                                  |       | 16,513    |       | 16,513                              |       | —             |       | —             |       | —                      |       |
| Capital purchase obligations(2)                                          |       | 545       |       | 545                                 |       | —             |       | —             |       | —                      |       |
| Self-insurance reserves(3)                                               |       | 2,873     |       | 2,873                               |       | —             |       | —             |       | —                      |       |
| Other long-term liabilities reflected on  the balance sheet(4) |       | 1,394     |       | —                              |       | —             |       | —             |       | 1,394                       |       |
| Unrecognized tax benefits(5)                                             |       | —    |       | —                              |       | —             |       | —             |       | —                      |       |
| Total                                                                    |       | $         | 32,229     |                                | $          | 24,674             |       | $                  | 4,267      |                        | $          | 1,760 |   | $ | 1,528 |   |

 

----

| (1)    |   | Purchase obligations include non-cancelable  purchase agreements for both botanical and non-botanical raw materials  related to our forecasted 2008 production estimates, as well as related  packaging materials.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    |   | Capital purchase obligations included  non-cancelable purchase agreements for upgrades related to our information  systems and manufacturing equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    |   | The Company retains a significant portion  of the risks associated with certain employee medical benefits and product  liability insurance. Recorded liabilities for self-insured risks are  calculated using actuarial methods and are not discounted. Amounts for  self-insurance obligations are included in accrued liabilities on the  Company’s consolidated balance sheet.                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (4)    |   | The Company provides a nonqualified  deferred compensation plan for its officers and certain key employees. Under  this plan, participants may defer up to 100 percent of their annual salary  and bonus (less the participant’s share of employment taxes). The deferrals  become an obligation owed to the participant by the Company under the plan.  Upon separation of the participant from the service of the Company, the  obligation owed to the participant under the plan will be paid as a lump sum  or over a period of either three or five years. As we cannot easily determine  when our officers and key employees will separate from the Company, we have  classified the obligation greater than five years for payment. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (5)    |   | At December 31, 2008, there was  $30,952 of liabilities related to unrecognized tax benefits. Because of the  high degree of uncertainty regarding the timing of future cash outflows  associated with these liabilities, if any, the Company is unable to estimate  the years in which cash settlement may occur with the respective tax  authorities.                                                                                                                                                                                                                                                                                                                                                                                    |

 

**OFF-BALANCESHEET ARRANGEMENTS**

 

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

 

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**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2007, the FASB issued SFAS No. 141 (revised2007), “Business Combinations,” (“SFAS No. 141R”), which changes how businesscombinations are accounted for and will impact financial statements both on theacquisition date and in subsequent periods. SFAS No. 141R is effective January 1,2009, and will be applied prospectively. The effect of adopting SFAS No. 141Rwill depend on the nature and terms of future acquisitions.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements” (“SFAS No. 160”), whichchanges the accounting and reporting standards for the noncontrolling interestsin a subsidiary in consolidated financial statements. SFAS No. 160recharacterizes minority interest as noncontrolling interests and requiresnoncontrolling interests to be classified as a component of shareholders’equity. SFAS No. 160 is effective January 1, 2009 and requiresretroactive adoption of the presentation and disclosure requirements forexisting minority interest. The Company is currently evaluating the impact ofSFAS No. 160 on the Company’s consolidated financial statements, but doesnot expect SFAS No. 160 to have a material impact on our consolidatedfinancial position, results of operations, or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — an Amendment of SFAS No. 133(“SFAS 161”).  This standard requiresenhanced disclosures regarding derivatives and hedging activities,including:  (a) the manner in whichan entity uses derivative instruments; (b) the manner in which derivativeinstruments and related hedged items are accounted for under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities;” and (c) theeffect of derivative instruments and related hedged items on a entity’sfinancial position, financial performance, and cash flows.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  As SFAS 161 relates specificallyto disclosures, the standard will have no impact on our consolidated financialcondition, results of operations or cash flows.

 

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From time to time, new accounting pronouncements are issued by the FASBor other standard setting bodies, which the Company evaluates and adopts as ofthe specified effective date.  Unlessotherwise discussed, the Company believes recently issued standards andpronouncements that are not yet effective will not have a material impact uponits financial condition, results of operations, or cash flows upon adoption.

 

## ***Item 7A. Quantitative andQualitative Disclosures about Market Risk***

## *** ***

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

 

**ForeignCurrency Risk**

 

During the year ended December 31, 2008, approximately 60.3percent of our net sales revenue and approximately 61.1 percent of ouroperating expenses were realized outside of the United States. Inventorypurchases are transacted primarily in U.S. dollars from vendors located in theUnited States. The local currency of each international subsidiary isconsidered the functional currency, while certain regions, including Russia andthe Ukraine, are served by a U.S. subsidiary through third party entities, forwhich all business is conducted in U.S. dollars. We conduct business intwenty-three different currencies with exchange rates that are not on aone-to-one relationship with the U.S. dollar. All revenues and expenses are translated at average exchange rates forthe periods reported. Therefore, our operating results will be positivelyimpacted by a weakening of the U.S. dollar in relation to another fluctuatingcurrency and negatively impacted by a strengthening of the U.S. dollar inrelation to another fluctuating currency. Given the uncertainty and diversityof exchange rate fluctuations, we cannot estimate the effect of thesefluctuations on our future business, product pricing, results of operations, orfinancial condition, but we have provided consolidated sensitivity analysesbelow of functional currency/reporting currency exchange rate risks. Ourexposure to local currency/functional currency exchange rate risk is notsignificant. Changes in various currency exchange rates affect the relativeprices at which we sell our products. We regularly monitor our foreign currencyrisks and periodically take measures to reduce the risk of foreign exchangerate fluctuations on our operating results. We do not use derivativeinstruments for hedging, trading, or speculating on foreign exchange ratefluctuations.

 

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

 

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| ** **                                       | ** ** | **For year ended** | ** **  | **With Strengthening of U.S. Dollar by:** | ** ** |
|--------------------------------------------------|------------|------------------------------|-------------|--------------------------------------------------------------------|------------|
| **Exchange Rate Sensitivity -**   | ** ** | **December 31,**        | ** **  | **10%**                                                            | ** ** | **15%** | ** ** | **25%** | ** ** |
| **Operating Income**                        | ** ** | **2008**                     | ** **  | **Decrease ($)**                                              | ** ** | **Decrease (%)** | ** ** | **Decrease ($)** | ** ** | **Decrease (%)** | ** ** | **Decrease ($)** | ** ** | **Decrease (%)** | ** ** |
| **(Dollar amounts in thousands)** | ** ** | ** **                   | ** **  | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Net Sales Revenue**                            | ** ** | **$**                        | **381,299** |                                                               | $          | (12,438 | ) | (3.3 | )% | $ | (17,846 | ) | (4.7 | )% | $ | (27,364 | ) | (7.2 | )% |
|                                             |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cost and Expenses**                            |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cost of Goods Sold**                           | ** ** | **71,874**                   |        | (2,057                                                             | )          | (2.9 | )% | (2,952 | ) | (4.1 | )% | (4,526 | ) | (6.3 | )% |
| **Volume Incentives**                            | ** ** | **148,139**                  |        | (5,076                                                             | )          | (3.4 | )% | (7,282 | ) | (4.9 | )% | (11,166 | ) | (7.5 | )% |
| **Selling, General and Administrative**          | ** ** | **155,688**                  |        | (4,795                                                             | )          | (3.1 | )% | (6,879 | ) | (4.4 | )% | (10,548 | ) | (6.8 | )% |
|                                             |       |                         |        |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Operating Income**                             | ** ** | **5,598**                    |        | (510                                                               | )          | (9.1 | )% | (733 | ) | (13.1 | )% | (1,124 | ) | (20.1 | )% |
|                                                  |            |                              |             |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

The following table sets forth a compositesensitivity analysis of our assets and liabilities by those balance sheet lineitems that are subject to exchange rate risk, together with the total gain orloss from the strengthening of the U.S. in relation to our various fluctuatingfunctional currencies.  The sensitivityof our assets and liabilities, taken by balance sheet line items, was somewhatless than the sensitivity of our operating income to increases in the strengthof the U.S. in relation to other fluctuating currencies in which we conductbusiness.

** **
| ** **                                                             | ** ** | ** ** | ** ** | **With Strengthening of U.S. Dollar by:** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | **10%**                                                            | ** ** | **15%** | ** ** | **25%** | ** ** |
| ** **                                                             | ** ** | ** ** | ** ** | **Gain**                                                           | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** | **Gain** | ** ** |
| **Exchange Rate Sensitivity - Balance Sheet** | ** ** | **2008**   | ** ** | **(Loss) ($)**                                                | ** ** | **(Loss) (%)** | ** ** | **(Loss) ($)** | ** ** | **(Loss) (%)** | ** ** | **(Loss) ($)** | ** ** | **(Loss) (%)** | ** ** |
| **(Dollar amounts in thousands)**                       |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| ***Current Assets subject to Exchange Rate  Risk***                    |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Cash and cash equivalents**                                          | ** ** | **$**      | **34,853** |                                                               | $          | (2,693 | ) | (7.7 | )% | $ | (3,863 | ) | (11.1 | )% | $ | (5,924 | ) | (17.0 | )% |
| **Accounts receivable, net**                                           | ** ** | **10,786** |       | (391                                                               | )          | (3.6 | )% | (561 | ) | (5.2 | )% | (860 | ) | (8.0 | )% |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| ***Current Liabilities subject to Exchange  Rate Risk***               |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Accounts payable**                                                   | ** ** | **8,777**  |       | 206                                                                |       | 2.3 | % | 296 |   | 3.4 | % | 454 |   | 5.2 | % |
|                                                                   |       |       |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Total Loss from Strengthening of U.S.  Dollar**                 |       |       |       | (2,878                                                             | )          |   |   | (4,128 | ) |   |   | (6,330 | ) |   |   |
|                                                                        |            |            |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table sets forth the localcurrencies other than the U.S. dollar in which our assets that are subject toexchange rate risk were denominated as of December 31, 2008 and exceeded$1 million upon translation into U.S. dollars. None of our liabilities that are denominated in a local currency otherthan the U.S. dollar and that are subject to exchange rate risk exceeded $1million upon translation into U.S. dollars. We use the spot exchange rate fortranslating balance sheet items from local currencies into our reportingcurrency.  The respective spot exchangerate for each such local currency meeting the foregoing thresholds is providedin the table as well.

 

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**Translationof Balance Sheet Amounts Denominated in Local Currency**

 

(Dollar amounts inthousands)

 
| ** **                    | ** ** | ** **               | ** ** | **At Spot Exchange Rate per** | ** ** |
|-------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|
| ** **                    | ** ** | **Translated into** | ** ** | **One U.S. Dollar as of**     | ** ** |
| ** **                    | ** ** | **U.S. Dollars**    | ** ** | **December 31, 2008**                   | ** ** |
| **Cash and Cash Equivalents** |       |                     |       |                                              |       |
| Canada (Dollar)               |       | $                        | 1,712      |                                              | 1.2        |   |
| Colombia (Peso)               |       | 1,991                    |       | 2,251.7                                           |       |
| Indonesia (Rupiah)            |       | 2,591                    |       | 11,123.5                                          |       |
| Japan (Yen)                   |       | 8,852                    |       | 90.4                                              |       |
| Mexico (Peso)                 |       | 1,304                    |       | 13.8                                              |       |
| South Korea (Won)             |       | 2,181                    |       | 1,265.8                                           |       |
| Venezuela (Bolivar)           |       | 3,415                    |       | 2.1                                               |       |
| Other                         |       | 7,008                    |       | Varies                                            |       |
| Total                         |       | $                        | 29,054     |                                              |       |   |
|                          |       |                     |       |                                              |       |
| **Accounts Receivable**       |       |                     |       |                                              |       |
| Japan (Yen)                   |       | $                        | 1,914      |                                              | 90.4       |   |
| Other                         |       | 2,385                    |       | Varies                                            |       |
| Total                         |       | $                        | 4,299      |                                              |       |   |

 

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

 
| **Year ended December 31** | ** ** | **2008**  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Canada (Dollar)                           | ** ** | **1.1**   |       | 1.1      |       | 1.1      |       |
| Japan (Yen)                               | ** ** | **102.8** |       | 117.7    |       | 116.3    |       |
| Mexico (Peso)                             | ** ** | **11.1**  |       | 10.9     |       | 10.9     |       |
| Venezuela (Bolivar)                       | ** ** | **2.1**   | **(1)**    | 2,145.9  |       | 2,145.9  |       |

 

----

(1)       Effective January 1, 2008, Venezuelachanges its currency from the bolivar to the bolivar fuerte (the bolivar fuerteis equal to approximately 1000 bolivars; both are referred to as “bolivars”).

 

The functional currency in highly inflationary economies is the U.S.dollar and transactions denominated in the local currency are re-measured as ifthe functional currency were the U.S. dollar if they are considered material tothe consolidated financial statements. The re-measurement of local currenciesinto U.S. dollars creates translation adjustments, which are included in theconsolidated statements of operations. There were no countries considered tohave a highly inflationary economy during 2008, 2007, or 2006.

 

As of December 31, 2008, we have approximately $3.4 million in cashdenominated in Venezuelan bolivars. Currency restrictions enacted by the government of Venezuela have had anegative impact on the ability of our subsidiary in Venezuela to obtain U.S.dollars at the official exchange rate to pay for imported products or torepatriate dividends back to the Company. Our Venezuelan subsidiary continues to expect to convert its bolivarsinto U.S. dollars at the official exchange rate to pay for imported products orrepatriate dividends.  As a result, wecontinue to use the official exchange rate to translate the financialstatements of our Venezuelan subsidiary into U.S. dollars.  Unless the official exchange rate is mademore readily available, however, our subsidiary’s operations could be adverselyaffected as it may need to obtain U.S. dollars at less favorable exchange ratesfrom non-government sources.

 

**Interest Rate Risk**

 

The primary objectives of our investment activities are to preserveprincipal while maximizing yields without significantly increasing risk. Theseobjectives are accomplished by purchasing investment grade securities. On December 31,2008, we had investments of $3.9 million of which $2.9 million were municipalobligations, which carry an average fixed interest rate of 4.9

 

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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, which wereredeemed at par value in January 2009.

 

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## ***Table of Contents***

 

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

## *** ***

**INDEX TO FINANCIAL STATEMENTS**

 
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRM                                                                                       |   | 38     |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                           |   |   |
| CONSOLIDATED BALANCE SHEETS AS OF DECEMBER  31, 2008, AND 2007                                                                                 |   | 39     |
|                                                                                                                                           |   |   |
| CONSOLIDATED  STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER  31, 2008, 2007, AND 2006                                                  |   | 40     |
|                                                                                                                                           |   |   |
| CONSOLIDATED STATEMENTS OF CHANGES IN  SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS FOR  THE YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006 |   | 41     |
|                                                                                                                                           |   |   |
| CONSOLIDATED  STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER  31, 2008, 2007, AND 2006                                                  |   | 42     |
|                                                                                                                                           |   |   |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                                                                                    |   | 43     |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

 

We have audited the accompanying consolidated balance sheets of Nature’sSunshine Products, Inc. and subsidiaries (the “Company”) as of December 31,2008 and 2007, and the related consolidated statements of operations, changesin shareholders’ equity and comprehensive loss, and cash flows for each of thethree years in the period ended December 31, 2008. Our audits alsoincluded the financial statement schedule listed in the Index at Item 15. Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thefinancial statements and financial statement schedule based on our audits.

 

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

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Nature’s Sunshine Products, Inc.and subsidiaries as of December 31, 2008 and 2007, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2008, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

As discussed in Note 1 to the consolidated financial statements, in 2007the Company changed its method of accounting for uncertain tax positions toconform with Financial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes.”

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the Company’s internalcontrol over financial reporting as of December 31, 2008, based on thecriteria established in *Internal Control —Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 18,2009 expressed an adverse opinion on the effectiveness of the Company’sinternal control over financial reporting.

 
| /s/ Deloitte & Touche LLP |   |
|------------------------------------|--------|
|                               |   |
| Salt Lake City, Utah               |   |
| March 18, 2009                |   |

 

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

 

**CONSOLIDATEDBALANCE SHEETS**

***(Amounts in thousands)***

 
| **As of December 31**                                                                                               | ** ** | **2008**    | ** **  | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|----------|------------|
| **Assets**                                                                                                                         |       |        |        |     |       |
| Current Assets:                                                                                                                    |       |        |        |     |       |
| Cash and cash equivalents                                                                                                          | ** ** | **$**       | **34,853**  |     | $          | 45,299 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $1,472 and $739, respectively                                      | ** ** | **10,786**  |        | 7,450    |       |
| Investments available for sale                                                                                                     | ** ** | **3,858**   |        | 4,755    |       |
| Restricted investments                                                                                                             | ** ** | **2,050**   |        | —   |       |
| Inventories, net                                                                                                                   | ** ** | **39,558**  |        | 35,249   |       |
| Deferred income tax assets                                                                                                         | ** ** | **9,080**   |        | 8,071    |       |
| Prepaid expenses and other                                                                                                         | ** ** | **7,935**   |        | 8,153    |       |
| Total current assets                                                                                                               | ** ** | **108,120** |        | 108,977  |       |
| Property, plant and equipment, net                                                                                                 | ** ** | **30,224**  |        | 28,282   |       |
| Investment securities                                                                                                              | ** ** | **1,394**   |        | 1,674    |       |
| Restricted investments                                                                                                             |       | **—**  |        | 2,075    |       |
| Intangible assets, net                                                                                                             | ** ** | **1,538**   |        | 1,656    |       |
| Deferred income tax assets                                                                                                         | ** ** | **6,412**   |        | 5,828    |       |
| Other assets                                                                                                                       | ** ** | **16,588**  |        | 16,846   |       |
| ** **                                                                                                                         |       | **$**       | **164,276** |     | $          | 165,338 |   |
|                                                                                                                               |       |        |        |     |       |
| **Liabilities and Shareholders’ Equity**                                                                                      |       |        |        |     |       |
| Current Liabilities:                                                                                                               |       |        |        |     |       |
| Accounts payable                                                                                                                   | ** ** | **$**       | **8,777**   |     | $          | 7,009 |   |
| Accrued volume incentives                                                                                                          | ** ** | **15,753**  |        | 15,922   |       |
| Accrued liabilities                                                                                                                | ** ** | **45,475**  |        | 44,322   |       |
| Deferred revenue                                                                                                                   | ** ** | **5,167**   |        | 5,207    |       |
| Income taxes payable                                                                                                               | ** ** | **2,748**   |        | 4,500    |       |
| Total current liabilities                                                                                                          | ** ** | **77,920**  |        | 76,960   |       |
| Liability related to unrecognized tax benefits                                                                                     | ** ** | **30,952**  |        | 25,888   |       |
| Deferred compensation payable                                                                                                      | ** ** | **1,394**   |        | 1,674    |       |
| Other liabilities                                                                                                                  | ** ** | **333**     |        | 424      |       |
| Total long-term liabilities                                                                                                        | ** ** | **32,679**  |        | 27,986   |       |
|                                                                                                                               |       |        |        |     |       |
| **Commitments and Contingencies (Notes 8 and  11)**                                                                                |       |        |        |     |       |
|                                                                                                                               |       |        |        |     |       |
| Shareholders’ Equity:                                                                                                         |       |        |        |     |       |
| Common stock, no par value; 20,000 shares  authorized, 15,510 shares issued and outstanding as of December 31, 2008  and 2007 | ** ** | **66,705**  |        | 66,619   |       |
| Retained earnings                                                                                                                  | ** ** | **4,172**   | ** **  | 9,112    |       |
| Accumulated other comprehensive loss                                                                                               | ** ** | **(17,200** | **)**       | (15,339  | )          |
| Total shareholders’ equity                                                                                                    | ** ** | **53,677**  |        | 60,392   |       |
| ** **                                                                                                                         |       | **$**       | **164,276** |     | $          | 165,338 |   |

 

See accompanying notes to consolidated financial statements.

 

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

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

** **
| **Year Ended December 31**                                                                                | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Net Sales Revenue (net of the rebate  portion of volume incentives of $42,923, $43,927, and $41,344,  respectively) | ** ** | **$**       | **381,299** |     | $          | 366,647  |       | $ | 362,222 |   |
| Costs and Expenses:                                                                                                      |       |        |        |     |       |     |       |
| Cost of goods sold                                                                                                       | ** ** | **71,874**  |        | 70,996   |       | 68,745   |       |
| Volume incentives                                                                                                        | ** ** | **148,139** |        | 143,884  |       | 145,827  |       |
| Selling, general and administrative                                                                                      | ** ** | **155,688** |        | 148,706  |       | 139,645  |       |
| ** **                                                                                                               |       | **375,701** |        | 363,586  |       | 354,217  |       |
| Operating Income                                                                                                         | ** ** | **5,598**   |        | 3,061    |       | 8,005    |       |
| Other Income (Expense):                                                                                                  |       |        |        |     |       |     |       |
| Interest and other income, net                                                                                           | ** ** | **1,830**   |        | 1,409    |       | 1,319    |       |
| Interest expense                                                                                                         | ** ** | **(52**     | **)**       | (69      | )          | (609     | )          |
| Foreign exchange (losses) gains, net                                                                                     | ** ** | **(908**    | **)**       | 64       |       | (86      | )          |
| ** **                                                                                                               |       | **870**     |        | 1,404    |       | 624      |       |
| Income Before Provision for Income Taxes                                                                                 | ** ** | **6,468**   |        | 4,465    |       | 8,629    |       |
| Provision for Income Taxes                                                                                               | ** ** | **8,306**   |        | 12,702   |       | 12,194   |       |
| Net Loss                                                                                                                 | ** ** | **$**       | **(1,838**  | **)**    | $          | (8,237   | )          | $ | (3,565 | ) |
|                                                                                                                     |       |        |        |     |       |     |       |
| Basic Net Loss Per Common Share                                                                                          | ** ** | **$**       | **(0.12**   | **)**    | $          | (0.53    | )          | $ | (0.23 | ) |
| Diluted Net Loss Per Common Share                                                                                        | ** ** | **$**       | **(0.12**   | **)**    | $          | (0.53    | )          | $ | (0.23 | ) |
| Basic Common Shares Outstanding                                                                                          | ** ** | **15,510**  |        | 15,495   |       | 15,344   |       |
| Diluted Common Shares Outstanding                                                                                        | ** ** | **15,510**  |        | 15,495   |       | 15,344   |       |

 

See accompanying notes to consolidated financial statements.

 

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**NATURE’S SUNSHINEPRODUCTS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**ANDCOMPREHENSIVE LOSS**

***(Amounts in thousands)***

 
| ** **                                                                                                                 | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|---------------------------------------|------------|-------------|------------|
| ** **                                                                                                                 | ** ** | **Shares**            | ** ** | **Value**    | ** ** | **Earnings**                          | ** ** | **Loss**    | ** ** | **Total** | ** ** |
| Balance at January 1, 2006                                                                                            |       | 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 ($0.20 per share)                                                                                           |       | —                |       | —       |       | (3,069                                | )          | —      |       | (3,069 | ) |
| Components of comprehensive 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 ($0.20 per share)                                                                                           |       | —                |       | —       |       | (3,102                                | )          | —      |       | (3,102 | ) |
| Components of comprehensive 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** | ** ** |
| **Share-based compensation expense**                                                                                       | ** ** | **—**            | ** ** | **86**       | ** ** | **—**                            | ** ** | **—**  | ** ** | **86** | ** ** |
| **Cash dividends ($0.20 per share)**                                                                                       | ** ** | **—**            | ** ** | **—**   | ** ** | **(3,102**                            | **)**      | **—**  | ** ** | **(3,102** | **)** |
| **Components of comprehensive loss:**                                                                                      | ** ** | ** **            | ** ** | ** **   | ** ** | ** **                            | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Foreign currency translation (net of tax  of $1,115)**                                                              | ** ** | **—**            | ** ** | **—**   | ** ** | **—**                            | ** ** | **(1,757**  | **)**      | ** ** | ** ** |
| **Net unrealized losses on investment  securities (net of tax of $66)**                                                    | ** ** | **—**            | ** ** | **—**   | ** ** | **—**                            | ** ** | **(104**    | **)**      | ** ** | ** ** |
| **Net loss**                                                                                                               | ** ** | **—**            | ** ** | **—**   | ** ** | **(1,838**                            | **)**      | **—**  | ** ** | ** ** | ** ** |
| **Total comprehensive loss**                                                                                               | ** ** | ** **            | ** ** | ** **   | ** ** | ** **                            | ** ** | ** **  | ** ** | **(3,699** | **)** |
| **Balance  at December 31, 2008**                                                                                     | ** ** | **15,510**            | ** ** | **$**        | **66,705** | ** **                            | **$**      | **4,172**   | ** ** | **$** | **(17,200** | **)** | **$** | **53,677** | ** ** |

 

See accompanying notes to consolidated financial statements.

 

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

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

***(Amounts In Thousands)***

 
| **Year Ended December 31**                                        | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                            |       |        |        |     |       |     |       |
| Net loss                                                                         | ** ** | **$**       | **(1,838**  | **)**    | $          | (8,237   | )          | $ | (3,565 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |        |        |     |       |     |       |
| Provision for doubtful accounts                                                  | ** ** | **990**     |        | (208     | )          | (441     | )          |
| Depreciation and amortization                                                    | ** ** | **5,437**   |        | 6,409    |       | 6,224    |       |
| Share-based compensation expense                                                 | ** ** | **86**      |        | 326      |       | —   |       |
| Tax benefit from stock option exercise                                           | ** ** | **—**  |        | (246     | )          | (215     | )          |
| Loss (gain) on sale of property and  equipment                                   | ** ** | **102**     |        | (18      | )          | 50       |       |
| Deferred income taxes                                                            | ** ** | **(3,091**  | **)**       | (1,450   | )          | (2,685   | )          |
| Amortization of bond discount                                                    | ** ** | **38**      |        | 48       |       | 69       |       |
| Purchase of trading investment securities                                        | ** ** | **(1,769**  | **)**       | (149     | )          | (167     | )          |
| Proceeds from sale of trading investment  securities                             | ** ** | **1,714**   |        | 173      |       | 570      |       |
| Realized and unrealized losses (gains) on  investments                           | ** ** | **428**     |        | (171     | )          | (157     | )          |
| Amortization of prepaid taxes related to  gain on intercompany sales             | ** ** | **1,215**   |        | 1,471    |       | 1,280    |       |
| Foreign exchange losses                                                          | ** ** | **908**     | ** **  | 433      |       | 497      |       |
| Changes in assets and liabilities:                                               |       |        |        |     |       |     |       |
| Accounts receivable                                                              | ** ** | **(4,168**  | **)**       | (857     | )          | 2,720    |       |
| Inventories                                                                      | ** ** | **(4,825**  | **)**       | 3,780    |       | (3,423   | )          |
| Prepaid expenses and other                                                       | ** ** | **(225**    | **)**       | (1,826   | )          | 178      |       |
| Other assets                                                                     | ** ** | **(1,632**  | **) ** | (323     | )          | (951     | )          |
| Accounts payable                                                                 | ** ** | **1,840**   |        | 358      |       | (893     | )          |
| Accrued volume incentives                                                        | ** ** | **114**     |        | 383      |       | (235     | )          |
| Accrued liabilities                                                              | ** ** | **2,268**   |        | 15,480   |       | 11,121   |       |
| Deferred revenue                                                                 | ** ** | **(40**     | **)**       | 393      |       | 137      |       |
| Income taxes payable                                                             | ** ** | **(1,564**  | **)**       | (3,017   | )          | 4,411    |       |
| Liability related to unrecognized tax  positions                                 | ** ** | **5,064**   |        | —   |       | —   |       |
| Deferred compensation payable                                                    | ** ** | **(280**    | **)**       | 80       |       | (273     | )          |
| Net cash provided by operating activities                                        | ** ** | **772**     |        | 12,832   |       | 14,252   |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                            |       |        |        |     |       |     |       |
| Purchases of property, plant and equipment                                       | ** ** | **(7,504**  | **)**       | (4,456   | )          | (2,718   | )          |
| Proceeds from sale of investments available  for sale                            | ** ** | **640**     |        | 1,432    |       | 1,396    |       |
| Purchase of investments available for sale                                       | ** ** | **—**  |        | —   |       | (1,901   | )          |
| Proceeds from sale of restricted  investments                                    | ** ** | **25**      |        | —   |       | —   |       |
| Purchase of restricted investments                                               | ** ** | **—**  |        | (2,075   | )          | —   |       |
| Purchase of intangible assets                                                    | ** ** | **—**  |        | (1,000   | )          | (763     | )          |
| Proceeds from sale of property, plant and  equipment                             | ** ** | **80**      |        | 398      |       | 27       |       |
| Net cash used in investing activities                                            | ** ** | **(6,759**  | **)**       | (5,701   | )          | (3,959   | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                            |       |        |        |     |       |     |       |
| Advances on line of credit                                                       |       | **—**  |        | —   |       | 4,643    |       |
| Payments on line of credit                                                       |       | **—**  |        | —   |       | (11,643  | )          |
| Payments of cash dividends                                                       | ** ** | **(3,102**  | **)**       | (3,102   | )          | (3,069   | )          |
| Proceeds from exercise of stock options                                          |       | **—**  |        | 1,252    |       | 551      |       |
| Tax benefits from stock option exercises                                         |       | **—**  |        | 246      |       | 215      |       |
| Net cash used in financing activities                                            | ** ** | **(3,102**  | **)**       | (1,604   | )          | (9,303   | )          |
| Effect of exchange rates on cash and cash  equivalents                           | ** ** | **(1,357**  | **)**       | 711      |       | 196      |       |
| Net (decrease) increase in cash and cash  equivalents                            | ** ** | **(10,446** | **)**       | 6,238    |       | 1,186    |       |
| Cash and cash equivalents at beginning of  the year                              | ** ** | **45,299**  |        | 39,061   |       | 37,875   |       |
| Cash and cash equivalents at end of the  year                                    | ** ** | **$**       | **34,853**  |     | $          | 45,299   |       | $ | 39,061 |   |

** **
| **Year Ended December 31**                                | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Supplemental disclosure of cash flow  information:                       |       |       |       |     |       |     |       |
| Cash paid for income taxes                                               | ** ** | **$**      | **5,807**  |     | $          | 11,140   |       | $ | 6,015 |   |
| Cash paid for interest                                                   | ** ** | ** ** | **60**     |     | 85         |     | 297        |   |
| Supplemental disclosure of noncash  investing and financing activities:  |       |       |       |     |       |     |       |
| Purchases of property, plant and equipment  included in accounts payable | ** ** | **$**      | **487**    |     | $          | 78       |       | $ | 138 |   |

 

See accompanying notes to consolidated financial statements.

## *** ***

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

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

** **

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

 

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

 

**Nature of Operations**

 

Nature’s Sunshine Products, Inc. and itssubsidiaries (hereinafter referred to collectively as the “Company”) areprimarily engaged in the manufacturing and marketing of herbal products,vitamin and mineral supplements, personal care, and miscellaneous products.Nature’s Sunshine Products, Inc. is a Utah corporation with its principalplace of business in Provo, Utah. The Company sells its products to a salesforce of independent Distributors and Managers who use the products themselvesor resell them to other Distributors or consumers. The formulation,manufacturing, packaging, labeling, advertising, distribution and sale of eachof the Company’s major product groups are subject to regulation by one or moregovernmental agencies.

 

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

 

**Principles of Consolidation**

 

The accompanying consolidated financialstatements include the accounts and transactions of Nature’s Sunshine Products, Inc.and its subsidiaries. At December 31, 2008, 2007, and 2006, all of theCompany’s subsidiaries were wholly owned.

 

The Company has a variable interest and hasdetermined that it is the primary beneficiary in a development stageentity.  As a result, the Company hasconsolidated the entity in accordance with Financial Accounting Standards Board(“FASB”) Interpretation No. 46(R) (“FIN 46R”), “Consolidation ofVariable Interest Entities.”   Thisvariable interest is the result of loans of $1,094 provided by the Company tothe entity during 2008, which are secured by the entity’s assets. The Companyhas provided additional payments of $409 subsequent to December 31, 2008.This entity is a developmental stage nutritional supplement company, withassets of $454 and liabilities of $128 as of December 31, 2008.  The Company provided loans to the entity inorder to provide them with some of the capital necessary to market theirproducts, and to provide the Company with access to new product formulations.The Company has provided no guarantees on behalf of the entity and has nofuture obligations to the entity.  Itscreditors do not have any recourse against the Company.  The effect of consolidating the variableinterest entity was an increase in the Company’s net loss of $885 for the yearended December 31, 2008.

 

Intercompany balances and transactions havebeen eliminated in consolidation.

 

**Use of Estimates**

 

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

 

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

 

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**Cash andCash Equivalents**

 

The Company considers all highly liquid short-term investments withoriginal maturities of three months or less to be cash equivalents.Substantially all of the Company’s cash deposits either exceed the UnitedStates federally insured limit or are located in countries that do not have governmentinsured accounts or are subject to tax withholdings when repatriating earnings.

 

Asof December 31, 2008 and 2007, the Company had $3,415 and $6,444 of cashdenominated in Venezuelan bolivars (Effective January 1, 2008, Venezuelachanged its currency from the bolivar to the bolivar fuerte—the bolivar fuerteis equal to approximately 1000 bolivars; both are referred to as “bolivars”).  Currency restrictions enacted by thegovernment of Venezuela have had a negative impact on the ability of the Company’ssubsidiary in Venezuela to obtain U.S. dollars at the official exchange rate topay for imported products or to repatriate dividends back to the Company.  The Company’s Venezuelan subsidiary continuesto expect to convert its bolivars into U.S. dollars at the official exchangerate to pay for imported products or repatriate dividends.  As a result, the Company continues to use theofficial exchange rate to translate the financial statements of our Venezuelansubsidiary into U.S. dollars.  Unless theofficial exchange rate is made more readily available, however, the subsidiary’soperations could be adversely affected as it may need to obtain U.S. dollars atless favorable exchange rates from non-government sources.

 

**Accounts Receivable Allowances**

 

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

 

**Investment Securities**

 

The Company’s investment securities, whichare generally categorized as available-for-sale securities, are reported atfair value, with unrealized gains and losses, net of tax, recorded inaccumulated other comprehensive loss in shareholders’ equity. Unrealized losseson available-for-sale securities that are determined to be other than temporaryare included in the determination of net income in the period in which thatdetermination is made. The cost of the securities sold is based on the specificidentification method. Realized gains and losses on sales of available-for-salesecurities are included in interest and other income.

 

The Company also has certain investmentsecurities classified as trading securities. The Company maintains its tradingsecurities portfolio to generate returns that are offset by correspondingchanges in certain liabilities related to the Company’s deferred compensationplans (see Note 10). The trading securities portfolio consists of marketablesecurities, which are recorded at fair value and are included in long-terminvestment securities on the consolidated balance sheets because they remainassets of the Company until they are actually paid out to the participants.These investment securities are not available to the Company to fund itsoperations.  The Company has establisheda rabbi trust to finance obligations under the plan. Both realized andunrealized gains and losses on trading securities are included in interest andother income.

 

If any of the Company’s investments experience a decline in fair valuethat is determined to be other-than-temporary, based on analysis of relevantfactors, it records a realized loss in its consolidated statements ofoperations. Management judgment is involved in evaluating whether a decline inan investment’s fair value is other-than-temporary. The Company analyzesrelevant factors individually and in combination including the length of timeand extent to which market value has been less than cost, the financialcondition and near-term prospects of the issuer as well as specific events orcircumstances that may influence the operations of the issuer, and the Company’sintent and ability to hold the investment for a sufficient time in order toenable recovery of our cost. New information and the passage of time can changethese judgments. The Company revises impairment judgments when new informationbecomes known or when the Company does not anticipate holding the investmentuntil recovery and record any resulting impairment charges at that time.  As of December 31, 2008, the Company’sinvestments did not have significant gross unrealized losses.

 

**Restricted Investments**

 

The Company’s restricted investments include auction rate preferredinvestments totaling $2,050 and $2,075 with Merrill Lynch with investmentgrades of AAA (original date of purchase) as of December 31, 2008 and2007, respectively. Auction rate preferred investments are similar in nature toauction rate securities in that they are long-term bonds or preferred stocksthat act like short-term debt; however unlike auction rate securities, theseinvestments require at least 200% collateral by the issuer. Interest rates forthese investments reset in Dutch auctions held weekly. These investments arecarried at par, which approximates fair value. The auction process for actionrate investments 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 

 

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process in 2007, the investments held by the Company experiencedauction failures during 2008. An unsuccessful auction is an event when thereare fewer securities bid for than are available for sale. As a result, theCompany has classified these securities as long-term investments as of December 31,2007.

 

In determining the fair value of the Company’s restricted investmentsat December 31, 2008, the Company has taken into consideration fair valuesdetermined by the financial institutions, current credit ratings of theunderlying securities, insurance provisions, discounted cash flow analysis, asdeemed appropriate, and its current liquidity position.  In January 2009, the Company redeemedthese securities at par value.  As aresult, the Company reclassified these restricted investments from long-term tocurrent assets at December 31, 2008.

 

**Fair Value of Financial Instruments**

 

The Company’s financial instruments consistprimarily of cash, cash equivalents, accounts receivable, investments, and accountspayable. The carrying values of these financial instruments approximate theirfair values.

 

The fair value of a financial instrument is the amount that could bereceived upon the sale of an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date.  Financial assets are marked to bid prices andfinancial liabilities are marked to offer prices.  Fair value measurements do not includetransaction costs.  The Company adopted Statement of FinancialAccounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” on January 1,2008.  This statement defines fairvalue, establishes a framework to measure fair value, and expands disclosuresabout fair value measurements.  SFAS No. 157establishes a fair value hierarchy used to prioritize the quality andreliability of the information used to determine fair values.  Categorization within the fair valuehierarchy is based on the lowest level of input that is significant to the fairvalue measurement.  The fair valuehierarchy is defined into the following three categories:

 

Level 1:  Inputs based upon quoted market prices foridentical assets or liabilities in active markets at the measurement date.

 

Level 2:  Observable inputs other than quoted prices includedin Level 1, such as quoted prices for similar assets and liabilities in activemarkets; quoted prices for identical or similar assets and liabilities inmarkets that are not active; or other inputs that are observable or can becorroborated by observable market data.

 

Level 3:  Inputs that are management’s best estimate ofwhat market participants would use in pricing the asset or liability at themeasurement date.  The inputs areunobservable in the market and significant to the instruments valuation.

 

In February 2008, the FASB issued Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157,”**which delays the effective date of SFAS No. 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008.  The Company is currently reviewing the requirements of FSP No. FAS 157-2, and at this point in time, has not determined what impact, if any, FSP No. FAS 157-2 will have on its financial condition, results of operations, or cash flows.

 

In October 2008, the FASB issued FSP No. FAS 157-3,“Determining the Fair Value of a Financial Asset When the Market for That Assetis Not Active.”  This statement clarifiesthat determining fair value in an inactive or dislocated market depends onfacts and circumstances and requires significant management judgment.  This statement specifies that it isacceptable to use inputs based on management estimates or assumptions, or formanagement to make adjustments to observable inputs to determine fair valuewhen markets are not active and relevant observable inputs are not available.

 

The Company adopted SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities,” effective January 1, 2008,and elected not to establish a fair value for its financial instruments andcertain other items under this statement. Therefore, the Company’s adoption of this statement did not impact itsconsolidated financial statements during the year ended December 31, 2008.

 

**Inventories**

 

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

 

**Property, Plant and Equipment**

 

Property, plant and equipment are recorded atcost less accumulated depreciation and amortization. Depreciation is computedusing the straight-line method over the estimated useful lives of the relatedassets. Estimated useful lives for buildings range from 20 to 50 years,building improvements range from 7 to 10 years, machinery and equipment rangefrom 2 to 10 years, and furniture and fixtures range from 2 to 5 years.Leasehold improvements are amortized over the shorter of the lease term or theestimated useful lives of the related assets. Maintenance and repairs areexpensed as incurred, and major improvements are capitalized.

 

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**Intangible Assets**

 

Intangible assets consist of purchasedproduct formulations. Such intangible assets are amortized using thestraight-line method over the estimated economic lives of the assets of 15years. Intangible assets, net of accumulated amortization, totaled $1,538 and$1,656 at December 31, 2008 and 2007, respectively.

 

**Impairment of Long-Lived Assets**

 

The Company reviews its long-lived assets,such as property, plant and equipment and intangible assets for impairment whenevents or changes in circumstances indicate that the carrying value of an assetmay not be recoverable. The Company uses an estimate of future undiscounted netcash flows of the related assets or groups of assets over their remaining livesin measuring whether the assets are recoverable. An impairment loss iscalculated by determining the difference between the carrying values and thefair values of these assets. At December 31, 2008 and 2007, the Companydid not consider any of its long-lived assets to be impaired.

 

**Incentive Trip Accrual**

 

The Company accrues for expenses for incentive trips associated withits direct sales marketing program, which rewards independent Distributors andManagers with paid attendance at its conventions and meetings. Expensesassociated with incentive trips are accrued over qualification periods as theyare earned. The Company specifically analyzes incentive trip accruals based onhistorical and current sales trends as well as contractual obligations whenevaluating the adequacy of the incentive trip accrual. Actual results couldresult in liabilities being more or less than the amounts recorded. The Companyhas accrued convention and meeting costs of $4,499 and $5,517 at December 31,2008 and 2007, respectively, which are included in accrued liabilities in theconsolidated balance sheets.

 

**Foreign Currency Translation**

 

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

 

The functional currency in highlyinflationary economies is the U.S. dollar and transactions denominated in thelocal currency are remeasured as if the functional currency were the U.S.dollar. The remeasurement of local currencies into U.S. dollars createstranslation adjustments, which are included in the consolidated statements ofoperations.  There were no countriesconsidered to have a highly inflationary economy during 2008, 2007, or 2006.

 

**Revenue Recognition**

 

Net sales revenue and related volumeincentive expenses are recorded when persuasive evidence of an arrangementexists, collectibility is reasonably assured, the amount is fixed anddeterminable, and title and risk of loss have passed, generally when themerchandise has been delivered. The amount of the volume incentive isdetermined based upon the amount of qualifying purchases in a given month. Itis necessary for the Company to make estimates about the timing of whenmerchandise has been delivered.  Theseestimates are based upon the Company’s historical experience related to time intransit, and timing of when shipments occurred, and shipping volumes. Amountsreceived for undelivered merchandise are recorded as deferred revenue. Fromtime to time, the Company’s United States operation extends short-term creditassociated with product promotions. In addition for certain of the Company’sinternational operations, the Company offers credit terms consistent withindustry standards within the country of operation. Payments to Distributorsand Managers for sales incentives or rebates are recorded as a reduction ofrevenue. Payments for sales incentives and rebates are calculated monthly basedupon qualifying sales. Membership fees are deferred and amortized as revenueover the life of the membership, which is primarily one year. Prepaid eventregistration fees are deferred and recognized as revenues when the relatedevent is held.

 

A reserve for product returns is recorded based upon historicalexperience.  The Company allowsDistributors or Managers to return the unused portion of products within ninetydays of purchase if they are not satisfied with the product.  In some of our markets, the requirements toreturn product are more restrictive.  Sales returns for the years 2008, 2007, and 2006, were $113, $93, and$93, respectively.

 

Amounts billed to customers for shipping andhandling are reported as a component of net sales revenue. Shipping andhandling revenues of approximately $9,924, $9,453, and $10,131 were reported asnet sales revenue for the years ended December 31, 2008, 2007, and 2006, respectively.The corresponding shipping and handling expenses are reported in selling,general and administrative expenses and approximated the amounts reported asnet sales revenue.

 

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

 

**Advertising Costs**

 

Advertising costs are expensed as incurred.Advertising expense incurred for the years ended December 31, 2008, 2007,and 2006 totaled approximately $1,728, $1,547, and $1,453 respectively.

 

**Research and Development**

 

All research and development costs areexpensed as incurred and classified in selling, general and administrativeexpense. Total research and development expenses were approximately $2,034,$1,940, and $1,920 in 2008, 2007, and 2006, respectively.

 

**Income Taxes**

 

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

 

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

 

On January 1, 2007, the Company adoptedFASB Interpretation No. 48 (“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.” Under FIN 48, tax positions shall initially be recognized inthe financial statements when it is more likely than not the position will besustained upon examination by the tax authorities. Such tax positions shallinitially and subsequently be measured as the largest amount of tax benefitthat has a greater than 50% likelihood of being realized upon ultimatesettlement with the tax authority assuming full knowledge of the position andall relevant facts.  The adoption of FIN48 did not have a material impact on the consolidated financial statements.

 

**Net Loss Per Common Share**

 

Basicnet loss per common share (“Basic EPS”) excludes dilution and is computed bydividing net loss by the weighted-average number of common shares outstandingduring the year. Diluted net loss per common share (“Diluted EPS”) reflects thepotential dilution that could occur if stock options or other contracts toissue common stock were exercised or converted into common stock. Thecomputation of Diluted EPS does not assume exercise or conversion of securitiesthat would have an anti-dilutive effect on net loss per common share.

 

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Following is a reconciliation of the numerator and denominator of BasicEPS to the numerator and denominator of Diluted EPS for all years:

 
| ** **                        | ** ** | **Net Loss  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Net Loss Per  Share Amount** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|---------------------------|------------|-----------------------------------------------|------------|
| Year Ended December 31, 2008 |       |                           |       |                      |       |                                          |       |
| Basic EPS                         | ** ** | **$**                          | **(1,838** | **)**                     | **15,510** | ** **                                    | **$**      | **(0.12** | **)** |
| Effect of options                 | ** ** | **—**                     | ** ** | **—**                | ** ** | **—**                                    | ** ** |
| Diluted EPS                       | ** ** | **$**                          | **(1,838** | **)**                     | **15,510** | ** **                                    | **$**      | **(0.12** | **)** |
|                              |       |                           |       |                      |       |                                          |       |
| 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 | ) |

 

Because of net losses in the years ended December 31, 2008, 2007and 2006, outstanding common stock options of 263, 307, and 432, respectively,were not included in the computation of diluted earnings per share because theeffect on net loss per share would be antidilutive.

 

**Share-Based Compensation**

 

The Company recognizes all share-based payments to employees, includinggrants of employee stock options, to be recognized in the statement ofoperations based on their fair values in accordance with SFAS No. 123(R), “Share-BasedPayment.” This accounting utilizes a “modified grant-date” approach in whichthe fair value of an equity award is estimated on the grant date without regardto service or performance vesting conditions. Under SFAS No. 123(R), theCompany records compensation expense over the vesting period of the stockoptions based on the fair value of the stock options on the date of grant.

 

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

 

**Comprehensive Loss**

 

Comprehensive loss includes all changes in shareholders’ equity exceptthose resulting from investments by, and distributions to, shareholders.Accordingly, the Company’s comprehensive loss includes net loss, net unrealizedgains (losses) on investment securities, reclassifications of realized gains,and foreign currency adjustments that arise from the translation of thefinancial statements of the Company’s foreign subsidiaries.

 

**Recent Accounting Pronouncements**

 

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

 

In December 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements” (“SFAS No. 160”), whichchanges the accounting and reporting standards for the noncontrolling interestsin a subsidiary in consolidated financial statements. SFAS No. 160recharacterizes minority 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 No. 160 on the Company’sconsolidated financial statements, but does not expect SFAS No. 160 tohave a material impact on the Company’s consolidated financial position, resultof operations, or cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — an 

 

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Amendment of SFAS No. 133” (“SFAS No. 161”).  This Standard requires enhanced disclosuresregarding derivatives and hedging activities, including:  (a) the manner in which an entity usesderivative instruments; (b) the manner in which derivative instruments andrelated hedged items are accounted for under SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities;” and (c) the effect ofderivative instruments and related hedged items on a entity’s financialposition, financial performance, and cash flows.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008.  As SFAS No. 161 relatesspecifically to disclosures, the Standard will have no impact on the Company’sconsolidated financial condition, results of operations, or cash flows.

 

**NOTE 2: INVENTORIES**

 

The composition ofinventories is as follows:

 
| **As of December 31** | ** ** | **2008**   | ** ** | **2007** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| Raw materials                        | ** ** | **$**      | **9,515**  |     | $          | 8,175 |   |
| Work in process                      | ** ** | **766**    |       | 912      |       |
| Finished goods                       | ** ** | **29,277** |       | 26,162   |       |
| ** **                           |       | **$**      | **39,558** |     | $          | 35,249 |   |

 

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

 

The composition of property, plant andequipment is as follows:

 
| **As of December 31**      | ** ** | **2008**    | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------|------------|
| Land and improvements                     | ** ** | **$**       | **3,784**  |     | $          | 2,208 |   |
| Buildings and improvements                | ** ** | **32,036**  |       | 29,387   |       |
| Machinery and equipment                   | ** ** | **16,906**  |       | 17,018   |       |
| Furniture and fixtures                    | ** ** | **24,959**  |       | 25,476   |       |
| ** **                                |       | ** **  | **77,685** |     |       | 74,089 |   |
| Accumulated depreciation and amortization | ** ** | **(47,461** | **)**      | (45,807  | )          |
| ** **                                |       | **$**       | **30,224** |     | $          | 28,282 |   |

 

Depreciation expense was $5,319, $6,310, and $6,216 for the years endedDecember 31, 2008, 2007, and 2006, respectively.

 

**NOTE 4: INTANGIBLE ASSETS**

 

The Company acquired certain product formulations during the yearsended December 31, 2007 and 2006. At December 31, 2008 and 2007, theproduct formulations had a gross carrying amount of $1,763 and $1,763,accumulated amortization of $225 and $107, and a net amount of $1,538 and$1,656, respectively. The estimated useful life of the product formulations isestimated to be 15 years.

 

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Amortization expense for intangible assetsfor the years ended December 31, 2008, 2007 and 2006 was $118, $99 and $8,respectively. Estimated amortization expense for the five succeeding fiscalyears and thereafter is as follows:

 
| **Year Ending December 31:** | ** ** | **Estimated  Amortization  Expense** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| 2009                                        |       | $                                    | 118        |   |
| 2010                                        |       | 118                                  |       |
| 2011                                        |       | 118                                  |       |
| 2012                                        |       | 118                                  |       |
| 2013                                        |       | 118                                  |       |
| Thereafter                                  |       | 948                                  |       |
| Total                                       |       | $                                    | 1,538      |   |

 

**NOTE 5: INVESTMENT SECURITIES**

 

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

 
| **As of December 31, 2008** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|-----------------|------------|
| Municipal obligations                           |       | $                   | 2,858      |                         | $          | 66                            |       | $               | (1         | ) | $ | 2,923 |   |
| U.S. Government Securities Funds                |       | 691                 |       | 19                           |       | —                        |       | 710             |       |
| Equity securities                               |       | 233                 |       | —                       |       | (8                            | )          | 225             |       |
| Total short-term investment securities          |       | $                   | 3,782      |                         | $          | 85                            |       | $               | (9         | ) | $ | 3,858 |   |

 
| **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 |   |

 

Contractual maturities of municipalobligations fair value at December 31, 2008, are as follows:

 
| Mature after one year through five years |   | $   | 2,493  |   |
|------------------------------------------|--------|-----|--------|--------|
| Mature after five years                  |   | 430 |   |
| Total                                    |   | $   | 2,923  |   |

 

During 2008, 2007, and 2006, the proceeds from the sales ofavailable-for-sale securities were $640, $1,432, and $1,396, respectively. Thegross realized gains on sales of available-for-sale securities (net of tax)were $0, $0, and $14 for the years ended December 31, 2008, 2007, and2006, respectively. The gross realized losses on the sales ofavailable-for-sale securities (net of tax) were $0, $0, and $5 for the yearsended December 31, 2008, 2007, and 2006, respectively.

 

The Company’s trading securities portfolio totaled $1,394 and $1,674 atDecember 31, 2008 and 2007, respectively, and generated losses of $345 andgains of $171 and $148 for the years ended December 31, 2008, 2007 and2006, respectively.

 

As of December 31, 2008 and 2007, the Company had unrealizedlosses of $9 and $6, respectively, in its municipal obligations and equitysecurities investments. These losses are due to the interest rate sensitivityof the municipal obligations and the performance of the overall stock marketfor the equity securities.

 

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**NOTE 6: ACCRUED LIABILITIES**

 

The composition of accrued liabilities is as follows:

 
| **As of December 31**                | ** ** | **2008**   | ** ** | **2007** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------|------------|
| Foreign non-income tax contingencies (See  Note 11) | ** ** | **$**      | **8,141**  |     | $          | 6,624 |   |
| Sales, use, and property tax (See Note 11)          | ** ** | **11,447** |       | 8,833    |       |
| Salaries and employee benefits                      | ** ** | **9,590**  |       | 8,545    |       |
| Convention and meeting costs                        | ** ** | **4,499**  |       | 5,517    |       |
| Other                                               | ** ** | **11,798** |       | 14,803   |       |
| Total                                               | ** ** | **$**      | **45,475** |     | $          | 44,322 |   |

 

**NOTE 7: ACCUMULATED OTHER COMPREHENSIVE LOSS**

 

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

 
| ** **                           | ** ** | **Foreign Currency  Translation  Adjustments** | ** **  | **Net Unrealized  Gains (Losses) On  Available-For-Sale  Securities** | ** ** | **Total  Accumulated Other  Comprehensive Loss** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|-------------|--------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| Balance as of January 1, 2006   |       | $                                                   | (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                                                    | )          |
| Activity, net of tax                 | ** ** | **(1,757**                                          | **)**       | **(104**                                                                             | **)**      | **(1,861**                                                 | **)**      |
| Balance as of December 31, 2008 | ** ** | **$**                                               | **(17,286** | **)**                                                                                | **$**      | **86**                                                     | ** ** | **$** | **(17,200** | **)** |

 

**NOTE 8: INCOME TAXES**

 

Income from operations before provision(benefit) for income taxes are taxed under the following jurisdictions:

 
| **Year Ended December 31** | ** ** | **2008**  | ** ** | **2007**   | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
| Domestic                                  | ** ** | **$**     | **1,067**  | ** ** | $          | 265      |       | $ | 1,138 |   |
| Foreign                                   | ** ** | **5,401** | ** ** | 4,200      |       | 7,491    |       |
| Total                                     | ** ** | **$**     | **6,468**  |       | $          | 4,465    |       | $ | 8,629 |   |

 

Components of the provision (benefit) forincome taxes for each of the three years in the period ended December 31,2008 are as follows:

 
| **Year Ended December 31** | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Current:                                  |       |       |       |     |       |     |       |
| Federal                                   | ** ** | **$**      | **3,437**  |     | $          | 5,161    |       | $ | 3,848 |   |
| State                                     | ** ** | **454**    |       | 1,196    |       | 388      |       |
| Foreign                                   | ** ** | **7,506**  |       | 7,795    |       | 10,643   |       |
| Subtotal                                  | ** ** | **11,397** |       | 14,152   |       | 14,879   |       |
| Deferred:                                 |       |       |       |     |       |     |       |
| Federal                                   | ** ** | **(1,904** | **)**      | (1,324   | )          | (2,173   | )          |
| State                                     | ** ** | **(463**   | **)**      | (527     | )          | 237      |       |
| Foreign                                   | ** ** | **(724**   | **)**      | 401      |       | (749     | )          |
| Subtotal                                  | ** ** | **(3,091** | **)**      | (1,450   | )          | (2,685   | )          |
| Total provision for income taxes          | ** ** | **$**      | **8,306**  |     | $          | 12,702   |       | $ | 12,194 |   |

 

Theincome tax benefits associated with employee exercises of options under thenonqualified stock option plan decreased the income taxes payable by $0, $246,and $215 in 2008, 2007, and 2006, respectively. These benefits were recorded asan increase to common stock.

 

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

 
| **Year Ended December 31**                   | ** ** | **2008**  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Statutory U.S. federal income tax rate                      | ** ** | **35.0**  | **%**      | 35.0     | %          | 35.0     | %          |
| State income taxes, net of U.S. federal  income tax benefit | ** ** | **(0.1**  | **)**      | 10.6     |       | 4.8      |       |
| U.S. tax impact of foreign operations                       | ** ** | **(33.6** | **)**      | 17.1     |       | (3.1     | )          |
| Valuation allowance change                                  | ** ** | **68.2**  | ** ** | 61.1     |       | 29.3     |       |
| Tax contingencies                                           | ** ** | **(1.0**  | **)**      | 16.0     |       | 54.0     |       |
| Foreign exchange gains (losses)                             |       | **(16.8** | **)**      | 17.4     |       | 9.9      |       |
| Gain on sale of intercompany assets                         |       | **17.4**  | ** ** | 25.2     |       | 12.9     |       |
| Charitable contributions                                    | ** ** | **(0.5**  | **)**      | (0.9     | )          | (2.5     | )          |
| Extra territorial income                                    |       | —    | ** ** | —   |       | (2.6     | )          |
| Foreign tax rate differential                               | ** ** | **1.7**   | ** ** | 5.6      |       | —   |       |
| Unrecognized tax benefits                                   |       | **59.7**  | ** ** | 104.4    |       | —   |       |
| Meals and entertainment                                     | ** ** | **1.3**   | ** ** | 2.4      |       | 1.2      |       |
| Tax adjustment for inflation                                |       | **(1.1**  | **)**      | (7.1     | )          | (0.7     | )          |
| Domestic manufacturing deduction                            | ** ** | **(2.3**  | **)**      | (3.7     | )          | (0.9     | )          |
| Nondeductible foreign expenses                              |       | **2.7**   | ** ** | 6.2      |       | 2.1      |       |
| Other                                                       | ** ** | **(2.2**  | **)**      | (4.8     | )          | 1.9      |       |
| Effective income tax rate                                   | ** ** | **128.4** | **%**      | 284.5    | %          | 141.3    | %          |

 

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

 

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

 
| **As of December 31** | ** ** | **2008**    | ** ** | **2007**   | ** ** |
|--------------------------------------|------------|-------------|------------|------------|------------|
| Inventory                            | ** ** | **$**       | **2,314**  | ** ** | $          | 1,829 |   |
| Accrued liabilities                  | ** ** | **4,086**   | ** ** | 5,560      |       |
| Impaired investments                 | ** ** | **549**     | ** ** | 757        |       |
| Deferred compensation                | ** ** | **786**     | ** ** | 785        |       |
| Amortization of intangibles          | ** ** | **1,384**   | ** ** | 1,014      |       |
| Bad debts                            | ** ** | **510**     | ** ** | 497        |       |
| Net operating losses                 | ** ** | **6,813**   | ** ** | 4,304      |       |
| Capital losses                       | ** ** | **708**     | ** ** | 688        |       |
| Foreign tax and withholding credits  | ** ** | **3,909**   | ** ** | 3,953      |       |
| Non-income tax accruals              | ** ** | **3,791**   | ** ** | 3,013      |       |
| Health insurance accruals            | ** ** | **1,182**   | ** ** | 730        |       |
| APB 23— outside basis           | ** ** | **2,073**   | ** ** | 1,302      |       |
| Accelerated depreciation             | ** ** | **131**     | ** ** | 139        |       |
| Other deferred tax assets            | ** ** | **2,061**   | ** ** | 2,328      |       |
| Valuation allowance                  | ** ** | **(13,986** | **)**      | (11,290    | )          |
| Total deferred tax assets            | ** ** | **16,311**  | ** ** | 15,609     |       |
| Other deferred tax liabilities       | ** ** | **(1,438**  | **)**      | (2,446     | )          |
| Total deferred tax liabilities       | ** ** | **(1,438**  | **)**      | (2,446     | )          |
| Total deferred taxes, net            | ** ** | **$**       | **14,873** | ** ** | $          | 13,163 |   |

 

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

 
| **Year Ended December 31** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Net current deferred tax assets           | ** ** | **$**      | **9,080**  | ** ** | $          | 8,071 |   |
| Net non-current deferred tax assets       | ** ** | **6,412**  | ** ** | 5,828      |       |
| Total net deferred tax assets             | ** ** | **15,492** | ** ** | 13,899     |       |
|                                      |       |       | ** ** |       |       |
| Net current deferred tax liabilities      | ** ** | **(286**   | **)**      | (312       | )          |
| Net non-current deferred tax liabilities  | ** ** | **(333**   | **)**      | (424       | )          |
| Total net deferred tax liabilities        | ** ** | **(619**   | **)**      | (736       | )          |
|                                      |       |       | ** ** |       |       |
| Total deferred tax assets, net            | ** ** | **$**      | **14,873** | ** ** | $          | 13,163 |   |

 

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

 

Management has provided a valuation allowanceof $13,986 and $11,290 as of December 31, 2008 and 2007, respectively, forcertain deferred tax assets, including foreign net operating losses and foreigntax credits, for which management cannot conclude it is more likely than notthat they will be realized. The Company reviewed its tax positions andincreased its valuation allowance by approximately $2,696, $3,468, and $2,525for 2008, 2007 and 2006, respectively.

 

At December 31, 2008, foreignsubsidiaries had unused operating loss carryovers of approximately $6,813. Thenet operating losses will expire at various dates from 2009 through 2012. Forfinancial reporting purposes, the release of these valuation allowances wouldreduce income tax expenses. The Company has approximately $3,489 of foreign taxcredits which begin to expire at various times starting in 2012.

 

The Company is subject to regular audits byfederal, state and foreign tax authorities. These audits may result inadditional tax liabilities. The Company believes it has appropriately providedfor income taxes for all years. Several factors drive the calculation of itstax reserves. Some of these factors include: (i) the expiration of variousstatutes of limitations; (ii) changes in tax law and regulations; (iii) theissuance of tax rulings; and (iv) settlements with tax authorities.Changes in any of these factors may result in adjustments to the Company’sreserves, which would impact its reported financial results.

 

The Company’s U.S. federal income tax returnsfor 2003 through 2008 are open to examination for federal tax purposes. TheCompany has several foreign tax jurisdictions which have open tax years from2000 through 2008. The IRS is currently conducting an audit of the Company’sU.S. federal income tax returns for the 2003 through 2005 tax years. TheCompany believes the outcome of these matters will not have a material adverseeffect on its reported financial results.

 

The Brazilian tax authorities are currentlyauditing the 2004 income tax return of the Company’s Brazilian subsidiary.  The Company has also received notice in 2008that the tax authorities in Venezuela will be auditing the 2005 through 2007income tax returns of the Company’s Venezuelan subsidiary. The Company iscurrently unable to estimate the impact, if any, of these income taxexaminations in Brazil and Venezuela.

 

The total outstanding balance for liabilitiesrelated to unrecognized tax benefits at December 31, 2008 and 2007 was $19,675and $15,820, respectively, all of which would favorably impact the effectivetax rate if recognized.  Included inthese amounts is approximately $5,558 and $4,274, respectively, of interest andpenalties.  The Company recordedapproximately $1,284 and $1,773 in interest and penalties for the years endedDecember 31, 2008 and 2007, respectively. The Company accounts for interest expense and penalties for unrecognizedtax benefits as part of its income tax provision.

 

During the years ended December 31, 2008 and2007, the Company added approximately $6,892 and $4,728, respectively, to itsliability for unrecognized tax benefits, all of which would favorably impactthe Company’s effective tax rate if recognized. Included in these amounts areapproximately $2,690 and $1,773 for the years ended December 31, 2008, and2007, respectively, related to interest expense and penalties. In addition, theCompany recorded a benefit related to the lapse of applicable statute of limitationsof approximately $3,030 and $64, for the years ended December 31, 2008 and2007, respectively, all of which favorably impacted the Company’s effective taxrate.

 

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The Companyadopted the provisions of FIN 48 on January 1, 2007, which did not result in acumulative effect adjustment.  The totalliability for unrecognized tax benefits at January 1, 2007, including accruedinterest and penalties of approximately $2,501, was approximately $11,156 allof which would favorably impact the Company’s effective rate if recognized.Other assets included $4,375 of amounts related to competent authority androyalty benefit positions at January 1, 2007.

 

A reconciliation of the beginning and endingamount of liabilities associated with uncertain tax benefits, excludinginterest and penalties, is as follows for the years:

 
| **Year Ended December 31**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |
| Unrecognized  tax benefits, opening balance |       | $        | 21,614     |     | $          | 13,030 |   |
| Tax  positions taken in a prior period      |       |     |       |     |       |
| Gross  increases                            |       | 937      |       | —   |       |
| Gross  decreases                            |       | (238     | )          | —   |       |
| Tax  positions taken in the current period  |       |     |       |     |       |
| Gross  increases                            |       | 4,712    |       | 8,592    |       |
| Gross  decreases                            |       | —   |       | —   |       |
| Settlements  with taxing authorities        |       | —   |       | —   |       |
| Lapse of  applicable statute of limitations |       | (1,631   | )          | (8       | )          |
| Unrecognized  tax benefits, ending balance  |       | $        | 25,394     |     | $          | 21,614 |   |

 

The FIN 48 tabular roll forward endingbalances do not include interest expense and penalties related to unrecognizedtax benefits and the impact of competent authority and royalty benefitpositions. At December 31, 2008 and 2007, other assets included $11,277 and$10,068, respectively, of amounts related to competent authority and royaltybenefit positions where the unrecognized tax liability and other assets arepresented on a gross basis in the consolidated balance sheets as there is noright of offset between the Company and other tax jurisdictions. 

 

The Company anticipates that unrecognized taxbenefits will increase approximately $1,600 to $3,000 within the next twelvemonths due to additional transactions related to commissions and transferpricing.

 

The Company believes that it is reasonablypossible that unrecognized tax benefits will decrease approximately $800 to$1,200 within the next twelve months due to the close of audits or theexpiration of statutes of limitations in various foreign jurisdictions.

 

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

 

**NOTE 9:  CAPITAL TRANSACTIONS**

 

**Dividends**

 

TheCompany paid cash dividends totaling $3,102, $3,102, and $3,069, for the yearsended December 31, 2008, 2007, and 2006, respectively.  On February 19, 2009, the Companydeclared quarterly cash dividends of five cents per common share.

 

**Share-BasedCompensation**

 

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

 

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Stockoption activity for 2008, 2007, and 2006 consisted of the following:

 
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Weighted Average Exercise  Price Per Share** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------------|------------|
| Options outstanding at January 1, 2006    |       | 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                                                              |       |
| Granted                                        |       | —                     |       | —                                                             |       |
| Forfeited or canceled                          |       | (44                        | )          | 13.44                                                              |       |
| Exercised                                      |       | —                     |       | —                                                             |       |
| Options outstanding at December 31,  2008 |       | 263                        |       | $                                                                  | 11.77      |   |

 

Theaggregate intrinsic values on the dates of exercise of options exercised duringthe years ended December 31, 2007 and 2006, was $623 and $567, respectively.Intrinsic value is defined as the difference between the current market valueof the underlying common stock and the grant price for options with exerciseprices less than the market values on such dates.

 

Duringthe year ended December 31, 2007, the Company issued 140 nonqualifiedstock options outside the stock option plan, with a weighted-average grant datefair value of $3.85 per share, a vesting period of one year from the optiongrant date, and an option termination date of six years from the option grantdate. The fair value of each option grant was estimated on the date of thegrant 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     | %          |

 

Expectedoption lives and volatilities are based on historical data of the Company. Therisk free interest rate is calculated as the average U.S. Treasury bill ratethat corresponds with the option life.

 

Share-basedcompensation expense from nonqualified stock options for the years ended December 31,2008 and 2007 was approximately $86 and $326, and the related tax benefit wasapproximately $33 and $124, respectively. There was no share-based compensationexpense in 2006. As of December 31, 2008, there was no unrecognizedshare-based compensation cost related to grants described above.

 

Thefollowing table summarizes information about options outstanding and exercisableat December 31, 2008.

 
| ** **                                                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                        | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Option  Prices Per Share** | ** ** | **Options  Outstanding**     | ** ** | **Weighted-Avg.  Remaining  Contractual Life** | ** ** | **Weighted-Avg.  Exercise Price  Per Share** | ** ** | **Options  Exercisable** | ** ** | **Weighted-  Avg. Exercise  Price Per  Share** | ** ** |
| $6.87 to $9.99                                            |       | 32                           |       | 3.9                                                 |       | $ | 8.35 |   | 32 |   | $ | 8.35 |   |
| $10.00 to $11.99                                          |       | 158                          |       | 4.1                                                 |       | 11.73 |   | 158 |   | 11.73 |   |
| $12.00 to $19.71                                          |       | 73                           |       | 0.7                                                 |       | 13.38 |   | 73 |   | 13.38 |   |
|                                                      |       | 263                          |       | 3.1                                                 |       | $ | 11.77 |   | 263 |   | $ | 11.77 |   |

 

The aggregate intrinsic value of 263 optionsoutstanding and exercisable at December 31, 2008 had no value as alloptions outstanding and exercisable had an exercise price greater than the fairvalue of the underlying common stock.  Asof December 31, 2008, there were no unvested options outstanding.

 

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**NOTE10:  EMPLOYEE BENEFIT PLANS**

 

**DeferredCompensation Plans**

 

TheCompany sponsors a qualified deferred compensation plan, which qualifies under Section 401(k) ofthe Internal Revenue Code. The Company makes matching contributions of 100percent of employee contributions up to a maximum of five percent of theemployee’s compensation. The Company’s contributions to the plan vest after aperiod of three years. During 2008, 2007, and 2006, the Company contributed tothe plan approximately $1,142, $1,087, and $887, respectively.

 

The Company provides a nonqualified deferredcompensation plan for its officers and certain key employees. Under this plan,participants may defer up to 100 percent of their annual salary and bonus.Although participants direct the investment of these funds, they are classifiedas trading securities and are included in long-term investment securities onthe consolidated balance sheets because they remain assets of the Company untilthey are actually paid out to the participants. The Company has established atrust to finance obligations under the Plan. At the end of each year and atother times provided under the Plan, the Company adjusts its obligation to aparticipant by the investment return or loss on the funds selected by theparticipant under rules established in the Plan. Upon separation ofemployment of the participant with the Company, the obligation owed to theparticipant under the Plan will be paid as a lump sum or over a period ofeither three or five years (and will continue to be adjusted by the applicableinvestment return or loss during the period of pay-out). The Company haddeferred compensation plan assets of approximately $1,394 and $1,674 as of December 31,2008 and December 31, 2007, respectively. The change in the liabilityassociated with the deferred compensation plan is recorded in the deferredcompensation payable.

 

**Management and Employee BonusPlan**

 

The Companyhas a discretionary bonus plan that provides for participants to receivepayments based upon the achievement of specified annual increases in net salesrevenue and operating income, as well as individual objectives. The expenserelated to the bonus plan was approximately $3,487, $3,580, and $2,325 for theyears ended December 31, 2008, 2007, and 2006, respectively. These amountswere accrued as liabilities in the respective year-end consolidated balancesheets. All United States employees as well as key international employeesparticipate in the bonus plan.

 

**NOTE11:  COMMITMENTS AND CONTINGENCIES**

 

**Contractual Obligations**

 

TheCompany leases certain facilities and equipment used in its operations andaccounts for leases with escalating payments using the straight-line method.The Company incurred expenses of approximately $6,103, $5,358, and $5,496 inconnection with operating leases during 2008, 2007, and 2006, respectively. Theapproximate aggregate commitments under non-cancelable operating leases ineffect at December 31, 2008 were as follows:

 
| **Year Ending December 31** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| 2009                                       |       | $          | 4,743      |   |
| 2010                                       |       | 2,698      |       |
| 2011                                       |       | 1,569      |       |
| 2012                                       |       | 1,135      |       |
| 2013                                       |       | 625        |       |
| Thereafter                                 |       | 134        |       |
|                                       |       | $          | 10,904     |   |

 

TheCompany enters into contracts with suppliers to ensure the availability of bothbotanical and non-botanical raw materials, as well as packing materials, inadvance of its annual requirements. As of December 31, 2008, the Companyhas entered into non-cancelable purchase agreements for $16,513 related tofiscal year 2009 production needs.

 

Asof December 31, 2008, the Company has entered into non-cancelable capitalpurchase agreements for $545 related to upgrades to the Company’s informationsystems and new manufacturing equipment.

 

**LegalProceedings**

 

Currently,the Company is a party to various legal proceedings, including those notedbelow. Management cannot predict the ultimate outcome of these proceedings,individually or in the aggregate, or their resulting effect on the Company’sbusiness, financial position, results of operations or cash flows as litigationand related matters are subject to inherent uncertainties, and 

 

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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, cash flows or prospects for the period in which theruling occurs or future periods. The Company maintains directors’ and officers’liability, product liability, general liability and excess liability insurancecoverage. However, no assurances can be given that such insurance will continueto be available at an acceptable cost to the Company, that such coverage willbe sufficient to cover one or more large claims, or that the insurers will notsuccessfully disclaim coverage as to a pending or future claim.

 

**Class-Action Litigation**

 

Between April 3, 2006 and June 2, 2006, five separateshareholder class-action lawsuits were filed against the Company and certain ofits 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 (the “ConsolidatedComplaint”) against the Company, the Company’s Chief Executive Officer andformer director, Douglas Faggioli, the Company’s former Chief Financial Officer,Craig D. Huff, and a former director and former Chair of the Company’s AuditCommittee, Franz L. Cristiani. The Consolidated Complaint asserts threeseparate claims on behalf of purchasers of the Company’s common stock: (1) aclaim against Mr. Faggioli and the Company for violation of Section 10(b) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5promulgated thereunder, alleging that Mr. Faggioli made a series ofalleged material misrepresentations to the investing public; (2) a claimagainst Mr. Faggioli and the Company for violation of Section 10(b) andRule 10b-5, alleging that Mr. Faggioli made a series ofmisrepresentations to the Company’s then independent auditor, KPMG, LLP (“KPMG”),for the purpose of obtaining unqualified or “clean” audit opinions and reviewopinions from KPMG concerning certain of the Company’s annual and quarterlyfinancial statements; and (3) a claim against Messrs. Faggioli, Huffand Cristiani for violation of Section 20(a) of the Exchange Act,alleging that the individual defendants have “control person” liability for thepreviously-alleged violations by the Company. The Consolidated Complaint seeksan unspecified amount of compensatory damages, together with interest thereon,litigation costs and expenses, including attorneys’ fees and expert fees, andany such other and further relief as may be allowed by law.

 

On January 5, 2007, the Company and Messrs. Faggioli, Huffand Cristiani moved to dismiss the Consolidated Complaint in its entirety. On May 21,2007, the Court issued its decision denying the motion in large part, butshortening the proposed class period on one of the plaintiffs’ claims. On June 6,2007, the Company and the other defendants answered the Consolidated Complaint,wherein they denied all allegations of wrongdoing and raised a number ofaffirmative defenses. On November 1, 2007, the plaintiffs filed theirmotion for class certification, which the Company opposed. On September 25,2008, the Court granted the plaintiffs’ motion for class certification in part,establishing the class as all persons who purchased or otherwise acquired theCompany’s common stock, and were damaged thereby, from March 16, 2005 to March 20,2006. On May 9, 2008, at the invitation of the Court based upon recentcase law developments, the Company filed a motion to dismiss the plaintiffs’second cause of action (a 10b-5 claim based on non-public representations toKPMG).  The plaintiffs opposed this motion.  On September 23,2008, the Court granted the Company’s motion and dismissed the plaintiffs’second cause of action.

 

The case is currently in the early stages of discovery. The trial isnot scheduled to commence until April 19, 2010. Although the Company andthe other defendants are vigorously defending against the allegations in thelawsuit, and the Company intends to continue doing so, the Company is not ableat this time to predict the outcome of this litigation or whether the Companywill incur any liability associated with the litigation, or to estimate theeffect such outcome would have on the financial condition, results ofoperations, or cash flows of the Company.

 

The Company maintains insurance that may provide coverage for thepotential consequences of a negative outcome of the litigation described above.The Company has given notice to its insurers of the claims and the insurershave responded by requesting additional information and by reserving theirrights under the policies, including the rights to deny coverage under variouspolicy exclusions or to rescind the policies in question as a result of theCompany’s restatement of its financial statements. There can be no assurancethat the insurers will not seek to deny coverage or rescind the policies; thatsome or all of the claims will not be covered by such policies; or that, evenif covered, the Company’s ultimate liability will exceed the availableinsurance.  Moreover, there can be noassurances as to the Company’s ability to obtain insurance coverage in thefuture, or as to the cost of such insurance.

 

**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.

 

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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, the 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, managementbelieves that it is not possible 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, results of operations, or cash flows of the Company.

 

**SEC and DOJ Investigations**

 

In March 2006, the Company voluntarily disclosed to the SECcertain information related to the independent investigation by the Company’sAudit Committee. Since that time, the SEC has subpoenaed certain informationand requested that the Company voluntarily provide other information inconnection with its subsequent investigation related to these events, which theCompany has provided. The Company is cooperating fully with this investigation.The Company cannot predict what impact, if any, and the materiality of suchimpact, if any, the conclusion of this matter may have on its 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 the financial condition, results ofoperations, or cash flows of the Company.

 

**SEC Section 12(j) Proceeding**

 

On July 12, 2007, the Company announced that the SEC hadinstituted administrative proceedings pursuant to Section 12(j) ofthe Exchange Act to suspend or revoke the registration of its 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, the Company filed a petition for review with the SEC. On December 5,2007, the SEC granted the Company’s petition for review. The SEC heard oralargument from both the Company and the SEC staff on January 7, 2009. On January 21, 2009, the SEC issued a final order revoking theregistration of the Company’s common stock.  As a result of this order,broker-dealers are not permitted to effect transactions in the Company’ssecurities until the Company’s registration statement on Form 10, whichwas filed with the SEC on February 12, 2009, becomes effective. Although the Company’s goal remains to return, as quickly as practicable, itscommon stock to public markets, the Company cannot predict when theregistration statement will be come effective.

 

**Self-Insurance Liabilities**

 

Similar to other manufacturers anddistributors of products that are ingested, the Company faces an inherent riskof exposure to product liability claims in the event that, among other things,the use of its products results in injury. Effective April 12, 2004, theCompany complied with the FDA’s ban on the ingredient ephedra. The Companycarries insurance in the types and amounts it considers reasonably adequate tocover the risks associated with its business. On June 1, 2003, the Companyestablished a wholly owned captive insurance company to provide it with productliability insurance coverage. The Company has accrued an amount that itbelieves is sufficient to cover probable and reasonably estimable liabilitiesrelated to product liability claims based on the Company’s history of suchclaims. However, there can be no assurance that these estimates will prove tobe sufficient nor can there be any assurance that the ultimate outcome of anylitigation for product liability will not have a material negative impact onthe Company’s business prospects, financial position, results of operations, orcash flows.

 

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

 

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The Company has accrued $2,873 and $2,306 forproduct liability and employee medical claims at December 31, 2008 and2007, respectively, and such amounts are included in accrued liabilities on theCompany’s consolidated balance sheets.

 

**Other Litigation**

 

One of the Company’s foreign subsidiaries isa defendant in litigation regarding primarily employee-related matters. TheCompany has recorded accruals of approximately $113 and $600 related to thislitigation at December 31, 2008 and 2007, respectively, which is includedin accrued liabilities.

 

The Company is party to various other legalproceedings in several foreign jurisdictions related to VAT assessments andother civil litigation.  While there is areasonable possibility that a material loss may be incurred, the Company cannotat this time estimate the loss, if any, therefore, no provision for losses hasbeen provided.  The Company believesfuture payments related to these matters could range from $0 to approximately$1,100.

 

**Non-Income Tax Contingencies**

 

The Company has reserved for certain statesales and use tax and foreign non-income tax contingencies based on thelikelihood of an obligation in accordance with SFAS No. 5, “Accounting forContingencies.” Under SFAS No. 5, loss contingency provisions are recordedfor probable losses at management’s best estimate of a loss, or when a bestestimate cannot be made, a minimum loss contingency amount is recorded.  The Company provides provisions for potentialpayments of tax to various tax authorities for contingencies related tonon-income tax matters.  The Company alsoprovides provisions for state sales taxes in each of the states where theCompany has potential nexus. As of December 31, 2008 and 2007, accruedliabilities include $17,359 and $14,393, respectively, related to non-incometax contingencies. 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, results of operations, or cash flows of the Company.

 

**Government Regulations**

 

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

 

**NOTE 12: OPERATING BUSINESS SEGMENT AND INTERNATIONAL OPERATION INFORMATION**

 

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

 

TheCompany has two reportable business segments based on geographic operationsthat include a United States segment and an international segment that operateunder the Nature’s Sunshine Products name. The Company’s third reportablebusiness segment is Synergy Worldwide, which 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. The accountingpolicies of the segments are the same as those described in the summary ofsignificant accounting policies in Note 1. Net sales revenues for each segmenthave been reduced by any intercompany sales as they are not included in themeasure of segment profit or loss reviewed by the chief operating decisionmaker. The Company evaluates performance based on operating income (loss) bysegment before consideration of certain inter-segment transfers and expenses.

 

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Reportablebusiness segment information for the years ended December 31, 2008, 2007,and 2006 is as follows:

 
| **Year Ended December 31** | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Net Sales Revenue:                        |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **$**       | **150,101** |     | $          | 148,254  |       | $ | 148,374 |   |
| International                             | ** ** | **174,097** |        | 149,822  |       | 130,596  |       |
| ** **                                |       | **324,198** |        | 298,076  |       | 278,970  |       |
| Synergy Worldwide                         | ** ** | **57,101**  |        | 68,571   |       | 83,252   |       |
| Total net sales revenue                   | ** ** | **381,299** |        | 366,647  |       | 362,222  |       |
| Operating Expenses:                       |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **155,988** |        | 153,522  |       | 152,446  |       |
| International                             | ** ** | **157,212** |        | 137,123  |       | 118,976  |       |
| ** **                                |       | **313,200** |        | 290,645  |       | 271,422  |       |
| Synergy Worldwide                         | ** ** | **62,501**  |        | 72,941   |       | 82,795   |       |
| Total operating expenses                  | ** ** | **375,701** |        | 363,586  |       | 354,217  |       |
| Operating Income (Loss):                  |       |        |        |     |       |     |       |
| Nature’s Sunshine Products:          |       |        |        |     |       |     |       |
| United States                             | ** ** | **(5,887**  | **)**       | (5,268   | )          | (4,072   | )          |
| International                             | ** ** | **16,885**  | ** **  | 12,699   |       | 11,620   |       |
| ** **                                |       | **10,998**  | ** **  | 7,431    |       | 7,548    |       |
| Synergy Worldwide                         | ** ** | **(5,400**  | **)**       | (4,370   | )          | 457      |       |
| Total operating income                    | ** ** | **5,598**   |        | 3,061    |       | 8,005    |       |
|                                      |       |        |        |     |       |     |       |
| Other Income (Expense), net               | ** ** | **870**     |        | 1,404    |       | 624      |       |
| Income Before Provision for Income Taxes  | ** ** | **$**       | **6,468**   |     | $          | 4,465    |       | $ | 8,629 |   |

 
| **Year Ended December 31** | ** ** | **2008**  | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Capital Expenditures:                     |       |      |       |     |       |     |       |
| Nature’s Sunshine Products:          |       |      |       |     |       |     |       |
| United States                             | ** ** | **$**     | **2,467**  |     | $          | 3,000    |       | $ | 1,488 |   |
| International                             | ** ** | **4,872** |       | 422      |       | 630      |       |
| ** **                                | ** ** | **7,339** |       | 3,422    |       | 2,118    |       |
| Synergy Worldwide                         | ** ** | **574**   |       | 974      |       | 605      |       |
| Total capital expenditures                | ** ** | **$**     | **7,913**  |     | $          | 4,396    |       | $ | 2,723 |   |
|                                      |       |      |       |     |       |     |       |
| Depreciation and Amortization:            |       |      |       |     |       |     |       |
| Nature’s Sunshine Products:          |       |      |       |     |       |     |       |
| United States                             | ** ** | **$**     | **3,419**  |     | $          | 3,729    |       | $ | 4,074 |   |
| International                             | ** ** | **756**   |       | 1,161    |       | 854      |       |
| ** **                                | ** ** | **4,175** |       | 4,890    |       | 4,928    |       |
| Synergy Worldwide                         | ** ** | **1,262** |       | 1,519    |       | 1,296    |       |
| Total depreciation and amortization       | ** ** | **$**     | **5,437**  |     | $          | 6,409    |       | $ | 6,224 |   |

 
| **As of December 31** | ** ** | **2008**    | ** **  | **2007** | ** ** |
|--------------------------------------|------------|-------------|-------------|----------|------------|
| Assets:                              |       |        |        |     |       |
| Nature’s Sunshine Products      |       |        |        |     |       |
| United States                        | ** ** | **$**       | **95,131**  |     | $          | 93,322 |   |
| International                        | ** ** | **45,995**  |        | 47,223   |       |
| ** **                           | ** ** | **141,126** |        | 140,545  |       |
| Synergy Worldwide                    | ** ** | **23,150**  |        | 24,793   |       |
| Total Assets                         | ** ** | **$**       | **164,276** |     | $          | 165,338 |   |

 

From an individual country perspective, onlythe United States, Japan, Russia, and Ukraine comprise approximately 10 percentor more of consolidated net sales revenue for the years ended December 31,2008, 2007, and 2006 as follows:

 
| **Year Ended December 31** | ** ** | **2008**    | ** **  | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Net Sales Revenue:                        |       |        |        |     |       |     |       |
| United States                             | ** ** | **$**       | **151,332** |     | $          | 152,943  |       | $ | 157,132 |   |
| Japan                                     | ** ** | **38,972**  |        | 45,554   |       | 52,301   |       |
| Russia                                    | ** ** | **44,768**  |        | 34,314   |       | 28,394   |       |
| Ukraine                                   | ** ** | **36,398**  |        | 24,251   |       | 12,224   |       |
| Other                                     | ** ** | **109,829** |        | 109,585  |       | 112,171  |       |
| Total Net Sales Revenue                   | ** ** | **$**       | **381,299** |     | $          | 366,647  |       | $ | 362,222 |   |

 

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Net sales revenue by product group has notbeen disclosed as management has determined that it is impracticable toaccumulate such information.

 

From an individual country perspective, onlythe United States and Venezuela comprise 10 percent or more of consolidatedlong-lived assets, consisting of property, plant and equipment and intangibleassets, as follows:

 
| **As of December 31** | ** ** | **2008**  | ** ** | **2007** | ** ** |
|--------------------------------------|------------|-----------|------------|----------|------------|
| Long-Lived Assets                    |       |      |       |     |       |
| United States                        | ** ** | **$**     | **23,723** |     | $          | 25,022 |   |
| Venezuela                            | ** ** | **4,646** |       | 377      |       |
| Other                                | ** ** | **3,393** |       | 4,539    |       |
| Total Long-Lived Assets              | ** ** | **$**     | **31,762** |     | $          | 29,938 |   |

 

**NOTE 13: RELATED PARTY TRANSACTIONS**

 

The Company maintains split-dollar lifeinsurance policies on certain executives. The cash surrender value of $206 and$294 related to such policies is recorded in other assets as of December 31,2008 and 2007, respectively.

 

Mr. Eugene Hughes, amember of the Company’s Board of Directors and a shareholder, retired as anemployee of the Company effective as of December 22, 2008. Prior to hisretirement, the Company and Mr. Hughes entered into a Retirement andConsulting Agreement, dated as of December 9, 2008, pursuant to which Mr. Hughesprovides consulting services to the Company for an initial term of eight yearsfollowing his retirement. In exchange for such consulting services, Mr. Hugheswill receive (i) annual compensation of $215 for the first two years ofservice, (ii) annual compensation of $100 for the remainder of the initialterm, (iii) annual compensation of $50 after the initial term, and (iv) certainmedical and life insurance benefits.

 

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**NOTE14:  FAIR VALUE**

 

The followingtable presents the Company’s hierarchy for its asset measured at fair value ona recurring basis as of December 31, 2008:

 
| ** **                                                 | ** ** | **Level 1**                                            | ** ** | **Level 2**                           | ** ** | **Level 3**                      | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Quoted Prices  in Active  Markets for  Identical Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Total**  | ** ** |
| Investments available for sale                             |       | $                                                           | 933        |                                       | $          | 2,925                                 |       | $          | —     |   | $ | 3,858 |   |
| Investment securities                                      |       | 1,394                                                       |       | —                                     |       | —                                |       | 1,394      |       |
| Restricted investments                                     |       | —                                                      |       | —                                     |       | 2,050                                 |       | 2,050      |       |
| Total assets measured at fair value on a  recurring basis. |       | $                                                           | 2,327      |                                       | $          | 2,925                                 |       | $          | 2,050      |   | $ | 7,302 |   |

 

*Investments available for sale*— The majority of the Company’s investment portfolio consist of various fixedincome securities such as U.S government and state and municipal bonds, mutualfunds, and equity securities.  The Level1 securities are valued using quoted prices for identical assets in activemarkets including equity securities, U.S. government treasuries, and variousmutual funds.  The Level 2 securitiesinclude investments in state and municipal bonds whereby all significant inputsare observable or can be derived from or corroborated by observable market datafor substantially the full term of the asset.

 

*Investment securities*—  The majority of the Company’s tradingportfolio consists of various mutual funds that are using quoted prices inactive markets.

 

*Restricted investments* —  TheCompany’s restricted investments include auction rate preferred investmentsthat have failed at auction during 2008. Despite the underlying long-term contractual maturity of auction-ratesecurities (“ARS”), there was historically a ready liquid market for thesesecurities based on the interest reset mechanism.  However, as a result of current negativeliquidity and uncertainty in financial credit markets, the Company experienced “failed”auctions associated with its ARS.  In thecase of a failed auction, the ARS become illiquid investments (until a futureauction is successful or the security is called prior to the contractualmaturity date by the issuer) and the rates are reset in accordance with termsin the prospectus/offering circular

 

The ARSconsist primarily of AAA securities.  Indetermining the fair value of the Company’s restricted investments at December 31,2008, the Company has taken into consideration fair values determined by thefinancial institutions, current credit rating of the underlying securities,insurance provisions, discounted cash flow analysis, as deemed appropriate, andits current liquidity position.  In January 2009,the Company redeemed these securities at par value.  As a result, the Company reclassified theserestricted investments from long-term to current assets as of December 31,2008.

 

The following table shows a reconciliation ofthe beginning and ending fair value measurements using significant unobservableinputs for the year ended December 31. 2008:

 
| ** **                                | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------|------------|
| Balance at January 1, 2008           |       | $         | 2,075      |   |
| Net unrealized gains included in earnings |       | —    |       |
| Sales of restricted investments           |       | (25       | )          |
| Purchases                                 |       | —    |       |
| Balance at December 31, 2008         |       | $         | 2,050      |   |

 

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**NOTE15:  SUMMARY OF QUARTERLY OPERATIONS —UNAUDITED**

 

The followingtable displays the unaudited interim consolidated statements of operations forthe quarters ended March 31, 2008, June 30, 2008, September 30,2008, and December 31, 2008.

 
| ** **                          | ** ** | **For the Quarter Ended** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **March 31,  2008**                 | ** ** | **June 30,  2008** | ** ** | **September  30, 2008** | ** ** | **December  31, 2008** | ** ** |
| Net sales revenue                   |       | $                                        | 98,557     |   | $ | 97,879 |   | $ | 94,669 |   | $ | 90,194 |   |
| Cost of goods sold                  |       | 19,217                                   |       | 16,796 |   | 17,146 |   | 18,715 |   |
| Gross profit                        |       | 79,340                                   |       | 81,083 |   | 77,523 |   | 71,479 |   |
| Volume incentives                   |       | 38,703                                   |       | 38,425 |   | 36,588 |   | 34,423 |   |
| Selling, general and administrative |       | 39,738                                   |       | 39,280 |   | 38,864 |   | 37,806 |   |
| Operating income (loss)             |       | 899                                      |       | 3,378 |   | 2,071 |   | (750 | ) |
| Other income (expense)              |       | (359                                     | )          | 312 |   | (448 | ) | 1,365 |   |
| Income before income taxes          |       | 540                                      |       | 3,690 |   | 1,623 |   | 615 |   |
| Provision for income taxes          |       | 983                                      |       | 4,391 |   | 1,789 |   | 1,143 |   |
| Net loss                            |       | (443                                     | )          | (701 | ) | (166 | ) | (528 | ) |
| Basic net loss per share            |       | (0.03                                    | )          | (0.05 | ) | (0.01 | ) | (0.03 | ) |
| Diluted net loss per share          |       | (0.03                                    | )          | (0.05 | ) | (0.01 | ) | (0.03 | ) |
|                                     |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

The following table displays the unauditedinterim consolidated statements of operations for the quarters 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                   |       | $                                        | 93,678     |   | $ | 90,536 |   | $ | 88,213 |   | $ | 94,220 |   |
| Cost of goods sold                  |       | 18,520                                   |       | 15,939 |   | 18,325 |   | 18,212 |   |
| Gross profit                        |       | 75,158                                   |       | 74,597 |   | 69,888 |   | 76,008 |   |
| Volume incentives                   |       | 36,666                                   |       | 35,734 |   | 35,140 |   | 36,344 |   |
| Selling, general and administrative |       | 35,905                                   |       | 35,221 |   | 39,558 |   | 38,022 |   |
| Operating income (loss)             |       | 2,587                                    |       | 3,642 |   | (4,810 | ) | 1,642 |   |
| Other income (expense), net         |       | 949                                      |       | 160 |   | 426 |   | (131 | ) |
| Income (loss) before income taxes   |       | 3,536                                    |       | 3,802 |   | (4,384 | ) | 1,511 |   |
| Provision for income taxes          |       | 5,470                                    |       | 6,242 |   | (2,761 | ) | 3,751 |   |
| Net loss                            |       | (1,934                                   | )          | (2,440 | ) | (1,623 | ) | (2,240 | ) |
| Basic net loss per share            |       | (0.13                                    | )          | (0.16 | ) | (0.10 | ) | (0.14 | ) |
| Diluted net loss per share          |       | (0.13                                    | )          | (0.16 | ) | (0.10 | ) | (0.14 | ) |
|                                     |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

Basic and diluted loss per share are computedindependently for each of the quarters presented. Therefore, the sum of thequarterly net loss per share may not equal the total computed for the year.

 

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

 

NONE

 

**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**

 

Management identified certain material weaknesses which are describedin our Annual Report on Form 10-K/A for the year ended December 31,2007. During 2008 and through the date of this filing, management has beenfocused on remediating these material weaknesses. This overview provides asummary of the status of each of the previously identified material weaknesses,followed by a discussion of management’s evaluation of disclosure controls andprocedures, management’s report on internal control over financial reporting,and management’s efforts to remediate the material weaknesses, as set forth inthe table below.

 

As shownbelow, three material weaknesses reported as of December 31, 2007 wereremediated as of December 31, 2008. Three other material weaknesses reported as of December 31, 2007remain material weaknesses as of December 31, 2008, for which managementcontinues to remediate.

 
| **Material Weakness Reported**        | ** **                               | **Status as of**      | ** **              | **Status as of the Date** | ** **              |
|-------------------------------------------------|------------------------------------------|---------------------------------|-------------------------|-----------------------------------------------|-------------------------|
| **as of December 31, 2007** | ** **                               | **December 31, 2007** | ** **              | **of this Filing**                  | ** **              |
| 1.                                              | Maintenance  of Risk Assessment Programs |                            | Remediation in  process |                                          | Remediated              |   |
| 2.                                              | Application  of GAAP                     |                            | Remediation  in process |                                          | Remediated              |   |
| 3.                                              | Accounting  for Income Taxes             |                            | Remediation  in process |                                          | Remediation  in process |   |
| 4.                                              | Financial  Reporting Process             |                            | Remediation  in process |                                          | Remediation  in process |   |
| 5.                                              | Monitoring  of Service Provider          |                            | Remediation  in process |                                          | Remediated              |   |
| 6.                                              | 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 SEC, and that such information is accumulated andcommunicated to management, including the chief executive officer and the chieffinancial officer, to allow timely decisions regarding required disclosures.

 

In connectionwith the preparation of this report, the Company’s management, under thesupervision and with the participation of the Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as of December 31, 2008. Based onthat evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were not effective as of December 31,2008, as a result of the existence of material weaknesses in our internalcontrols over financial reporting.

 

Since December 31,2007, we have made significant progress in improving our disclosure controlsand procedures. We have taken, and are taking, the actions described belowunder “Remediation Activities Related to Weaknesses” to remediate the remainingmaterial 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 

 

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controls and procedures are effective untilthe material weaknesses have been fully remediated.

 

To address thematerial weaknesses reported in our 2007 Form 10K/A, management performedadditional analyses and other post-closing procedures designed to ensure thatour consolidated financial statements were prepared in accordance with GAAP.These procedures included documentation and testing of processes, datavalidation procedures from the systems into the general ledger, testing ofsystems, validation of results, disclosure review, and other analytics. As aresult, management believes that the consolidated financial statements includedin this report fairly present, in all material respects, our financialposition, results of operations and cash flows as of the dates, and for theperiods presented.

 

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

 

*Overview*

 

Our managementis responsible 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 GAAP, andincludes those 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 GAAP, 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 auditing rules as a deficiency, or acombination of deficiencies, in internal control over financial reporting suchthat there is a reasonable possibility that a material misstatement of acompany’s annual or interim financial statements will not be prevented ordetected on a timely basis by the company’s internal controls.

 

*Management’sAssessment of Internal Control over Financial Reporting*

 

Management, with the participation of our Chief Executive Officer andour Chief Financial Officer, assessed the effectiveness of our internal controlover financial reporting as of December 31, 2008. Management’s assessmentof internal control over financial reporting was conducted using the criteriain *Internal Control — Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission(“COSO”).

 

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Management hasconcluded that the Company did not maintain effective internal control overfinancial reporting as of December 31, 2008, based on the criteriaestablished in COSO**because of thecontinued existence of material weaknesses related to the accounting for incometaxes, the financial reporting process, and information technology systems.Certain of these material weaknesses have resulted in adjustments to theCompany’s consolidated financial statements for the year ended December 31,2008. A description of the material weaknesses relating to each of these areasas of December 31, 2008 is included below.

 

Accounting for Taxes*—*The Company’s processes, procedures and controls relatedto the preparation and review of the annual tax provision, and the accrual ofthe other non-income tax contingencies were not effective to ensure thatamounts related to the tax provision, related current or deferred income taxasset and liability accounts and non-income tax contingencies were accurate,recorded in the proper period, and determined in accordance with GAAP.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 and non-income tax positionsin accordance with GAAP*,* and (iii) filetax returns in certain foreign jurisdictions. Additionally, we had insufficientqualifications and training in accounting for taxes.

 

Financial Reporting Process*—*The Company did not maintain an effective financialreporting process to prepare financial statements in accordance with GAAP.Specifically, our process lacked timely and complete financial statementreviews and appropriate account closing procedures and reconciliation processes.  Further, we were unable to complete timelyregulatory filings as required by the rules of the SEC.

 

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

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

 

Deloitte & Touche LLP, the Company’sindependent registered public accounting firm, issued its attestation report onthe effectiveness of our internal control over financial reporting as of December 31,2008, and expressed an adverse opinion.

 

**Changes inInternal Control over Financial Reporting**

 

*Overview*

 

Management, with the participation of our Chief Executive Officer andChief Financial Officer, has assessed whether any changes in our internalcontrol over financial reporting that occurred during the period from January 1,2008 through the date of this filing have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting. Based on management’s assessment, significant changes wereimplemented and tested during the period from January 1, 2008 through 

 

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December 31,2008 to continue the remediation of our material weaknesses in internal controlover financial reporting.

 

Management believes the measures that we have implemented during 2008to remediate the material weaknesses in internal control over financialreporting have had a favorable impact on our internal control over financialreporting since December 31, 2007. Changes in our internal control overfinancial reporting from January 1, 2008 through the date of this filingthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting are described below.

 

**RemediationActions Relating to Material Weaknesses**

 

The discussion below describes the actions that management has takenduring 2008 and is in the process of taking to remediate our remaining materialweaknesses in internal control over financial reporting.

 

Description of Material Weakness as of December 31,2007

 

*Maintenance of Risk Assessment Programs*– We did not maintain an adequate risk oversight function to evaluate andreport on risks to financial reporting throughout the organization, includingcompletion of a comprehensive, worldwide risk assessment to identify allpotential risk areas and evaluate the adequacy of controls to mitigateidentified risks.

 

Description of 2008 Remediation Actions

 

Management has, in conjunction with theassessment of internal controls for 2008, identified key financial reportingrisks and has evaluated the adequacy of the internal control procedures toaddress the identified risks.  Thisincluded the completion of a comprehensive, worldwide entity level control questionnairesand fraud risk assessments in 2008 by senior management, the Company’s GeneralCounsel and Chief Compliance Officer, and the Manager of Internal Audit. Thishas provided enhanced assistance to the Audit Committee in monitoringidentified risks and in establishing more robust internal audit plans. Inaddition, management is continuing to provide compliance training, includingon-line compliance training in various languages, throughout its worldwideorganization.

 

As a result of these actions, managementbelieves this previous material weakness has been remediated.

 

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Description of Material Weakness as of December 31,2007

 

*Application of GAAP*— The Company 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.

 

Description of 2008 Remediation Actions

 

We have implemented procedures to addressrevenue recognition issues.  With respectto accruals and contingencies, in 2008 our management performed an analysiswith the assistance of outside legal counsel to assess and estimate theexposure related to such positions. To address income statement and balancesheet classification issues, we have enhanced our close processes andprocedures as described in the financial reporting process remediationactivities below.  We have prepared GAAPdisclosure and SEC filing checklists and expanded the financial statement closechecklists.  In addition, we have hired aFinancial Reporting Manager with GAAP and SEC reporting experience.

 

We have also increased the training ofinternational subsidiary controllers to provide for consistent communication ofour policies and procedures over financial reporting and internal control overfinancial reporting.

 

As a result of these actions, management nowconsiders this previous material weakness to be remediated.

 

Description of Material Weakness as of December 31,2007

 

*Accounting for Taxes*— The Company’s processes, procedures and controls related to the preparationand review of the annual tax provision and the accrual of the other non-incometax contingencies were not effective to ensure that amounts related to the taxprovision, related current or deferred income tax asset and liability accounts,and non-income tax contingences were accurate, recorded in the proper period,and determined 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 and non-income tax positionsin accordance with generally accepted accounting principles, and (iii) filetax returns in certain foreign jurisdictions. Additionally, we had insufficientpersonnel with appropriate qualifications and training in accounting for incometaxes.

 

Description of 2008 Remediation Actions

 

In late 2008, we hired a second Tax Directorand during 2008 have utilized various outsourced service providers for taxconsulting services to assist in our accounting for income taxes and therecording of non-income tax contingencies. We continue to evaluate our taxprocess and tax resource requirements. In 2007 and 2008, we performed a comprehensivereview of our foreign statutory tax filings, and have assessed the impact ofthe delinquent filings and the process that we need to complete these filings.In addition, in 2007 and 2008 our management performed an analysis with theassistance of outside consultants to assess, estimate, and record the exposurerelated to our uncertain income tax positions and non-income tax contingenciesin accordance with generally accepted accounting principles. We continue toevaluate the adequacy of our tax resources.

 

This material weakness still exists, and theCompany is in the process of remediating the material weakness.

 

Description of Material Weakness as of December 31,2007

 

*Financial Reporting Process*— The Company did not maintain an effective financial reporting process toprepare financial statements in accordance with GAAP. Specifically, our processlacked timely and complete financial statement reviews, effective journal entry

 

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controls, and appropriate reconciliation processes. Further, we wereunable to complete regulatory filings as required by the rules of the SEC.

 

Description of2008 Remediation Actions

 

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

 

This material weakness still exists, and theCompany is in the process of remediating the material weakness.

 

Description ofMaterial Weakness as of December 31, 2007

 

*Monitoring of a Service Provider*— The Company did not effectively monitor a service provider responsible formanaging the 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 established amonitoring process including a recalculation of commissions expense based onsales reported 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 our financialstatements.

 

Description of 2008 Remediation Actions

 

During 2008, we redesigned our procedures to more effectively monitorthe service provider responsible for the management of the operations of one ofour foreign locations. In particular, we improved our monitoring process toensure that the commissions expense recalculations and other reconciliationprocesses (based on information reported by the outside service provider) areperformed on a regular basis, documented and reviewed. In addition, inconjunction with our 2008 assessment of internal controls, our Manager ofInternal Audit and our out-sourced internal auditor performed two site visitsto the foreign location to observe the facility, interview on site employees ofthe service provider, and evaluate the internal control procedures of theservice provider.  These visits increasedmonitoring of other critical business processes performed by the serviceprovider, such as product registration, product shipment and operatingexpenses.   Additional future visits tothe location will be conducted as part of internal audit’s overall plan.

 

As a result of these actions, management nowconsiders this previous material weakness to be remediated.

 

Description of Material Weakness as of December 31,2007

 

*Information Technology Systems*— The Company did not maintain effective internal control over financialreporting related to certain information technology applications and generalcomputer controls which are considered to have an impact on financial reportingand which resulted in a more than reasonable possibility that materialmisstatements in our financial statements would not be prevented or detected.Specifically, we lacked effective controls in the following areas:

 

*Access Control* — TheCompany did not maintain effectively designed controls to prevent unauthorizedaccess to certain programs and data, and provide for periodic review andmonitoring of access 

 

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including reviews of security logs and analysis of segregation ofduties conflicts.

 

*Change Management* —The Company did not maintain effectively designed controls to ensure that allinformation technology program and data changes were authorized, developeraccess to the production environment was limited, and that all program and datachanges were adequately tested for accuracy and appropriate implementation.

 

*Spreadsheets* — TheCompany did not maintain effectively designed controls to ensure that criticalspreadsheets were identified, access to these spreadsheets was restricted toappropriate personnel, changes to data or formulas were authorized andappropriate, or that the spreadsheets were adequately reviewed by someone otherthan the preparer.

 

Description of 2008 Remediation Actions

 

*Access Control —*Management performed a broad and detailed analysis of user access to theapplications we have determined to have a material impact on our financial reportingfor our NSP United States locations.  Wehave implemented formal training of managers and others who grant and approveaccess to these data programs.  Inaddition, the Company is providing better data program descriptions and othertools to those managers and employees that approve user access to assist intheir understanding if the access of their subordinates violates segregation ofduties or access controls.

 

*Change Management —*During2008, management continued implementation of enhanced procedures to controlchanges to the production environment, and we continue to evaluate additionalmeasures to ensure that adequate documentation is retained. In addition, during2007 and 2008, management redesigned job descriptions within the change controlprocess of certain of the Company’s application systems to improve segregationof duties, including removing the ability of the Information TechnologyDirector to perform code changes and increasing his responsibilities to conductcode review. 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.   Procedures are being implemented to ensurethat data changes are adequately tested for accuracy and appropriateimplementation.

 

*Spreadsheets* —During 2007 and 2008, management has designed and implemented procedures toinventory, assess the risk of, and rank our critical financial reportingspreadsheets for locations that have a material impact on our financialreporting. In conjunction with the assessment of internal controls for 2008,management performed detailed testing at locations that have a material impacton our financial reporting around security and change management for spreadsheets.Management intends to further enhance the design of our controls overspreadsheets by establishing procedures for benchmarking critical spreadsheetsto ensure that formulas are appropriate and protected, and that the logic anddesign of the spreadsheets is appropriate and consistent. Management is alsoimplementing enhanced review procedures and we will extend any or all of ourenhanced procedures to additional international locations as considerednecessary.

 

Management is also in the process of implementing an applicationpackage that will facilitate a worldwide consolidation and reduce our relianceon spreadsheets.  In addition, ourinformation technology management has selected an application to provide for aworld-wide standardization of the general ledger system. Management hasdeveloped a timeline for implementation of this application.

 

This material weakness still exists, and theCompany is in the process of remediating the material weakness.

 

**Conclusion**

 

We believe the measures described above will facilitate remediation ofthe material weaknesses we have identified and will continue to strengthen ourinternal control over financial reporting. We are committed to continuallyimproving our internal control processes and will diligently and vigorouslyreview our financial reporting controls and procedures. As we continue toevaluate and work to improve our internal control over financial reporting, wemay determine that additional measures are necessary to 

 

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addresscontrol deficiencies. Moreover, we may decide to modify, or in appropriatecircumstances not to complete, certain of the remediation measures describedabove.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Tothe Board 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 31,2008, based on criteria established in *InternalControl — 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.

 

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

 

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

 
| · | *Accounting for Taxes* — The Company’s processes, procedures and  controls related to the preparation and review of the annual tax provision  and the accrual of other non-income tax contingencies were not effective to  ensure that amounts related to the tax provision, related current or deferred  income tax asset and liability accounts, and non-income tax contingencies  were accurate, recorded in the proper period, and determined in accordance  with generally accepted accounting principles. Specifically, the Company did  not (i) analyze and reconcile certain deferred income and tax payable  accounts, (ii) appropriately consider the need to record or disclose  contingencies for certain income tax and non income tax positions in  accordance with generally accepted accounting principles*,* and (iii) file tax returns in  certain foreign jurisdictions. Additionally, the Company had insufficient  qualifications and training in accounting for taxes. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| · | *Financial Reporting Process**—*The Company did not maintain an effective  financial reporting process to prepare financial statements in accordance  with generally accepted accounting principles. Specifically, their process  lacked timely and complete financial statement reviews and appropriate  account closing procedures and reconciliation processes. Further, they were  unable to complete regulatory filings as required by the rules of the  SEC.                                  |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |
| · | *Information Technology Systems* — The Company did not maintain effective  internal control over financial reporting related to certain information  technology applications and general computer controls which are considered to  have an impact on financial reporting and which resulted in a more than  reasonable possibility that material misstatements in their financial  statements would not be prevented or detected. Specifically, they lacked  effective controls in the following areas: |

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

 

Thesematerial weaknesses were considered in determining the nature, timing, andextent of audit tests applied in our audit of the consolidated financialstatements and financial statement schedule as of and for the year ended December 31,2008, of the Company and this report does not affect our report on such financialstatements and financial statement schedule.

 

Inour opinion, because of the effect of the material weaknesses identified aboveon the achievement of the objectives of the control criteria, the Company hasnot maintained effective internal control over financial reporting as of December 31,2008, based on the criteria established in *InternalControl — Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year ended December 31,2008, of the Company and our report dated March 18, 2009, expressed anunqualified opinion on those financial statements and financial statementschedule.

 

 
| /s/  Deloitte & Touche LLP |   |
|-------------------------------------|--------|
|                                |   |
| Salt  Lake City, Utah               |   |
| March 18,  2009                |   |

 

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

## *** ***

As ashareholder, you may be entitled to present proposals for action at aforthcoming meeting if you comply with the requirements of the proxy rulesestablished by the SEC in a timely manner. Shareholder proposals to be considered for inclusion in the proxymaterials for the 2009 Annual Meeting of Shareholders must be received inwriting by our Secretary no later than April 6, 2009 and must comply with therequirements of Rule 14a-8 of the Exchange Act. The proxy solicited by the Board of Directors for the 2009 AnnualMeeting of Shareholders will confer discretionary authority to vote on any proposalpresented to the shareholders at the meeting for which the Company did not havenotice on or prior to April 6, 2009.

 

Allshareholder proposals must be delivered to our Secretary by mail at Nature’sSunshine Products, Inc., 75 East 1700 South, Provo, Utah 84606 by theapplicable deadline.

 

**PART III**

** **

## ***Item 10.  Directors, Executive Officers and CorporateGovernance***

## *** ***

The Company’s directors and executiveofficers, as of February 28, 2009, are as follows:

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                                               | ** ** | **Served in  Position  Since** | ** ** | **Class and Year  Term will Expire(1)** |
|------------------------|------------|---------|------------|----------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------------|
| Kristine F. Hughes     |       | 70      |       | Chairperson of the Board                                                   |       | 1980                                |       | Class III                                              |
| Robert K. Bowen        |       | 59      |       | Director                                                                   |       | 2006                                |       |                                                        |
| Larry A. Deppe         |       | 59      |       | Director                                                                   |       | 2006                                |       |                                                        |
| Eugene L. Hughes       |       | 78      |       | Director                                                                   |       | 1980                                |       | Class II                                               |
| Pauline Hughes Francis |       | 67      |       | Director                                                                   |       | 1988                                |       | Class I                                                |
| Douglas Faggioli       |       | 54      |       | President and Chief Executive Officer                                      |       | 2003                                |       | —                                                      |
| Stephen M. Bunker      |       | 50      |       | Executive Vice President, Chief Financial  Officer and Treasurer           |       | 2006                                |       | —                                                      |
| Jamon Jarvis           |       | 42      |       | Executive Vice President, 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         |       | 52      |       | Executive Vice President—Operations,  Nature’s Sunshine Products |       | 2002                                |       | —                                                      |
| William J. Keller      |       | 66      |       | Vice President—Health Sciences and  Educational Services              |       | 2001                                |       | —                                                      |
| Lynda Marie Hammons    |       | 54      |       | Vice President—Quality and Regulatory  Affairs                        |       | 2001                                |       | —                                                      |
| R. Kay Olsen           |       | 53      |       | Vice President—Information Technology                                 |       | 2002                                |       | —                                                      |

 

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(1)      Under a plain reading of our RestatedArticles of Incorporation, the directors’ terms expire as follows:  Mrs. Francis (Class I) at the nextannual meeting; Mr. Hughes (Class II) at the second annual meetingfrom now; Mrs. Hughes (Class III) at the third annual meeting from now;and Messrs. Bowen and Deppe (not yet placed in a Class) at the next annualmeeting.  The Company is evaluating thisoutcome under our Restated Articles of Incorporation in light of applicableUtah law and will make a final determination regarding the nomination ofcandidates for election to the Board prior to the mailing of proxy materialsfor our annual meeting planned for 2009. See “Board Composition and Election” below.

 

Certain information regarding the businessexperience of the directors and executive officers and directors is set forthbelow.

 

*Kristine F. Hughes.*  Mrs. Hughes is the Chairperson of ourBoard of Directors, a member of our Compensation Committee and NominationsCommittee. 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 spouse ofEugene L. Hughes, one of our founders and directors.

 

*Robert K. Bowen.*  Mr. Bowen is a member of our Board ofDirectors, and a member of our Audit Committee, Compensation Committee, andNominations Committee. A Certified Public Accountant, Mr. Bowen has been apartner at the accounting firm of Hansen, Barnett & Maxwell, P.C.since 1980.

 

*Larry A. Deppe.*  Mr. Deppe is an independent member ofour Board of Directors and a member of our Audit Committee. Mr. Deppe is aCertified Public Accountant with over 35 years experience auditing and teachingaccounting. Mr. Deppe is currently an Associate Professor of Accounting inthe School of Accountancy at Weber State University, Ogden, Utah. Prior toembarking on an academic career, Mr. Deppe for eight years held variousaccounting posts with Intermountain Health Care, the Office of the Utah StateAuditor, Christensen, Inc. and Arthur Young & Co. Active inprofessional affairs, Mr. Deppe served two four-year terms as Chair of theUtah State Board of Accountancy.

 

*Eugene L. Hughes.*  Mr. Hughes is a founder and member ofour Board of Directors. He co-founded Hughes Development Corporation, apredecessor of our Company, in 1972. He has served as an officer or director ofour Company and/or its 

 

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predecessorssince 1972. Mr. Hughes graduated from Brigham Young University. He is thespouse of Kristine F. Hughes, our Chairperson of the Board.

 

*Pauline Hughes Francis.*  Mrs. Francis is a member of our Board ofDirectors, and a member of our Audit Committee, Compensation Committee, and NominationsCommittee. She has served on our Board of Directors since 1988. Mrs. Franciswas a co-founder in 1972 of Hughes Development Corporation, a predecessor ofthe Company, and has acted as a consultant from time to time to our Company andits predecessors. Mrs. Francis is the former sister-in-law of Eugene L. Hughes, a member of the Board.

 

*Douglas Faggioli.*  Mr. Faggioli is the President and ChiefExecutive Officer of our Company. Prior to his appointment as President andChief Executive Officer in November 2003, Mr. Faggioli served asExecutive Vice President and Chief Operating Officer of our Company. He beganhis employment with us in 1983 and has served as one of our officers since1989. He is a Certified Public Accountant.

 

*Stephen M. Bunker.*  Mr. Bunker has served as Executive VicePresident, Chief Financial Officer and Treasurer since March 27, 2006. Mr. Bunkerserved as Vice President of Finance and Treasurer of Geneva Steel HoldingsCorporation from July 2001 until March 2006. Prior to July 2001 Mr. Bunkerserved as Corporate Controller for Geneva Steel Corporation. Mr. Bunker isa Certified Public Accountant, and worked for Arthur Andersen for six years.

 

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

 

*Greg Halliday.*  Mr. Halliday is the President—U.S. Salesfor Nature’s Sunshine Products. He has served in this position since April 2006and previously served as Vice President—Nature’s Sunshine Products U.S. Salesfrom May 2001 to March 2006. Mr. Halliday received his B.S. in1989 and M.B.A. with an emphasis in Marketing in 1991 from the Marriott Schoolof Management at Brigham Young University.

 

*Bryant J. Yates.*  Mr. Yates is the President—Internationalof our Company. Mr. Yates, has served as Executive Director—Internationalof the Company, Director—International—Europe/Middle East and General Managerof Nature’s Sunshine Products of Russia, an affiliate of the Company. Mr. Yateshas been employed by the Company since 1999. 

 

*John R. Dewyze.*  Mr. DeWyze is the Executive VicePresident—Operations for Nature’s Sunshine Products and has served in thisposition since 1997. Mr. DeWyze received his B.S. in Chemistry in 1981from Grand Valley State University and his M.B.A. in 1994 from the Universityof Southern Indiana.

 

*William J. Keller.*  Dr. Keller is the Vice President—HealthSciences and Educational Services for Nature’s Sunshine Products. He wasappointed to serve in this capacity in April 2001. Prior to joining ourCompany, Dr. Keller was the Department Chair/Professor in the School ofPharmacy at Stamford University and Northeast Louisiana University. Dr. Kellerreceived his B.S. in Pharmacy and M.S. in Pharmaceutical Sciences from IdahoState University. In 1972, the University of Washington awarded him a Ph.D. inPharmacognosy.

 

*Lynda Marie Hammons.*  Mrs. Hammons is the VicePresident—Quality and Regulatory Affairs for Nature’s Sunshine Products. She hasserved in this capacity since June 2001. Mrs. Hammons received herB.S. in Chemistry and Microbiology from Bowling Green State University and herM.B.A. with an emphasis on Quality Management from the University ofCincinnati. Mrs. Hammons is also a Certified Quality Engineer, a CertifiedQuality Technician and a Certified Quality Auditor—American Society forQuality.

 

*R. Kay Olsen.*  Mr. Olsen is the VicePresident—Information Technology of our Company and has served in this capacitysince March 2002. Mr. Olsen received his B.S. in InformationManagement from Brigham Young University and his M.B.A. from the University ofPhoenix.

 

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**Board Composition and Election**

 

Directors are elected at annual meetings ofshareholders. Our Bylaws provide for a classified Board of Directors,consisting of three staggered classes of directors, as nearly equal in numberas possible. As a result, shareholders will elect a portion of our Board ofDirectors each year. The Class I directors’ terms were originally set toexpire at our annual meeting held in 2006, the Class II directors’ termswere originally set to expire at our annual meeting held in 2007, and the Class IIIdirectors’ terms were originally set to expire at our annual meeting held in2008. Due to our inability to file our Quarterly and Annual Reports with theSEC in those years, we were not able to hold annual meetings in 2008, 2007 or2006. As a result, under our Restated Articles of Incorporation, the terms ofthree directors, Pauline Hughes Francis (Class I), Robert K. Bowen and Larry A.Deppe, will expire at our next annual meeting. Furthermore, according to a plain reading of our Restated Articles ofIncorporation, Eugene L. Hughes (Class II) would stand for election at thefollowing annual meeting (presumed to be in 2010) and Kristine F. Hughes (ClassIII) would stand for election at the yet subsequent annual meeting (presumed tobe in 2011).  The Company is evaluatingthis outcome under our Restated Articles of Incorporation in light ofapplicable Utah law and will make a final determination regarding thenomination of candidates for election to the Board prior to the mailing ofproxy materials for our annual meeting planned for 2009.

 

**Committees of the Board of Directors**

 

The Board of Directors has formed thefollowing committees:

 

*The Compensation Committee.*  The Compensation Committee reviewscompensation policies applicable to executive officers and board members,establishes the compensation to be paid to our Chief Executive Officer anddetermines the compensation and benefits of all directors on the Board. TheCompensation Committee has adopted a written charter, a copy of which may befound at our website at *www.natr.com*,or upon request, without charge, from the Company by sending a written requestto the following: Nature’s Sunshine Products, Inc., Compensation CommitteeCharter Request, Attn: Legal Department, 75 East 1700 South, P.O. Box19005, Provo, Utah 84605.

 

 Themembers of the Compensation Committee are Robert K. Bowen, (Chairperson) KristineF. Hughes, and Pauline Hughes Francis. Mrs. Francis and Mr. Bowen areIndependent Directors (as defined below) as discussed in Item 13, “CertainRelationships and Related Transactions, and Director Independence.”

 

*The Audit Committee.*  The Audit Committee is aseparately-designated standing committee of the Board of Directors, 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 Audit Committee has adopted a written charter, a copy of whichmay be found at our website at *www.natr.com*,or upon request, without charge, from the Company by sending a written requestto the following: Nature’s Sunshine Products, Inc., Audit CommitteeCharter Request, Attn: Legal Department, 75 East 1700 South, P.O. Box19005, Provo, Utah 84605.

 

The members of the Audit Committee are LarryA. Deppe (Chairperson), Robert K. Bowen and Pauline Hughes Francis, each ofwhom is an Independent Director and independent for the purposes of theregulations promulgated by the SEC. Our Board of Directors has determined thatLarry A. Deppe and Robert K. Bowen are audit committee financial experts, asthat term is defined in Item 407(d)(5)(ii) of Regulation S-Kpromulgated by the SEC. We believe Pauline Hughes Francis falls outside the SECsafe harbor providing that a person will not be deemed an affiliate forpurposes of determining audit committee member independence if he or she beneficiallyowns 10 percent or less of an issuer’s voting stock. As of December 31,2008, Mrs. Francis beneficially owned approximately 12.3 percent of theCompany’s common stock. The Board has determined that Mrs. Francis isindependent for purposes of SEC regulations and the NASD Marketplace Rules.

 

*The**Nominations Committee.*  The Nominations Committee makesrecommendations to the Board of Directors about the size of the Board or anycommittee thereof, identifies and recommends candidates for the Board and committeemembership, evaluates nominations received from shareholders, and develops andrecommends to the Board corporate governance principles applicable to ourCompany. The Nominations Committee has adopted a written charter, a copy ofwhich may be found at our website at *www.natr.com*,or upon request, without charge, from the Company by sending a written requestto the following: Nature’s Sunshine Products, Inc., Nominations CommitteeCharter Request, Attn: Legal Department, 75 East 1700 South, P.O. Box 19005,Provo, Utah 84605.

 

The members of the Nominations Committee areKristine F. Hughes (Chairperson), Pauline Hughes Francis, andRobert K. Bowen. Mrs. Francis and Mr. Bowen are both anIndependent Director as discussed in Item 13, “Certain Relationships andRelated 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, officers and persons whobeneficially own more than 10 percent of a registered class of the Company’sequity securities, to file initial reports of ownership on Form 3 andchanges in ownership on Forms 4 or 5 with the SEC. Such directors, officers and10 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, officers and 10 percentshareholders complied with all Section 16(a) filing requirements forthe fiscal years ended December 31, 2008, except for the followingfilings:  the Form 5 filed byPauline Hughes Francis on September 9, 2008 to report gift transactions onDecember 14, 2006, January 23, 2007 and December 26, 2007 andthe Form 5 filed by Eugene L. Hughes on September 2, 2008 to reportgift transactions on August 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, Chief Accounting Officer and senior financial and accounting officers.Among other matters, the Code of Conduct establishes policies to deterwrongdoing to promote (i) both honest and ethical conduct, includingethical handling of actual or apparent conflicts of interest, (ii) compliancewith applicable laws, rules and regulations, (iii) full, fair,accurate, timely and understandable disclosure in reports and documents that wefile with or submit to the SEC and in public communications and (iv) promptinternal reporting of violations of the Code of Conduct and accountability foradherence to the Code of Conduct. In addition, we provide an ethics line forreporting any violations of the Code of Conduct on a confidential basis. A copyof our Code of Conduct is available on our website at *www.natr.com*or upon request, without charge, from the Company by sending a written requestto the following: Nature’s Sunshine Products, Inc., Code of ConductRequest, Attn: Legal Department, 75 East 1700 South, P.O. Box 19005,Provo, Utah 84605. We will post on our internet website all amendments to, orwaivers from, our Code of Conduct that are required to be disclosed byapplicable law.

 

**Item 11. Executive Compensation**

 

**Compensation Discussion and Analysis**

 

ThisCompensation Discussion and Analysis provides disclosure about the policies andobjectives underlying the compensation programs for our executive officers.Accordingly, we will address and analyze each element of the compensationprovided to our Chief Executive Officer, our Chief Financial Officer and theother executive officers named in the Summary Compensation Table which followsthis discussion; these individuals are referred to as the named executiveofficers. The Compensation Committee of our Board of Directors administers thecompensation programs for our Chief Executive Officer. Our Chief ExecutiveOfficer administers the compensation programs for our other executive officers.

 

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

 

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

 

·                  aligneach executive officer’s interests with those of the Company’s shareholders;and

 

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

 

Each executive officer’s compensation packagehas historically consisted of three elements: (i) a base salary, (ii) acash bonus based upon pre-established financial objectives and the individualofficer’s personal performance, and (iii) participation in long-term,stock-based incentive awards, in the form of stock options, designed to alignand strengthen the mutuality of interests between our executive officers andour shareholders.

 

When establishing the compensation levels forthe executive officers, we take into account the Company’s overall financialperformance and its evaluation of each executive officer’s individualperformance level and his or her potential contribution to the Company’s futuregrowth. Over the years, the Company has endeavored to follow apay-for-performance philosophy of conservative base and competitive short-termbonus when Company performance measures have been achieved.

 

In setting executive officer compensation,the Compensation Committee and our Chief Executive Officer review a report (the“Executive Compensation Report”) prepared by our Director of Human Resources inorder to assess the competitiveness of the Company’s compensation programs incomparison to market averages. The Executive Compensation Report examined thedata contained in Watson Wyatt’s Top Management Compensation Survey and Mercer’sExecutive Compensation Survey for 2007-08. These surveys provide information oncompensation paid by surveyed companies nationally crossing multiple industriesand sizes. These two surveys are the largest executive compensation surveys inthe U.S. with hundreds of companies participating from all industries, bothpublic and private. The Executive Compensation Report compared the Company’sexecutive compensation practices including base pay, short-term 

 

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incentives,long-term incentives and other practices to such survey data. In addition, weperform regression analysis on the raw data from the surveys to provideappropriate comparisons based on company size. The regression analysis providesan expected level of each type of compensation based on our sales revenue; thedata from such analysis is used as the “market” data. The ExecutiveCompensation Report compared the base pay, bonus and total compensation ofofficers on an individual basis to the market data.

 

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

 

*Salary.*  The base salary level of each executiveofficer is reviewed in the last quarter of each year, with any salaryadjustments for the upcoming year to be effective on or about January 1 ofthat year. The Company targets base salaries to be in the range of 80% to 90%of market. However, the Company may also consider the performance of theexecutive, contributions by the executive towards the Company’s mission/goalsand tenure at the Company. The Company believes that this component ofcompensation should provide a level of security and stability from year to yearand not be dependent to any material extent on the Company’s financialperformance. The Compensation Committee approved a salary increase of 6% forour Chief Executive Officer for 2008. The salary levels for Mr. Bunker, Mr. DeWyze,Mr. Jarvis and Mr. Yates increased approximately 6%, 2.1%, 5.5% and12.5%, respectively. These increases were to bring these executives’ salariesin-line with market rates. After examining the market data, the Company foundthat, on average, our officers’ base salaries for 2008 were approximately 18%below market.

 

*Incentive Compensation.*  The bonus structure is generally designed tobring the total cash compensation for our executives up to market in a typicalyear and to exceed market when justified by company performance. TheCompensation Committee determines the bonus payable to Mr. Faggioli, and Mr.Faggioli determines the bonus amounts payable to Messrs. Bunker, DeWyze, Jarvisand Yates.  For 2008, the bonus for Mr.Faggioli was to be determined by the Compensation Committee at its solediscretion based on overall Company performance and Mr. Faggioli’s individualperformance. Similarly, the 2008 bonus for each other executive officer was tobe determined by Mr. Faggioli at his sole discretion based on overall Companyperformance and such executive officer’s individual performance. 

 

Actual amounts of 2008 bonuses weredetermined on March 13, 2009.  TheCompensation Committee awarded Mr. Faggioli a bonus in the amount of $171,107(which includes a $1,600 bonus for 25 years of service to the Company). Inexercising its discretion, the Compensation Committee reviewed the Company’sperformance measured in terms of the average operating income and sales revenuelevels attained by NSP United States, NSP International and Synergy Worldwidefor 2008 and the committee’s past practices for bonus awards to Mr. Faggioli.No portion of his bonus was directly tied to the attainment of any specificpre-established performance goals, but was determined based on the Company’s performancemeasured in terms of operating income and sales revenue levels as described. 

 

The bonuses for the other executive officerswere as follows:   Mr. Bunker - $80,385;Mr. DeWyze - $73,939; Mr. Jarvis - $70,147 and Mr. Yates - $82,350. Indetermining the bonus for each executive officer, Mr. Faggioli reviewed theCompany’s performance measured in terms of the operating income and salesrevenue levels attained by the divisions for which the executive was primarilyresponsible. No portion of any executive officer’s bonus was tied directly tothe attainment of any specific pre-established performance goals, but wasdetermined based on the Company’s performance measured in terms of operatingincome and sales revenue levels as described.

 

*Long-Term Incentives.*  In prior years, we have structured ourlong-term incentive program for executive officers in the form of option grantsunder our 1995 Stock Option Plan which was administered by our CompensationCommittee. Each option grant has been designed to align the interests of theexecutive officer with those of the shareholders and to provide him with asignificant incentive to manage the company from the perspective of an ownerwith an equity stake in the business. Each option grant allows the officer toacquire shares of our common stock at a fixed price per share over a specifiedperiod, usually ten years. Options granted in past years have generally vestedand become exercisable in a series of installments over a period of one tothree years measured from the grant date, contingent upon the officer’scontinued employment. All outstanding options are fully vested at this time.The 1995 Stock Option Plan terminated in 2005, and no options have been grantedunder this plan since its termination. No non-plan options have been granted tothe named executive officers since March 15, 2007.

 

***Executive OfficerPerquisites.*** In 2008, we paid premiums on $250,000 life insurance policies for ournamed executive officers and provided our named executive officers theopportunity to receive up to $2,500 for tuition assistance; however, none ofour executive officers elected to receive tuition assistance. We do not believethese perquisites are an important factor in retaining our executive officers.We use bonuses and other performance based incentives to retain our executiveofficers.

 

***Other Programs.***  Our executive officers are eligible toparticipate in our 401(k) employee savings plan on the same basis as allother regular U.S. employees.

 

***DeferredCompensation Programs.***  The Company has adopted a deferredcompensation plan for its executive officers, certain other selected employeesand its non-employee directors to enable them to save for retirement bydeferring their income and the associated tax to a future date followingtermination of employment. Under the Supplemental Elective Deferral Plan (the “SEDP”),the named executive officers and other participants have the opportunity todefer compensation to future dates specified by the participant with a returnbased on investment alternatives selected by the participant. The Companybelieves that the SEDP is comparable to similar plans offered by itscompetitors. The amounts deferred under the SEDP for the named executive officersare reported below in the Summary Compensation Table and the NonqualifiedDeferred Compensation Table.

 

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***Officer EmploymentAgreements.*** We have entered into employment agreements with each of our namedexecutive officers. We believe that the employment agreements with ourexecutive officers achieve two important goals crucial to our long-term financialsuccess: the long-term retention of our senior executives and their commitmentto the attainment of our strategic objectives. The agreements will allow ourexecutive officers to continue to focus their attention on our businessoperations and strategic plans without undue concern over their own financialsituations during periods when substantial disruptions and distractions mightotherwise prevail. Each employment agreement provides for an initial term oftwelve months which automatically renews for additional twelve month periodsprovided neither party terminates the employment relationship. Upon thecessation of a named executive officer’s employment due to termination by theCompany without cause, the Company’s non-renewal of the employment term, deathor incapacity, the named executive officer will receive severance benefits inan amount equal to his or her base salary for the year of termination andcontinued medical insurance coverage for 12 months.

 

A summary of the material terms of theofficer employment agreements, together with a quantification of the severancebenefits payable under those agreements to each of the executive officers namedin the Summary Compensation Table may be found in the section below entitled “PotentialPayments Upon Termination or Change in Control.”

 

***Compensation Committee Interlocks and InsiderParticipation.*** The members of the Compensation Committee of the Board of Directors areRobert K. Bowen, Kristine F. Hughes and Pauline Hughes Francis.  No member of the Compensation Committee atany time during 2008 was an officer or employee of the Company.  Mr. Bowen has not been an officer oremployee of the Company at any time. Both Mmes. Hughes and Francis are founders of the Company and have beenat various times officers or employees of the Company or Hughes DevelopmentCorporation, a predecessor of the Company, since 1972.  None of our executive officers serves on theboard of directors or compensation committee of any entity that has one or moreexecutive officers serving as a member of our Board or our CompensationCommittee.

 

Mrs. Hughes is the spouse of Eugene L.Hughes, a member of our Board of Directors, and Mrs. Francis is his formersister-in-law.  Mr. Hughespreviously informed the Company of his intention to retire as an employee ofthe Company effective as of December 22, 2008.  The Company and Mr. Hughes subsequentlyentered into a Retirement and Consulting Agreement, dated as of December 9,2008, pursuant to which Mr. Hughes provides consulting services to theCompany for an initial term of eight years following his retirement.  In exchange for such consulting services, Mr. Hugheswill receive (i) annual compensation of $215,000 for the first two yearsof service, (ii) annual compensation of $100,000 for the remainder of theinitial term, (iii) annual compensation of $50,000 after the initial term,and (iv) certain medical and life insurance benefits.

 

Other than the Retirement and ConsultingAgreement with Mr. Hughes, no member of the Compensation Committee at anytime during 2008 had any relationship with us to be disclosed as a relatedperson transaction.

 

***Compliance withInternal Revenue Code Section 162(m).***  Section 162(m) of the InternalRevenue Code disallows a tax deduction to publicly held companies forcompensation paid to certain of their executive officers to the extent suchcompensation exceeds $1.0 million per covered officer in any year. Thelimitation applies only to compensation that is not considered to beperformance-based under the terms of Section 162(m). Non-performance-basedcompensation paid to our executive officers for 2008 did not exceed the $1.0million limit per officer. However, as we continue to increase salaries andbonuses for our executive officers, together with the amounts recognized fromequity awards, it is possible that the non-performance-based compensationpayable to our executive officers will exceed the $1.0 million limit in one ormore future years. We believe that in establishing the cash and equityincentive compensation programs for our executive officers, the potentialdeductibility of the compensation payable under those programs should be onlyone of a number of relevant factors taken into consideration, and not the solegoverning factor. For that reason, we may deem it appropriate to provide one ormore executive officers with the opportunity to earn incentive compensation,whether through cash bonus programs tied to our financial performance orthrough equity awards, which together with base salary in the aggregate may bein excess of the amount deductible by reason of Section 162(m) orother provisions of the Internal Revenue Code. We believe it is important tomaintain cash and equity incentive compensation at the levels needed to attractand retain the executive officers essential to our success, even if all or partof that compensation may not be deductible by reason of the Section 162(m) limitation.

 

**Compensation Committee Report**

 

The Compensation Committee has reviewed anddiscussed the Compensation Discussion and Analysis disclosure with management.Based on this review and discussion, the Compensation Committee recommended tothe Board of Directors that the Compensation Discussion and Analysis beincluded in the Company’s Annual Report on Form 10-K for the year ended December 31,2008.

 

Submitted by:

Robert K. Bowen

Kristine F. Hughes

Pauline Hughes Francis

 

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**Executive Compensation**

 

The following table sets forth a summary, forthe years ended December 31, 2008, 2007 and 2006 of the compensation ofthe principal executive officer, the principal financial officer, the threemost highly compensated executive officers of the Company (not including theprincipal executive officer and the principal financial officer) whose totalcompensation for the 2008 fiscal year was in excess of $100,000 and who wereserving as executive officers at the end of 2008. The listed individuals shallbe hereinafter referred to as the “named executive officers.” No otherexecutive officers who would have otherwise been includable in such table onthe basis of total compensation for 2008 have been excluded by reason of theirtermination of employment or change in executive status during that year.

 

**Summary Compensation Table**

 
| **Name & Principal Position**  | ** ** | **Year** | ** ** | **Salary  ($)(1)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)(2)** | ** ** | **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,                                 |       | 2008     |       | 393,260            |       | 171,107        |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | 15,084                                   |       | 579,451        |       |
| President &  CEO                         |       | 2007     |       | 371,000            |       | —         |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | 14,126                                   |       | 385,126        |       |
|                                              |       | 2006     |       | 350,000            |       | —         |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | 13,860                                   |       | 363,860        |       |
|                                              |       |     |       |               |       |           |       |                   |       |                       |       |                                               |       |                                                                                             |       |                                     |       |           |       |
| Stephen Bunker,                                   |       | 2008     |       | 212,000            |       | 80,385         |       | —                 |       | 12,221                     |       | —                                             |       | —                                                                                           |       | 12,933                                   |       | 317,539        |       |
| EVP, CFO &  Treasurer                         |       | 2007     |       | 200,000            |       | 145,338        |       | —                 |       | 46,442                     |       | —                                             |       | —                                                                                           |       | 12,007                                   |       | 403,787        |       |
|                                              |       | 2006     |       | 131,250            |       | 18,081         |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | 7,283                                    |       | 156,614        |       |
|                                              |       |     |       |               |       |           |       |                   |       |                       |       |                                               |       |                                                                                             |       |                                     |       |           |       |
| John DeWyze,                                      |       | 2008     |       | 195,000            |       | 73,939         |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | 13,186                                   |       | 282,125        |       |
| EVP & VP  of                             |       | 2007     |       | 191,000            |       | 90,970         |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | 12,591                                   |       | 294,561        |       |
| Operations                                        |       | 2006     |       | 187,000            |       | 51,515         |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | 12,643                                   |       | 251,158        |       |
|                                              |       |     |       |               |       |           |       |                   |       |                       |       |                                               |       |                                                                                             |       |                                     |       |           |       |
| Jamon Jarvis,                                     |       | 2008     |       | 185,000            |       | 70,147         |       | —                 |       | 7,333                      |       | —                                             |       | —                                                                                           |       | 12,450                                   |       | 274,930        |       |
| EVP, General  Counsel & Chief Compliance |       | 2007     |       | 145,833            |       | 45,957         |       | —                 |       | 27,865                     |       | —                                             |       | —                                                                                           |       | 7,975                                    |       | 227,630        |       |
| Officer                                           |       | 2006     |       | —             |       | —         |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | —                                   |       | —         |       |
|                                              |       |     |       |               |       |           |       |                   |       |                       |       |                                               |       |                                                                                             |       |                                     |       |           |       |
| Bryant Yates,                                     |       | 2008     |       | 180,000            |       | 82,350         |       | —                 |       | 9,166                      |       | —                                             |       | —                                                                                           |       | 5,575                                    |       | 277,091        |       |
| President—Nature’s                      |       | 2007     |       | 160,000            |       | 200,450        |       | —                 |       | 34,831                     |       | —                                             |       | —                                                                                           |       | 2,971                                    |       | 398,252        |       |
| Sunshine Products                                 |       | 2006     |       | 115,343            |       | 28,600         |       | —                 |       | —                     |       | —                                             |       | —                                                                                           |       | 2,426                                    |       | 146,369        |       |
| International                                     |       |     |       |               |       |           |       |                   |       |                       |       |                                               |       |                                                                                             |       |                                     |       |           |       |

 

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(1)                                  Amountsfor 2008 include amounts that were deferred into the Company’s SupplementalElective Deferral Plan (“SEDP”) for 2008, as follows: Mr. Faggioli—$60,500;Mr. Bunker—$0; Mr. DeWyze—$29,354; Mr. Jarvis—$0; and Mr. Yates—$0.The SEDP provides selected employees and non-employee directors with theability to defer compensation to future dates specified by the participant witha return based on investment alternatives selected by the participant. The SEDPis more fully described in the section following the Nonqualified DeferredCompensation Plans table below.

 

(2)                                  Optionawards are calculated in the same manner as the expense of these awards that isrecognized in our consolidated financial statements. Each option award isvalued under FAS 123R, and the compensation expense relating to that award isrecognized over its vesting period. See Note 9 to the Notes to Consolidated FinancialStatements contained in the Company’s Form 10-K for the 2007 fiscal yearfor a description of the assumptions used in valuing stock awards and stockoptions. For this purpose, the estimate of forfeitures relating to vestingconditions is disregarded. The full amount of the FAS 123R value of the 2007stock options is reported under “Equity Compensation Plan” on page 88 ofthe Company’s Form 10-K for the 2007 fiscal year.

 

(3)                                  “AllOther Compensation” includes the following amounts paid by the Company for thefiscal year ended December 31, 2008. The amounts disclosed are the actualcosts to the Company of providing these benefits.

 

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| **Name**         | ** ** | **401(k) Plan  Company  Contribution ($)** | ** ** | **Life Insurance ($)** | ** ** | **Disability  Payments ($)** | ** ** | **Total ($)** | ** ** |
|------------------|------------|------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|--------------------|------------|
| Douglas Faggioli |       | 11,500                                               |       | 3,044                            |       | 540                               |       | 15,084             |       |
| Stephen Bunker   |       | 11,500                                               |       | 1,073                            |       | 360                               |       | 12,933             |       |
| John DeWyze      |       | 11,500                                               |       | 1,326                            |       | 360                               |       | 13,186             |       |
| Jamon Jarvis     |       | 11,500                                               |       | 590                              |       | 360                               |       | 12,450             |       |
| Bryant Yates     |       | 4,440                                                |       | 775                              |       | 360                               |       | 5,575              |       |

 

**Employment Agreements**

 

The Company has employment agreements inplace with each of its named executive officers. Among other things, theseemployment agreements set minimum annual base salaries for each named executiveofficer and also establish that each named executive officer is eligible toparticipate in the Company’s executive bonus program. Payment of any bonus willbe at the sole discretion of the Chief Executive Officer (or, in the case of Mr. Faggioli,at the sole discretion of the Compensation Committee). The following tableincludes the minimum annual base salary for each of the named executiveofficers under their respective employment agreements, which is subject toreview on at least an annual basis by the Chief Executive Officer (or, in thecase of Mr. Faggioli, by the Compensation Committee):

 
| **Name**         | ** ** | **Minimum Annual Base Salary ($)** | ** ** |
|------------------|------------|--------------------------------------------------------|------------|
| Douglas Faggioli |       | 393,200                                                |       |
| Stephen Bunker   |       | 200,360                                                |       |
| John DeWyze      |       | 195,000                                                |       |
| Jamon Jarvis     |       | 175,360                                                |       |
| Bryant Yates     |       | 160,360                                                |       |

 

**Grants of Plan-Based Awards in Fiscal Year2008**

 

The Company did not grant any awards to namedexecutive officers in 2008 under any incentive plan.

 

**Outstanding Equity Awards at Fiscal Year-End**

 

The following table provides certain summaryinformation concerning outstanding equity awards held by the named executiveofficers as of December 31, 2008:

 
| ** **       | ** ** | ** ** | **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 |   |
| ** **       | **TOTAL**  | ** ** | **2,000**                                                                              |       | — |   | — |   | — |   | — |   |
| ** **       | ** ** | ** ** | ** **                                                                             |       |   |   |   |   |   |   |   |   |
| 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**                                                                             |       | — |   | — |   | — |   | — |   |
| ** **       | ** ** | ** ** | ** **                                                                             |       |   |   |   |   |   |   |   |   |
| Jamon Jarvis     |       |       | 12,000                                                                                 |       | — |   | — |   | 11.85 |   | 3/14/2013 |   |
| ** **       | **TOTAL**  | ** ** | **12,000**                                                                             |       | — |   | — |   | — |   | — |   |
| ** **       | ** ** | ** ** | ** **                                                                             |       |   |   |   |   |   |   |   |   |
| Bryant Yates     |       |       | 15,000                                                                                 |       | — |   | — |   | 11.85 |   | 3/14/2013 |   |
| ** **       | **TOTAL**  | ** ** | **15,000**                                                                             |       | — |   | — |   | — |   | — |   |

 

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**Option Exercises and Stock Vested**

 

No named executive officer exercised optionsduring 2008, and no named executive officer held shares of stock that vestedduring 2008.

 

**Pension Benefits**

 

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

 

**Nonqualified Deferred Compensation Plans**

 

Information regarding the named executiveofficers’ participation in the Company’s nonqualified deferred compensation planis included below.

 

Supplemental Elective Deferral Plan. TheCompany has adopted the Nature’s Sunshine Products, Inc. SupplementalElective Deferral Plan (the “SEDP”). The following table sets forth informationrelating to the SEDP for 2008 for the named executive officers:

 
| **Name**         | ** ** | **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 |       | 60,500                                                     |       | —                                                   |       | (41,925                                               | )          | —                                          |       | 696,347                                            |       |
| Stephen Bunker   |       | —                                                     |       | —                                                   |       | —                                                |       | —                                          |       | —                                             |       |
| John DeWyze      |       | 29,354                                                     |       | —                                                   |       | (66,324                                               | )          | —                                          |       | 188,375                                            |       |
| Jamon Jarvis     |       | —                                                     |       | —                                                   |       | —                                                |       | —                                          |       | —                                             |       |
| Bryant Yates     |       | —                                                     |       | —                                                   |       | —                                                |       | —                                          |       | —                                             |       |

 

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

 

(2)                      Earnings isdefined to reflect the difference in the account balance between the beginningand end of the year, less any executive or Company contributions and anyamounts withdrawn or distributed. Earnings include realized and unrealizedgains, capital gains and dividends paid. These amounts do not constitute above-market or preferential earningsand, accordingly, are not included in amounts in the Summary Compensation Tableabove.

 

The SEDP permits the named executiveofficers, certain other employees and the Company’s non-employee directors withthe opportunity to defer specified percentages (up to 75%) of theircompensation, including amounts that could not be deferred under the Company’sTax Deferred Retirement Plan because of the limitations under such plan imposedby the Internal Revenue Code. Participants may elect deferred amounts to bepaid in monthly payments over 3 or 5 years or in a lump sum uponseparation from service. Deferrals are credited with gain or loss based on theperformance of one or more investment alternatives selected by the participantfrom among the investment funds offered by the Board. No actual investments areheld in the participants’ accounts and participants will at all times remaingeneral unsecured creditors of the Company with respect to their accountbalances.

 

**Potential Payments Upon Termination or Changein Control**

 

Included below is a summary of the materialterms and conditions of the employment agreements the Company has entered intowith its named executive officers that provide for certain payments andbenefits upon termination of employment. The employment agreements are the onlyarrangements the Company has with its named executive officers to providebenefits upon termination of employment. The Company does not have anycontract, agreement, plan or arrangement with its named executive officers thatprovides for payments at, following or in connection with a change in controlof the Company.

 

Pursuant to the terms of the employmentagreement each named executive officer has entered into with the Company, eachnamed executive officer is eligible to receive certain termination benefits.The employment agreements provide that in the event the named executive officeris terminated by the Company without cause or due to non-renewal of theemployment agreement or in the event the named executive officer’s employmentceases due to death or incapacity, he will be entitled to receive a severancepayment equal to his annual base salary for the year of termination payable inmonthly installments and continued medical insurance coverage for 12 months.Pursuant to the terms of their employment agreements, for a period of 1 yearafter the cessation of the named executive officer’s employment, the namedexecutive officer will be subject to certain non-compete and non-solicitationcovenants.

 

The following table sets forth the estimatedpayments and benefits that would have been payable to the named executiveofficers under their agreements in the termination circumstances indicatedbelow had their employment terminated on 

 

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December 31,2008. 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.

 

**Executive Benefits and Payments uponTermination Due to Termination by the Company Without Cause or Due toNon-Renewal, Death or Incapacity**

 
| ** **                           | ** ** | **Mr. Faggioli** | ** ** | **Mr. Bunker** | ** ** | **Mr. DeWyze** | ** ** | **Mr. Jarvis** | ** ** | **Mr. Yates** | ** ** |
|--------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|--------------------|------------|
| Salary severance                     |       | $                     | 393,260    |                | $          | 212,000             |       | $                   | 195,000    |               | $          | 185,000 |   | $ | 180,000 |   |
| Continued Medical Insurance Coverage |       | $                     | 7,752      |                | $          | 7,752               |       | $                   | 7,752      |               | $          | 7,752 |   | $ | 7,752 |   |
| TOTAL                                |       | $                     | 401,012    |                | $          | 219,752             |       | $                   | 202,752    |               | $          | 192,752 |   | $ | 187,752 |   |

 

**Director Compensation**

 

The following table sets forth certaininformation regarding the compensation of each individual who served as amember of our Board of Directors during the 2008 fiscal year. Except withrespect to Mr. Eugene Hughes, the compensation disclosed is for servicesrendered as a Board member during that year. Mr. Eugene Hughes was alsoour employee, and the compensation disclosed for him below reflects hiscompensation he received in his capacity as an employee. He did not receive anyadditional compensation for his Board service.

 
| **Name**               | ** ** | **Fees Earned or  Paid in Cash  ($)(1)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All Other  Compensation  ($)(2)** | ** ** | **Total  ($)** | ** ** |
|------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------|------------|
| **(a)**                | ** ** | **(b)**                                                      | ** ** | **(c)**                | ** ** | **(d)**                 | ** ** | **(e)**                                            | ** ** | **(f)**                                                                                          | ** ** | **(g)**                                  | ** ** | **(h)**        | ** ** |
| Kristine F. Hughes     |       | 145,963                                                      |       | —                 |       | —                  |       | —                                             |       | —                                                                                           |       | 4,982                                    |       | 150,945        |       |
| Pauline Hughes Francis |       | 55,363                                                       |       | —                 |       | —                  |       | —                                             |       | —                                                                                           |       | 2,660                                    |       | 58,023         |       |
| Robert Bowen           |       | 39,000                                                       |       | —                 |       | —                  |       | —                                             |       | —                                                                                           |       | 300                                      |       | 39,300         |       |
| Larry Deppe            |       | 43,160                                                       |       | —                 |       | —                  |       | —                                             |       | —                                                                                           |       | —                                   |       | 43,160         |       |
| Eugene Hughes          |       | 215,000                                                      |       | —                 |       | —                  |       | —                                             |       | —                                                                                           |       | 40,743                                   |       | 255,743        |       |

 

----

(1)                                  Consistsof retainer fees for service as a member of the Board with respect to KristineHughes, Pauline Hughes Francis and Messrs. Bowen and Deppe; Mr. Hughesreceived salary of $215,000, of which he deferred $13,000 into the SEDP.Retainers paid to Kristine Hughes and Pauline Hughes Francis were paid on amonthly basis; retainers paid to Messrs. Bowen and Deppe were paid on aquarterly basis.  The amount of retainerfees depends on the tenure of the Board member and the services being providedby that Board member.  Mmes. Hughes andFrancis have served as members of our Board for a significantly longer periodthan Messrs. Bowen and Deppe.  Ms. Hughes,as Chairperson of the Board, provides significant additional services.  Accordingly, the retainer fees for Mmes.Hughes and Francis are higher than the retainer fees paid to Messrs. Bowenand Deppe.  The aggregate paymentsinclude the following categories of payments:

 
| **Name**               | ** ** | **Retainer ($)** | ** ** | **Committee Chairperson  Additional Retainer ($)** | ** ** | **Total ($)** | ** ** |
|------------------------|------------|-----------------------|------------|-------------------------------------------------------------------|------------|--------------------|------------|
| Kristine F. Hughes     |       | 145,963               |       | —                                                            |       | 145,963            |       |
| Pauline Hughes Francis |       | 54,363                |       | 1,000                                                             |       | 55,363             |       |
| Robert Bowen           |       | 39,000                |       | —                                                            |       | 39,000             |       |
| Larry Deppe            |       | 39,160                |       | 4,000                                                             |       | 43,160             |       |
| Eugene Hughes          |       | —                |       | —                                                            |       | —             |       |

 

(2)                                  “AllOther Compensation” includes the following amounts paid by the Company for thefiscal year ended December 31, 2008:

 
| **Name**               | ** ** | **401(k) Plan  Company  Contribution  ($)** | ** ** | **Life  Insurance  Premiums  ($)** | ** ** | **Disability  Payments  ($)** | ** ** | **Product  Credit*  ($)** | ** ** | **Total  ($)** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|---------------------------|------------|----------------|------------|
| Kristine F. Hughes     |       | —                                           |       | 9,256                              |       | —                        |       | 750                       |       | 10,006         |       |
| Pauline Hughes Francis |       | —                                           |       | 1,910                              |       | —                        |       | 750                       |       | 2,660          |       |
| Robert Bowen           |       | —                                           |       | —                             |       | —                        |       | —                    |       | —         |       |
| Larry Deppe            |       | —                                           |       | —                             |       | —                        |       | —                    |       | —         |       |
| Eugene Hughes          |       | 11,500                                           |       | 27,833                             |       | 360                           |       | 1,050                     |       | 40,743         |       |

----

*                                         Representsa credit of up to $1,050 to purchase the Company’s products.

 

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

 

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

 

Equity. No stock options or other equity awards were granted to our directorsduring 2008.

 

Nonqualified Deferred Compensation.  None of our non-employee directorsparticipated in the SEDP. Mr. Hughes elected to defer under the SEDP$13,000 of the compensation he received in 2008 in his capacity as an employee.The SEDP is more fully described above in the section following theNonqualified Deferred Compensation Plans table.  The earnings on amounts deferred under theSEDP do not constitute above-market or preferential earnings and, accordingly,are not included in the Director Compensation table above.

 

**Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Shareholder Matters**

 

The following table sets forth informationregarding beneficial ownership of our Common Stock as of February 28,2009, except as otherwise stated, 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 named executiveofficers in the Summary Compensation Table and (4) all directors andexecutive officers of the Company as a group. To our knowledge and except asotherwise indicated, the persons named in the table have sole voting andinvestment power with respect to all shares shown as beneficially owned bythem, subject to community property laws where applicable. Unless we indicate otherwise,each holder’s address is c/o Nature’s Sunshine Products, Inc., 75 East1700 South, Provo, Utah 84606.

 
| **Name and Address of Beneficial Owner**                                              | ** ** | **Number of  Shares(1)** | ** ** | **Percent of  Class(2)** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                     |       |                          |       |                          |       |
| **Beneficial Owners of More than 5%**                                                                          |       |                          |       |                          |       |
| ** **                                                                                                     |       |                          |       |                          |       |
| Prescott Group Capital Management,  LLC(3)                                                                |       | 1,865,383                     |       | 12.0                          | %          |
| 1924 South Utica, Suite 1120                                                                              |       |                          |       |                          |       |
| Tulsa, OK 74104                                                                                                |       |                          |       |                          |       |
|                                                                                                           |       |                          |       |                          |       |
| Delta Partners LLC(4)                                                                                          |       | 1,785,473                     |       | 11.5                          | %          |
| One International Place, Suite 2401                                                                       |       |                          |       |                          |       |
| Boston, MA 02110                                                                                               |       |                          |       |                          |       |
|                                                                                                           |       |                          |       |                          |       |
| Paradigm Capital Management, Inc.(5)                                                                      |       | 1,573,737                     |       | 10.2                          | %          |
| 9 Elk Street                                                                                                   |       |                          |       |                          |       |
| Albany, NY                                                                                                     |       |                          |       |                          |       |
|                                                                                                           |       |                          |       |                          |       |
| Nelson Obus(6)                                                                                                 |       | 1,330,102                     |       | 8.6                           | %          |
| Wynnefield Capital Management, LLC,                                                                       |       |                          |       |                          |       |
| 450 Seventh Avenue, Suite 509,                                                                            |       |                          |       |                          |       |
| New York, New York 10123                                                                                       |       |                          |       |                          |       |
|                                                                                                           |       |                          |       |                          |       |
| Red Mountain Capital Partners LLC(7)                                                                      |       | 1,317,474                     |       | 8.5                           | %          |
| 10100 Santa Monica Blvd., Suite 925                                                                       |       |                          |       |                          |       |
| Los Angeles, CA 90067                                                                                          |       |                          |       |                          |       |
|                                                                                                           |       |                          |       |                          |       |
| First Wilshire Securities Management,  Inc(8)                                                                  |       | 1,069,939                     |       | 6.9                           | %          |
| 1224 East Green Street, Suite 200                                                                         |       |                          |       |                          |       |
| Pasadena, CA 91106                                                                                             |       |                          |       |                          |       |
|                                                                                                           |       |                          |       |                          |       |
| **Directors and Executive Officers**                                                                           |       |                          |       |                          |       |
| ** **                                                                                                     |       |                          |       |                          |       |
| Kristine F. Hughes, Chairperson of the  Board                                                                  |       | 572,089                       |       | 3.7                           | %          |
| Eugene L. Hughes, Director                                                                                     |       | 692,313                       |       | 4.5                           | %          |
| Pauline Hughes Francis, Director                                                                               |       | 1,915,221                     |       | 12.3                          | %          |
| Douglas Faggioli, President and Chief Executive  Officer                                                       |       | 155,707                       |       | 1.1                           | %          |
| 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)                                                   |       | 3,342,949                     |       | 21.6                          | %          |

 

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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 December 31,2008.

 

(2)                                  Calculatedbased on 15,510,159 shares of our Common Stock outstanding on December 31,2008, 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)                                  Basedon Schedule 13G filed with the SEC on October 24, 2008.

 

(4)                                  Basedon Schedule 13G filed with the SEC on February 12, 2009.

 

(5)                                  Basedon Form 13G/A filed with the SEC on February 10, 2009.

 

(6)                                  Basedon Form 13G/A filed with the SEC on February 17, 2009.

 

(7)                                  Basedon Schedule 13D/A filed with the SEC on December 10, 2008.

 

(8)                                  Basedon Schedule 13G/A filed with the SEC on February 13, 2009.

 

**Item 13. Certain Relationships and Related Transactions, and DirectorIndependence**

 

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

 

Mr. Eugene Hughes, a member of our Boardof Directors, previously informed the Company of his intention to retire as anemployee of the Company effective as of December 22, 2008. The Company andMr. Hughes subsequently entered into a Retirement and ConsultingAgreement, dated as of December 9, 2008, pursuant to which Mr. Hughesprovides consulting services to the Company for an initial term of eight yearsfollowing his retirement. In exchange for such consulting services, Mr. Hugheswill receive (i) annual compensation of $215,000 for the first two yearsof service, (ii) annual compensation of $100,000 for the remainder of theinitial term, (iii) annual compensation of $50,000 after the initial term,and (iv) certain medical and life insurance benefits.

 

Kristine F. Hughes is the spouse of Mr. Hughes,and Pauline Hughes Francis is his former sister-in-law.  Both Mmes. Hughes and Francis are members ofour Board of Directors.

 

**Director Independence**

 

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

 

Robert K. Bowen

Larry A. Deppe

Pauline Hughes Francis

 

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

 

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

## *** ***

We engaged Deloitte & Touche LLP asour independent, registered public accounting firm on February 2, 2007.The fees 

 

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incurred by the Company duringthe fiscal years ended December 31, 2008 and 2007 for professionalservices rendered by the Company’s principal accountant, Deloitte &Touche LLP, are set forth below.

 

**Audit Fees**

 

During the fiscal years ended December 31,2008 and 2007, Deloitte & Touche LLP billed the Company approximately$1,866,000 and $3,582,000 for professional services rendered for the audit ofthe Company’s consolidated financial statements for the fiscal year ended December 31,2008 and 2007, respectively.

 

**Tax Fees**

 

The aggregate fees billed for tax servicesrendered by Deloitte & Touche LLP for the years ended December 31,2008 and 2007 were approximately $521,000 and $713,000, respectively.

 

**Audit Related Fees and All Other Fees**

 

During the fiscal years ended December 31,2008 and 2007, Deloitte & Touche LLP did not provide any services tothe Company other than those identified above.

 

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

 

**Pre-Approval Policies and Procedures**

 

The Company pre-approves a schedule of auditand non-audit services expected to be performed by the Company’s registeredpublic accountant in a given fiscal year. In addition, the Audit Committeedelegates authority to its Chairperson to pre-approve certain additional auditand non-audit services rendered by Company’s registered public accountant(other than services that have been generally pre-approved by the AuditCommittee) during the period between meetings of the Audit Committee. The Chairpersonmust report any such pre-approval decisions to the Audit Committee at its nextscheduled meeting. During the year ended December 31, 2008, 100 percent ofthe aggregate amounts set forth above under the captions “Audit-Related Fees,” “TaxFees,” and “All Other Fees” were pre-approved by the Chairperson of the AuditCommittee and subsequently reported to the Audit Committee in accordance withthe procedures set forth above.

 

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**PART IV**

** **

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

 
| **(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, 2008 and 2007                                                                                                                                                                                      |   |
|       |       |                                                                                                                                                                                                                                                    |   |
|       |       | Consolidated  statements of operations for the years ended December 31, 2008, 2007,  and 2006                                                                                                                                                      |   |
|       |       |                                                                                                                                                                                                                                                    |   |
|       |       | Consolidated  statements of changes in shareholders’ equity and comprehensive loss for the  years ended December 31, 2008, 2007, and 2006                                                                                                     |   |
|       |       |                                                                                                                                                                                                                                                    |   |
|       |       | Consolidated  statements of cash flows for the years ended December 31, 2008, 2007,  and 2006                                                                                                                                                      |   |
|       |       |                                                                                                                                                                                                                                                    |   |
|       |       | 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) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

**Nature’s Sunshine Products, Inc.**

 
| Date: **March 18, 2009** | By:    | /s/ Douglas Faggioli                  |
|-------------------------------|--------|---------------------------------------|
|                          |   |                                  |
|                          |   | Douglas Faggioli,                     |
|                          |   | President and Chief Executive Officer |

 

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

 

| **Signature** | ** **             | **Title**  | ** **                                                      | **Date**   |
|---------------|------------------------|------------|-----------------------------------------------------------------|------------|
| ** **    | ** **             | ** ** | ** **                                                      | ** ** |
| /s/           | Kristine F. Hughes     |       | Chair of the Board and Director                                 |       | March 18, 2009 |
|          | Kristine F. Hughes     |       |                                                            |       |   |
|          |                   |       |                                                            |       |   |
| /s/           | Douglas Faggioli       |       | President and Chief Executive Officer                           |       | March 18, 2009 |
|          | Douglas Faggioli       |       |                                                            |       |   |
|          |                   |       |                                                            |       |   |
| /s/           | Stephen M. Bunker      |       | Executive Vice President,                                       |       | March 18, 2009 |
|          | Stephen M. Bunker      |       | Chief Financial Officer and Treasurer, Chief Accounting Officer |       |   |
|          |                   |       |                                                            |       |   |
| /s/           | Robert K. Bowen        |       | Director                                                        |       | March 18, 2009 |
|          | Robert K. Bowen        |       |                                                            |       |   |
|          |                   |       |                                                            |       |   |
| /s/           | Larry A. Deppe         |       | Director                                                        |       | March 18, 2009 |
|          | Larry A. Deppe         |       |                                                            |       |   |
|          |                   |       |                                                            |       |   |
| /s/           | Eugene L. Hughes       |       | Director                                                        |       | March 18, 2009 |
|          | Eugene L. Hughes       |       |                                                            |       |   |
|          |                   |       |                                                            |       |   |
| /s/           | Pauline Hughes Francis |       | Director                                                        |       | March 18, 2009 |
|          | Pauline Hughes Francis |       |                                                            |       |   |

 

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**NATURE’S SUNSHINE PRODUCTS, INC.**

**SCHEDULEII — VALUATION AND QUALIFYING ACCOUNTS**

**FOR THE YEARS ENDED DECEMBER 31, 2008, 2007,AND 2006**

*(Amounts in thousands)*

 
| **Description**                            | ** ** | **Balance at  Beginning  of Year** | ** ** | **Provisions** | ** ** | **Amounts  Written Off** | ** ** | **Amounts  Recovered** | ** ** | **Effect of  Currency  Translation** | ** ** | **Balance at  End of Year** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|----------------|------------|-------------------------------|------------|------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year ended December 31, 2008**      |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for doubtful accounts receivable |       | $                                            | 739        |           | $          | 990                           |       | $                      | (90        | )                                         | $          | 18                                         |       | $ | (185 | ) | $ | 1,472 |   |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for sales returns                |       | 55                                           |       | 113            |       | (113                          | )     | —                 |       | —                                    |       | 55                                         |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for obsolete inventory           |       | 2,815                                        |       | 1,945          |       | (1,499                        | )          | —                 |       | 25                                        |       | 3,286                                      |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation allowance                    |       | 11,290                                       |       | 3,002          |       | (306                          | )          | —                 |       | —                                    |       | 13,986                                     |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| **Year ended December 31, 2007**      |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for doubtful accounts receivable |       | $                                            | 1,129      |           | $          | (208                          | )          | $                      | (508       | )                                         | $          | 259                                        |       | $ | 67 |   | $ | 739 |   |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for sales returns                |       | 74                                           |       | 93             |       | (112                          | )          | —                 |       | —                                    |       | 55                                         |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| 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 sales returns                |       | 100                                          |       | 93             |       | (119                          | )          | —                 |       | —                                    |       | 74                                         |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Allowance for obsolete inventory           |       | 4,641                                        |       | 736            |       | (2,052                        | )          | —                 |       | —                                    |       | 3,325                                      |       |
|                                       |       |                                         |       |           |       |                          |       |                   |       |                                      |       |                                       |       |
| Tax valuation allowance                    |       | 5,297                                        |       | 2,525          |       | —                        |       | —                 |       | —                                    |       | 7,822                                      |       |

 

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** **

**LIST OF EXHIBITS**

 
| ** **        | ** ** | ** **  | ** **                                                                                                                                                | **Located At**    |
|-------------------|------------|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
| ** **        | ** ** | ** **  | ** **                                                                                                                                                | **Sequentially**       |
| **Item No.** | ** ** | **Exhibit** | ** **                                                                                                                                                | **Numbered Page** |
|              |       |        |                                                                                                                                                      |                   |
|              | 3.1(1)     |        | Restated Articles of Incorporation.                                                                                                                       |                   |   |
|              | 3.2(1)     |        | By-laws, as amended.                                                                                                                                      |                   |   |
|              | 10.1(1)*   |        | Nature’s Sunshine Products, Inc. Tax Deferred Retirement Plan,  as restated as of March 1, 2008.                                           |                   |   |
|              | 10.2(1)*   |        | Nature’s Sunshine Products, Inc. Supplemental Elective Deferral  Plan, as restated effective as of January 1, 2008.                        |                   |   |
|              | 10.3(1)*   |        | 1995 Stock Option Plan, as amended.                                                                                                                       |                   |   |
|              | 10.4(1)*   |        | Form of Stock Option Agreement (1995 Stock Option Plan).                                                                                             |                   |   |
|              | 10.5(1)*   |        | Employment Agreement, dated as of April 16, 2001, by and between  Nature’s Sunshine Products, Inc. and William J. Keller.                  |                   |   |
|              | 10.6(2)*   |        | Employment Agreement, dated as of December 30, 2008, by and  between Nature’s Sunshine Products, Inc. and Greg Halliday.                   |                   |   |
|              | 10.7(2)*   |        | Employment Agreement, dated as of December 30, 2008, by and  between Nature’s Sunshine Products, Inc. and Douglas Faggioli.                |                   |   |
|              | 10.8(3)*   |        | Employment Agreement, dated as of December 21, 2007, between  Nature’s Sunshine Products, Inc. and Stephen M. Bunker.                      |                   |   |
|              | 10.9(2)*   |        | Amendment to Employment Agreement, dated as of December 30,  2008, by and between Nature’s Sunshine Products, Inc. and Stephen M.  Bunker. |                   |   |
|              | 10.10(3)*  |        | Employment Agreement, dated as of December 21, 2007, by and  between Nature’s Sunshine Products, Inc. and Bryant J. Yates.                 |                   |   |
|              | 10.11(2)*  |        | Amendment to Employment Agreement, dated as of December 30,  2008, by and between Nature’s Sunshine Products, Inc. and Bryant J.  Yates.   |                   |   |
|              | 10.12(2)*  |        | Employment Agreement, dated as of December 30, 2008, by and  between Nature’s Sunshine Products, Inc. and John DeWyze.                     |                   |   |
|              | 10.13(4)*  |        | Retirement and Consulting Agreement, dated as of December 9,  2008, by and between Nature’s Sunshine Products, Inc. and Eugene Hughes.     |                   |   |
|              | 10.14(5)*  |        | Employment Agreement, dated as of December 21, 2007, by and between  Nature’s Sunshine Products, Inc. and Jamon Jarvis.                    |                   |   |
|              | 10.15(5)*  |        | Amendment to Employment Agreement, dated as of December 30,  2008, by and between Nature’s Sunshine Products, Inc. and Jamon Jarvis.       |                   |   |
|              | 14(1)      |        | Nature’s Sunshine Products, Inc. Code of Conduct.                                                                                               |                   |   |
|              | 21(5)      |        | List of Subsidiaries of Registrant.                                                                                                                       |                   | 103 |
|              | 23.1(5)    |        | Consent of Independent Registered Public Accounting Firm.                                                                                                 |                   | 104 |
|              | 31.1(5)    |        | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) under  the Securities Exchange Act of 1934, as amended.                    |                   | 105 |
|              | 31.2(5)    |        | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) under  the Securities Exchange Act of 1934, as amended.                    |                   | 106 |
|              | 32.1(6)    |        | Certification of Chief Executive Officer pursuant to 18 U.S.C. §  1350.                                                                              |                   | 107 |
|              | 32.2(6)    |        | Certification of Chief Financial Officer pursuant to 18 U.S.C. §  1350.                                                                              |                   | 108 |

 

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(1)      Previously filed with the SEC on October 7,2008 as an exhibit to the Annual Report on Form 10-K for the year ended December 31,2006 and is incorporated herein by reference.

(2)      Previously filed with the SEC on January 12,2009 as an exhibit to the Current Report on Form 8-K and is incorporatedherein by reference.

(3)      Previously filed with the SEC on December 31,2007 as an exhibit to the Current Report on Form 8-K and is incorporatedherein by reference.

(4)      Previously filed with the SEC on February 12,2009 as an exhibit to the registration statement on Form 10 and isincorporated herein by reference.

(5)      Filed herewith.

(6)      Furnished herewith.

 

*         Management contract or compensatoryplan.

 

90

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