##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 0-26272
 NATURAL HEALTH TRENDS CORP.
  Delaware
    
    59-2705336(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)2050 Diplomat DriveDallas, Texas
    
    75234(Address of principal executive offices)
    
    (Zip code)
   Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.001 par value
    
    The Nasdaq Stock Market LLC(Nasdaq Capital Market)
 None
 Yes o No þ
 Yes o No þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Small reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    21Item 3. Legal Proceedings
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    24Item 6. Selected Financial Data
    
    
    24Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 8. Financial Statements and Supplementary Data
    
    
    34Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    61Item 9A(T). Controls and Procedures
    
    
    61Item 9B. Other Information
    
    
    62PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    62Item 11. Executive Compensation
    
    
    62Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    62Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    62Item 14. Principal Accounting Fees and Services
    
    
    62PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    63Signatures
    
    
    64Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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FORWARD-LOOKING STATEMENTS
    
    
    we may continue to experience substantial negative cash flows;
 
    
    adverse cash flow consequences from leverage and debt service obligations;
 
    
    substantial cash payments could be required upon an event of default under our variable
rate convertible debentures;
 
    
    covenants and restrictions in certain investor agreements could restrict our ability to
operate and fund our business;
 
    
    we may need to seek additional debt or equity financing on unfavorable terms, if
available at all;
 
    
    our dependence on the Hong Kong and China markets and our vulnerability to sometimes
unpredictable changes in those markets;
 
    
    our ability to attract and retain distributors;
 
    
    our ability to recruit and retain key management, directors and consultants;
 
    
    our inability to directly control the marketing of our products;
 
    
    our inability to control our distributors to the same extent as if they were our own
employees;
 
    
    our ability to protect or use our intellectual property rights;
 
    
    adverse publicity associated with our products, ingredients or network marketing
programs, or those of similar companies;
 
    
    our ability to maintain or expand the number of our distributors or their productivity
levels;
 
    
    changes to our distributor compensation plan may not be accepted;
 
    
    our failure to properly pay business taxes or customs duties, including those of China;
 
    
    risks associated with operating internationally;
 
    
    risks associated with the amount of compensation paid to distributors, which can affect
our profitability;
 
    
    we face risks related to litigation;
 
    
    we rely on our suppliers product liability insurance and product liability claims
could hurt our business;
 
    
    our internal controls and accounting methods may require further modification;
 
    
    we could be adversely affected if we fail to maintain an effective system of internal
controls;
 
    
    risks associated with our reliance on information technology systems;




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
    
    risks associated with the extensive regulation of our business and the implications of
changes in such regulations;
 
    
    currency exchange rate fluctuations could lower our revenue and net income;
 
    
    failure of new products to gain distributor or market acceptance;
 
    
    failure of our information technology system could harm our business;
 
    
    we have a limited product line;
 
    
    our reliance on outside manufacturers;
 
    
    the intensely competitive nature of our business;
 
    
    terrorist attacks, cyber attacks, acts of war or other disasters, particularly given
the scope of our international operations;
 
    
    disappointing quarterly revenue or operating results, which could adversely affect our
stock price;
 
    
    our common stock is particularly subject to volatility because of the industry in which
we operate;
 
    
    consequences arising if an active public trading market for our common stock does not
continue;
 
    
    consequences if we fail to regain compliance with applicable Nasdaq requirements;
 
    
    failure to maintain the registration statements covering the resale of shares of common
stock for certain investors will result in liquidated damages;
 
    
    the implications of the actual or anticipated conversion or exercise of our convertible
securities; and
 
    
    future sales by us or our stockholders of shares of common stock could depress the
market price of our common stock.




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Part I
 
 Item 1. BUSINESS
 Overview of Business
    www.naturalhealthtrendscorp.com
  Our Principal Products
  
    
    Skindulgence® is a skin care system that includes a 30-Minute Non-Surgical FaceLift as
well as a spa collection for hands, feet and all-over body. The 30-Minute Non-Surgical
FaceLift is designed to create a more youthful appearance by helping to tone and firm
facial muscles, by helping to diminish fine lines and wrinkles and by helping to improve
skin tone and color. The facelift masque is coupled with a cleanser and moisturizer.
 
    
    Alura® is an intimacy enhancing cream for women.
 
    
    Premium Noni Juiceis a reconstituted morinda citrifolia fruit juice, made from organic
noni puree. Noni is a fruit native in the Samoan Islands of the South Pacific. Marketed as
a refreshing and energizing beverage, its natural flavor has been enhanced with white grape
concentrate, concord grape concentrate, pineapple juice puree and other natural flavors.
 
    
    La Vieis an energy-boosting dietary supplement described as a non-alcoholic red wine.
 
    
    Trioteinis a lactose-free whey protein powder that provides amino acid substrates
needed to stimulate the bodys production of an anti-oxidant, intracellular glutathione
peroxidase, in an effort to optimize the bodys ability to heal itself.
 
    
    Cluster Concentrateis a product created for increased and more efficient cell
hydration.
 
    
    TriFusion MaxTM is a beverage with a unique blend of exotic fruits and
berries rich in antioxidants, lycopene, and more. Its main ingredients are Acai berry,
Goji berry, the Mangosteen fruit, and the Gac fruit; each containing phytonutrients.
Phytonutrients are compounds having antioxidative properties found naturally in plant-based
foods such as fruit and vegetables.
   1




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Operations of the Business
 Operating Strategy
    
    
    Regularly introducing consumable products;
 
    
    Offering attractive commission plans; and
 
    
    Supporting the field with superior customer services.
  Sourcing of Products
 Skindulgence ® Alura ® Premium Noni
Juice
 Skindulgence ® LaVie Alura ® Premium Noni
Juice and TriFusion Max
 Marketing and Distribution
   2




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December 31,2007
    
    
    2008North America
    
    
    3,900
    
    
    
    1,310Hong Kong
    
    
    33,470
    
    
    
    20,810Taiwan
    
    
    4,650
    
    
    
    3,450South Korea
    
    
    7,130
    
    
    
    3,480Japan
    
    
    2,440
    
    
    
    1,200Europe
    
    
    2,800
    
    
    
    2,170Other
    
    
    2,610
    
    
    
    270Total
    
    
    57,000
    
    
    
    32,690
  .
   Management Information Systems
  Employees
  Seasonality
   3




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Intellectual Property
  Alura ®
  Insurance
  Working with Distributors
 Sponsorship
     4




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Compensation Plans
  
    
    Through retail markups on sales of products purchased by distributors at wholesale
prices (in some markets, sales are for personal consumption only and income may not be
earned through retail mark-ups on sales in that market); and
 
    
    Through commissions paid on product purchases made by their down-line distributors.
  Distributor Support
    
    
    Teleconferences  we hold teleconferences with company management and associate
field leadership on various subjects such as technical product discussions, distributor
organization building and management techniques.
 
    
    Internet  we maintain a website at www.nhtglobal.com. On this website, the user
can read company news, learn more about various products, sign up to be a distributor,
place orders, and track the fulfillment and delivery of their order.
 
    
    Product Literature  we offer a variety of literature to distributors, including
product catalogs, informational brochures, pamphlets and posters for individual
products.
 
    
    Toll Free Access  we offer live consumer support where a customer service
representative can address general questions or concerns.
 
    
    Broadcast E-mail  we send announcements via e-mail to all active distributors.
  5




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Technology and Internet Initiatives
 www.nhtglobal.com
 Rules Affecting Distributors
    Government Regulations
 Direct Selling Activities
  
    
    impose cancellation/product return, inventory buy-backs and cooling-off rights for
consumers and distributors;
 
    
    require us or our distributors to register with governmental agencies;
 
    
    impose reporting requirements; and
 
    
    impose upon us requirements, such as requiring distributors to maintain levels of retail
sales to qualify to receive commissions, to ensure that distributors are being compensated
for sales of products and not for recruiting new distributors.
    6




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Regulation of Our Products
   Other Regulatory Issues
    7




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Product Warranties and Returns
  Our Industry
   Competition
  
 Item 1A. RISK FACTORS
  We May Continue To Experience Substantial Negative Cash Flows, Which May Have A Significant Adverse
Effect On Our Business And Could Threaten Our Solvency.
   8




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Leverage And Debt Service Obligations Adversely Affect Our Cash Flows .
  
    
    required us to dedicate a substantial portion of our cash flows from operations and
other capital resources to debt service;
 
    
    made it difficult for us to obtain other financing in the future for working capital,
acquisitions or other purposes;
 
    
    made us more vulnerable to industry downturns and competitive pressures; and
 
    
    limited our flexibility in planning for, and reacting to changes in, our business.
  We Could Be Required To Make Substantial Cash Payments Upon An Event Of Default Under Our Variable
Rate Convertible Debentures.
  The Agreements Governing The Variable Rate Convertible Debentures And Related Warrants Issued In
Our October 2007 Financing Contain Various Covenants And Restrictions That May Limit Our Ability To
Operate And Fund Our Business.
  
    
    until such time as no investor participating in the financing holds any of the
securities purchased therein, we are prohibited from effecting or entering into an
agreement to effect any financing involving (i) the issuance or sale of common stock or
equivalent securities with an effective price or number of underlying shares that floats or
resets or otherwise varies or is subject to adjustment based on trading prices of or
quotations for shares of common stock, the market for the common stock, or our business or
(ii) any agreement to sell securities at a future-determined price; and
 
    
    for so long as any of the debentures issued in the October 2007 financing remain
outstanding, neither we nor any of our subsidiaries may incur indebtedness for borrowed
money other than permitted indebtedness, create or suffer liens other than some permitted
liens, amend our charter documents in certain circumstances, repurchase shares of common
any of our equity securities other then in certain permitted circumstances, repay certain
indebtedness before its due date, pay cash dividends on stock other than our Series A
preferred stock, or enter into certain transactions with affiliates.
   9




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If We Continue To Experience Negative Cash Flows, We May Need To Seek Additional Debt Or Equity
Financing, Which May Not Be Available On Acceptable Terms Or At All. If Available, It Could Have A
Dilutive Effect On The Holdings Of Existing Stockholders.
  Because Our Hong Kong Operations Account For A Majority Of Our Overall Business, and Most Of Our
Hong Kong Business Is Derived From The Sale Of Products To Members In China, Any Material Adverse
Change In Our Business Relating To Either Hong Kong Or China Would Likely Have a Material Adverse
Impact On Our Overall Business.
       10




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Continued Adverse News About Us Could Have A Material Adverse Effect On Our Ability To Attract And
Maintain Distributors.
  We Could Be Adversely Affected By Additional Management Changes Or An Inability To Attract And
Retain Key Management, Directors And Consultants.
  As A Network Marketing Company, We Rely On An Independent Sales Force And We Do Not Have Direct
Control Over The Marketing Of Our Products.
  Since We Cannot Exert The Same Level Of Influence Or Control Over Our Independent Distributors As
We Could Were They Our Own Employees, Our Distributors Could Fail To Comply With Our Distributor
Policies And Procedures, Which Could Result in Claims Against Us That Could Harm Our Financial
Condition And Operating Results.
  We May Be Unable To Protect Or Use Our Intellectual Property Rights.
   11




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Adverse Publicity Associated With Our Products, Ingredients Or Network Marketing Program, Or Those
Of Similar Companies, Could Harm Our Financial Condition And Operating Results.
    Our Failure To Maintain And Expand Our Distributor Relationships Could Adversely Affect Our
Business.
   Changes to Our Distributor Compensation Plan May Not Gain Acceptance
   12




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Failure To Properly Pay Business Taxes Or Customs Duties, Including Those In China, Could Have A
Material Adverse Effect.
  If We Continue To Operate In Foreign Markets Our Business Becomes Increasingly Subject To Political
And Economic Risks. Changes In These Markets Could Adversely Affect Our Business.
    An Increase In The Amount Of Compensation Paid To Distributors Would Reduce Profitability.
   We Face Risks Related To Litigation That Could Have A Material Adverse Effect On Financial
Condition And Results Of Operations. We May Face Additional Litigation In The Future That Could
Also Harm Our Business.
   13




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We Do Not Have Product Liability Insurance And Product Liability Claims Could Hurt Our Business.
  
    
    our products contain contaminants or unsafe ingredients;
 
    
    our products include inadequate instructions as to their uses; or
 
    
    our products include inadequate warnings concerning side effects and interactions with
other substances.
  Our Internal Controls And Accounting Methods May Require Further Modification.
  If We Fail To Maintain An Effective System Of Internal Controls In The Future, We May Not Be Able
To Accurately Report Our Financial Results Or Prevent Fraud. As A Result, Investors May Lose
Confidence In Our Financial Reporting.
  We Rely On And Are Subject To Risks Associated With Our Reliance Upon Information Technology
Systems.
   14




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Regulatory Matters Governing Our Industry Could Have A Significant Negative Effect On Our Business.
  Direct Selling System
    15




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Product Regulations
     Product Claims, Advertising and Distributor Activities
  Transfer Pricing and Similar Regulations
   16




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Taxation Relating To Distributors
  Other Regulations
   Currency Exchange Rate Fluctuations Could Lower Our Revenue And Net Income.
     17




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Failure Of New Products To Gain Distributor And Market Acceptance Could Harm Our Business.
  System Failures Could Harm Our Business.
  We Have A Limited Product Line.
 Premium Noni Juice Skindulgence ® Alura ® La Vie
 We Do Not Manufacture Our Own Products So We Must Rely On Independent Third Parties For The
Manufacturing And Supply Of Our Products.
  The High Level Of Competition In Our Industry Could Adversely Affect Our Business.
     18




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Terrorist Attacks, Cyber Attacks, Acts Of War, Epidemics Or Other Communicable Diseases Or Any
Other Natural Disasters May Seriously Harm Our Business.
  Disappointing Quarterly Revenue Or Operating Results Could Cause The Price Of Our Common Stock To
Fall.
  Our Common Stock Is Particularly Subject To Volatility Because Of The Industry In Which We Operate.
  There Is No Assurance That An Active Public Trading Market Will Continue.
  If We Fail To Regain Compliance With Nasdaqs Minimum $1.00 Per Share Bid Price Requirement For
Continued Listing, Our Common Stock May Be Delisted From The Nasdaq Capital Market, Which May
Reduce The Price Of Our Common Stock And Levels Of Liquidity Available To Our Stockholders.
    19




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We Are Responsible For Maintaining The Effectiveness of Registration Statements Covering The Resale
Of Shares Of Common Stock Underlying Certain of Our Convertible Securities Issued In Our 2007
Private Placement Financings And Will Incur Liquidated Damage Payment Obligations And May Be
Subject To Other Liabilities If They Are Not Maintained or If We Fail To Perform Certain Other
Obligations In The Related Registration Rights Agreements.
   The Conversion Of Our Variable Rate Convertible Debentures, The Exercise Of Our Warrants Or The
Exercise Or Conversion Of Our Other Convertible Securities May Result In Substantial Dilution And
May Depress The Market Price Of Our Common Stock.
  Future Sales By Us Or Our Existing Stockholders Could Depress The Market Price Of Our Common Stock.
  
 Item 1B. UNRESOLVED STAFF COMMENTS
   20




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Item 2. PROPERTIES
   
 Item 3. LEGAL PROCEEDINGS
   th
  21




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22




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Election of Directors
    
    Shares For
    
    
    Shares WithheldRandall A. Mason
    
    
    6,402,124
    
    
    
    484,985Stefan W. Zuckut
    
    
    6,398,044
    
    
    
    489,065George K. Broady
    
    
    6,677,023
    
    
    
    210,086
 Proposal
    
    Shares For
    
    
    Shares Against
    
    
    AbstentionsApproval of the potential
issuance of shares of
common stock exceeding
19.99% of the number of
shares outstanding on
October 19, 2007, which
shares of common stock
underlie the variable rate
convertible debentures and
warrants issued in
connection with a private
placement financing, for
the purpose of complying
with applicable Nasdaq
Marketplace Rules and the
Securities Purchase
Agreement dated October
19, 2007 relating to such
private placement
financing
    
    
    2,010,460
    
    
    
    89,101
    
    
    
    14,395Approval of the increase
in the maximum aggregate
number of shares of common
stock available for
issuance under the Natural
Health Trends Corp. 2007
Equity Incentive Plan by
500,000 shares
    
    
    1,663,322
    
    
    
    445,674
    
    
    
    4,960Ratification of Lane
Gorman Trubitt, L.L.P. as
our independent registered
public accounting firm
    
    
    6,748,093
    
    
    
    64,339
    
    
    
    74,677
  23




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Part II
 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  Quarter Ended:
    
    High
    
    
    LowMarch 31, 2007
    
    $
    3.15
    
    
    $
    1.48June 30, 2007
    
    
    3.87
    
    
    
    1.71September 30, 2007
    
    
    5.33
    
    
    
    1.95December 31, 2007
    
    
    7.31
    
    
    
    1.00March 31, 2008
    
    $
    1.31
    
    
    $
    0.48June 30, 2008
    
    
    1.77
    
    
    
    0.77September 30, 2008
    
    
    1.16
    
    
    
    0.28December 31, 2008
    
    
    0.68
    
    
    
    0.21
 Holders of Record
  Dividend Policy
  
 Item 6. SELECTED FINANCIAL DATA
   24




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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Business Overview
       25




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Income Statement Presentation
  Year Ended December 31,2007
    
    
    2008North America
    
    $
    7,743
    
    
    
    10.1
    %
    
    $
    3,247
    
    
    
    7.1
    %Hong Kong
    
    
    47,240
    
    
    
    61.8
    
    
    
    30,272
    
    
    
    66.1China
    
    
    538
    
    
    
    0.7
    
    
    
    1,328
    
    
    
    2.9Taiwan
    
    
    5,861
    
    
    
    7.7
    
    
    
    4,444
    
    
    
    9.7South Korea
    
    
    9,334
    
    
    
    12.2
    
    
    
    3,805
    
    
    
    8.3Japan
    
    
    2,196
    
    
    
    2.9
    
    
    
    1,244
    
    
    
    2.7Europe
    
    
    
    
    
    
    
    
    
    
    1,223
    
    
    
    2.7Other1
    
    
    3,589
    
    
    
    4.6
    
    
    
    243
    
    
    
    0.5Total
    
    $
    76,501
    
    
    
    100.0
    %
    
    $
    45,806
    
    
    
    100.0
    %
 
 1
    
    Represents product sales to KGC Networks Ptd. Ltd. as
part of a separate agreement entered into effective December 31, 2005 upon the
sale of the Companys 51% interest in KGC to Bannks Foundation. Also included
are sales from the Latin America, Australia, New Zealand, and Southeast Asia
markets.  26




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
    
    Through retail markups on sales of products purchased by distributors at wholesale
prices (in some markets, sales are for personal consumption only and income may not be
earned through retail mark-ups on sales in that market); and
 
    
    Through commissions paid on product purchases made by their down-line distributors.
     27




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Results of Operations
  Year Ended December 31,2007
    
    
    2008Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    26.5
    
    
    
    27.7Gross profit
    
    
    73.5
    
    
    
    72.3Operating expenses:Distributor commissions
    
    
    45.9
    
    
    
    38.5Selling, general and administrative expenses
    
    
    41.7
    
    
    
    37.5Depreciation and amortization
    
    
    2.4
    
    
    
    3.2Impairment of goodwill and long-lived assets
    
    
    17.2
    
    
    
    Recovery of KGC receivable
    
    
    (0.7
    )
    
    
    Total operating expenses
    
    
    106.5
    
    
    
    79.2Loss from operations
    
    
    (33.0
    )
    
    
    (6.9
    )Other income (expense), net
    
    
    0.2
    
    
    
    (0.5
    )Loss before income taxes and minority interest
    
    
    (32.8
    )
    
    
    (7.4
    )Income tax provision
    
    
    (0.3
    )
    
    
    (1.0
    )Minority interest
    
    
    
    
    
    
    Net loss
    
    
    (33.1
    )%
    
    
    (8.4
    )%
 Net Sales.
   Cost of Sales.
 Gross Profit.
  28




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Distributor Commissions.
  Selling, General and Administrative Expenses.
 
    
    lower employee-related expense and severance costs ($1.8 million), travel-related
costs ($269,000), insurance costs ($326,000), credit card fees and assessments
($195,000), facility-related costs ($171,000), professional fees ($1.1 million) and
litigation settlement costs ($231,000) in North America;
 
    
    lower overall expense in Japan ($1.0 million), specifically employee-related expense,
due to expense reduction programs during the first nine months of 2007;
 
    
    lower employee-related expense ($2.3 million), event costs ($560,000), professional
fees ($1.6 million), public relations expense ($489,000), credit card charges and
assessments ($384,000), and other miscellaneous costs ($504,000) in Hong Kong and China;
 
    
    lower employee-related costs, event costs and other office-related costs ($512,000)
in Taiwan;
 
    
    lower operating costs due to office closures in Australia ($539,000), Mexico
($725,000), and Southeast Asia ($553,000);
 
    
    lower employee-related costs ($561,000), credit card charges and assessments
($220,000), facility-related costs ($156,000), and other miscellaneous costs ($190,000)
in South Korea;
 
    
    lower stock-based compensation expense ($291,000); partly offset by
 
    
    the reversal of the reserve established in fiscal 2004 with respect to the
allegations made by the South Korean customs agency regarding importation of Alura into
South Korea ($244,000).
 Depreciation and Amortization.
 Impairment of Goodwill and Long-Lived Assets.
  Recovery of KGC Receivable.
  29




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Other Income (Expense), Net.
 Income Taxes.
 Net Loss.
 Liquidity and Capital Resources
        30




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Alura ®
  Critical Accounting Policies and Estimates
   31




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Inventory Valuation.
 Valuation of Intangible Assets and Other Long-Lived Assets.
  Allowance for Sales Returns.
 Revenue Recognition.
  32




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Tax Valuation Allowance.
 
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   33




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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   PageReport of Lane Gorman Trubitt, L.L.P., Independent Registered Public Accounting Firm
    
    
    35Consolidated Balance Sheets
    
    
    36Consolidated Statements of Operations
    
    
    37Consolidated Statements of Stockholders Equity
    
    
    38Consolidated Statements of Cash Flows
    
    
    39Notes to Consolidated Financial Statements
    
    
    40
  34




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December 31,2007
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,282
    
    
    $
    3,491Restricted cash
    
    
    298
    
    
    
    340Accounts receivable
    
    
    418
    
    
    
    71Inventories, net
    
    
    3,585
    
    
    
    2,141Other current assets
    
    
    1,324
    
    
    
    735Total current assets
    
    
    11,907
    
    
    
    6,778Property and equipment, net
    
    
    1,537
    
    
    
    1,173Goodwill
    
    
    1,764
    
    
    
    1,764Intangible assets, net
    
    
    2,600
    
    
    
    1,800Restricted cash
    
    
    4,317
    
    
    
    3,646Deferred tax assets
    
    
    208
    
    
    
    Other assets
    
    
    2,363
    
    
    
    1,464Total assets
    
    $
    24,696
    
    
    $
    16,625LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,168
    
    
    $
    1,746Income taxes payable
    
    
    363
    
    
    
    187Accrued distributor commissions
    
    
    2,018
    
    
    
    554Other accrued expenses
    
    
    3,599
    
    
    
    2,456Deferred revenue
    
    
    3,496
    
    
    
    2,841Current portion of convertible debentures, net of discount of
$151 and $2,320 at December 31, 2007 and 2008, respectively
    
    
    203
    
    
    
    1,534Deferred tax liability
    
    
    
    
    
    
    351Other current liabilities
    
    
    3,254
    
    
    
    1,170Total current liabilities
    
    
    15,101
    
    
    
    10,839Convertible debentures, net of discount of $3,896 at December 31, 2007
    
    
    
    
    
    
    Total liabilities
    
    
    15,101
    
    
    
    10,839Commitments and contingenciesMinority interest
    
    
    33
    
    
    
    34Stockholders equity:Preferred stock, $0.001 par value; 5,000,000 shares authorized;
1,761,900 shares designated Series A convertible preferred
stock, 138,400 shares issued and outstanding at December 31,
2007 and 2008, aggregate liquidation value of $263
    
    
    124
    
    
    
    124Common stock, $0.001 par value; 50,000,000 shares authorized;
10,327,405 and 10,691,582 shares issued and outstanding at
December 31, 2007 and 2008, respectively
    
    
    10
    
    
    
    11Additional paid-in capital
    
    
    79,158
    
    
    
    79,711Accumulated deficit
    
    
    (70,989
    )
    
    
    (74,853
    )Accumulated other comprehensive income:Foreign currency translation adjustments
    
    
    1,259
    
    
    
    759Total stockholders equity
    
    
    9,562
    
    
    
    5,752Total liabilities and stockholders equity
    
    $
    24,696
    
    
    $
    16,625
   36




---



##### Table of Contents



Year Ended December 31,2007
    
    
    2008Net sales
    
    $
    76,501
    
    
    $
    45,806Cost of sales
    
    
    20,290
    
    
    
    12,681Gross profit
    
    
    56,211
    
    
    
    33,125Operating expenses:Distributor commissions
    
    
    35,095
    
    
    
    17,650Selling, general and administrative
expenses (including stock-based
compensation expense of $845 and $554
during 2007 and 2008, respectively)
    
    
    31,921
    
    
    
    17,171Depreciation and amortization
    
    
    1,808
    
    
    
    1,456Impairment of goodwill
    
    
    12,381
    
    
    
    Impairment of long-lived assets
    
    
    795
    
    
    
    30Recovery of KGC receivable
    
    
    (565
    )
    
    
    Total operating expenses
    
    
    81,435
    
    
    
    36,307Loss from operations
    
    
    (25,224
    )
    
    
    (3,182
    )Other income (expense), net:Gain (loss) on foreign exchange
    
    
    11
    
    
    
    (121
    )Interest income
    
    
    477
    
    
    
    107Interest expense (including amortization
of debt issuance costs and accretion of
debt discount of $245 and $2,083 during
2007 and 2008, respectively)
    
    
    (352
    )
    
    
    (2,424
    )De-recognition of commission liabilities
    
    
    
    
    
    
    2,237Other
    
    
    7
    
    
    
    (25
    )Total other income (expense), net
    
    
    143
    
    
    
    (226
    )Loss before income taxes and minority interest
    
    
    (25,081
    )
    
    
    (3,408
    )Income tax provision
    
    
    (200
    )
    
    
    (456
    )Minority interest
    
    
    (6
    )
    
    
    Net loss
    
    
    (25,287
    )
    
    
    (3,864
    )Beneficial conversion feature on preferred stock
    
    
    (1,574
    )
    
    
    Preferred stock dividends
    
    
    (91
    )
    
    
    (17
    )Net loss attributable to common stockholders
    
    $
    (26,952
    )
    
    $
    (3,881
    )Loss per share  basic and diluted
    
    $
    (3.15
    )
    
    $
    (0.40
    )Weighted-average number of shares outstanding
    
    
    8,555
    
    
    
    9,677
   37




---



##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBALANCE, December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    8,199,933
    
    
    $
    8
    
    
    $
    70,042
    
    
    $
    (44,128
    )
    
    $
    1,053
    
    
    $
    26,975Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,287
    )
    
    
    
    
    
    
    (25,287
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206
    
    
    
    206Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,081
    )Issuance of preferred stock and common stock warrants
    
    
    1,759,307
    
    
    
    1,574
    
    
    
    
    
    
    
    
    
    
    
    986
    
    
    
    
    
    
    
    
    
    
    
    2,560Beneficial conversion feature on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,574
    
    
    
    (1,574
    )
    
    
    
    
    
    
    Conversion of preferred stock
    
    
    (1,620,907
    )
    
    
    (1,450
    )
    
    
    1,620,907
    
    
    
    2
    
    
    
    1,448
    
    
    
    
    
    
    
    
    
    
    
    Receipt of common stock upon settlement of promissory
note
    
    
    
    
    
    
    
    
    
    
    (642,611
    )
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock warrants in conjunction with
convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,491
    
    
    
    
    
    
    
    
    
    
    
    2,491Beneficial conversion feature on convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,682
    
    
    
    
    
    
    
    
    
    
    
    1,682Issuance of restricted stock, net
    
    
    
    
    
    
    
    
    
    
    1,089,176
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    90Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845
    
    
    
    
    
    
    
    
    
    
    
    845BALANCE, December 31, 2007
    
    
    138,400
    
    
    
    124
    
    
    
    10,327,405
    
    
    
    10
    
    
    
    79,158
    
    
    
    (70,989
    )
    
    
    1,259
    
    
    
    9,562Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,864
    )
    
    
    
    
    
    
    (3,864
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (500
    )
    
    
    (500
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,364
    )Issuance of restricted stock, net
    
    
    
    
    
    
    
    
    
    
    364,177
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    554
    
    
    
    
    
    
    
    
    
    
    
    554BALANCE, December 31, 2008
    
    
    138,400
    
    
    $
    124
    
    
    
    10,691,582
    
    
    $
    11
    
    
    $
    79,711
    
    
    $
    (74,853
    )
    
    $
    759
    
    
    $
    5,752
   38




---



##### Table of Contents



Year Ended December 31,2007
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (25,287
    )
    
    $
    (3,864
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    1,008
    
    
    
    656Amortization of intangibles
    
    
    800
    
    
    
    800Amortization of debt issuance costs
    
    
    42
    
    
    
    356Accretion of debt discount
    
    
    203
    
    
    
    1,727Minority interest
    
    
    6
    
    
    
    Stock-based compensation
    
    
    845
    
    
    
    554Imputed interest on KGC installment payable
    
    
    (228
    )
    
    
    Recovery of KGC receivable
    
    
    (565
    )
    
    
    Impairment of long-lived assets
    
    
    795
    
    
    
    30Impairment of goodwill
    
    
    12,381
    
    
    
    Deferred income taxes
    
    
    7
    
    
    
    526Changes in assets and liabilities:Accounts receivable
    
    
    47
    
    
    
    293Inventories, net
    
    
    2,312
    
    
    
    1,328Other current assets
    
    
    927
    
    
    
    581Other assets
    
    
    250
    
    
    
    313Accounts payable
    
    
    (1,268
    )
    
    
    (424
    )Income taxes payable
    
    
    64
    
    
    
    (185
    )Accrued distributor commissions
    
    
    (1,829
    )
    
    
    (1,407
    )Other accrued expenses
    
    
    (1,693
    )
    
    
    (1,174
    )Deferred revenue
    
    
    (2,143
    )
    
    
    (636
    )Other current liabilities
    
    
    110
    
    
    
    (2,204
    )Net cash used in operating activities
    
    
    (13,216
    )
    
    
    (2,730
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (341
    )
    
    
    (299
    )Decrease (increase) in restricted cash
    
    
    (475
    )
    
    
    497Decrease in certificate of deposit
    
    
    1,283
    
    
    
    Proceeds from KGC receivable (see Note 1)
    
    
    1,183
    
    
    
    Net cash provided by investing activities
    
    
    1,650
    
    
    
    198CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of convertible debentures and warrants
    
    
    3,740
    
    
    
    Debt issuance costs
    
    
    (442
    )
    
    
    Proceeds from short-term debt
    
    
    
    
    
    
    145Payments on convertible debentures and other debt
    
    
    
    
    
    
    (541
    )Proceeds from issuance of preferred stock and warrants, net
    
    
    2,560
    
    
    
    Proceeds from issuance of common stock
    
    
    90
    
    
    
    Net cash provided by (used in) financing activities
    
    
    5,948
    
    
    
    (396
    )Effect of exchange rates on cash and cash equivalents
    
    
    (36
    )
    
    
    137Net decrease in cash and cash equivalents
    
    
    (5,654
    )
    
    
    (2,791
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    11,936
    
    
    
    6,282CASH AND CASH EQUIVALENTS, end of period
    
    $
    6,282
    
    
    $
    3,491
   39




---



##### Table of Contents



Nature of Operations
   Principles of Consolidation
  Use of Estimates
   Reclassification
  Cash and Cash Equivalents
  Restricted Cash
    40




---



##### Table of Contents



Inventories
  Property and Equipment
  Goodwill and Other Intangible Assets
   Impairment of Long-Lived Assets
  Income Taxes
      41




---



##### Table of Contents



Foreign Currency
  Revenue Recognition
      Income Per Share
    Year Ended December 31,2007
    
    
    2008Options to purchase common stock
    
    
    1,041,458
    
    
    
    70,500Warrants to purchase common stock
    
    
    6,281,310
    
    
    
    6,281,310Non-vested restricted stock
    
    
    1,044,186
    
    
    
    1,255,478Convertible preferred stock
    
    
    1,759,307
    
    
    
    138,400Convertible debentures
    
    
    1,700,000
    
    
    
    1,700,000
  42




---



##### Table of Contents



Certain Risks and Concentrations
    Premium Noni Juice, Skindulgence ® Alura ® La Vie Skindulgence ® La Vie Premium Noni Juice Alura ®
  Fair Value of Financial Instruments
    43




---



##### Table of Contents



Sale of KGC Networks
  De-Recognition of Commission Liabilities
  Recent Accounting Pronouncements
      44




---



##### Table of Contents



December 31,2007
    
    
    2008Property and equipment:Office equipment
    
    $
    1,507
    
    
    $
    1,088Office software
    
    
    805
    
    
    
    561Furniture and fixtures
    
    
    380
    
    
    
    197Plant equipment
    
    
    185
    
    
    
    188Leasehold improvements
    
    
    1,772
    
    
    
    1,528Property and equipment, at cost
    
    
    4,649
    
    
    
    3,562Accumulated depreciation and amortization
    
    
    (3,112
    )
    
    
    (2,389
    )$
    1,537
    
    
    $
    1,173Noncurrent restricted cash:Funds held for direct selling license application in China
    
    $
    2,806
    
    
    $
    2,941Funds held for consumer indemnity insurance in South Korea (see Note 5)
    
    
    641
    
    
    
    Reserve for credit card processor in South Korea (see Note 1)
    
    
    870
    
    
    
    644Other
    
    
    
    
    
    
    61$
    4,317
    
    
    $
    3,646
  45




---



##### Table of Contents



December 31,2007
    
    
    2008Other accrued expenses:Sales returns
    
    $
    754
    
    
    $
    517Employee-related expense
    
    
    1,100
    
    
    
    281Professional fees
    
    
    493
    
    
    
    47Warehousing and inventory-related expense
    
    
    203
    
    
    
    1,041Litigation settlement
    
    
    
    
    
    
    250Other
    
    
    1,049
    
    
    
    320$
    3,599
    
    
    $
    2,456Deferred revenue:Unshipped product
    
    $
    705
    
    
    $
    1,877Enrollment package revenue
    
    
    2,791
    
    
    
    964$
    3,496
    
    
    $
    2,841Other current liabilities:Unclaimed checks
    
    $
    2,636
    
    
    $
    860Other taxes payable
    
    
    351
    
    
    
    84Other
    
    
    267
    
    
    
    226$
    3,254
    
    
    $
    1,170
   Balance, December 31, 2006
    
    $
    14,145Impairment loss
    
    
    (12,381
    )Balance, December 31, 2007
    
    
    1,764Impairment loss
    
    
    Balance, December 31, 2008
    
    $
    1,764
   December 31, 2007
    
    
    December 31, 2008Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetComputer software and programs
    
    $
    5,600
    
    
    $
    3,000
    
    
    $
    2,600
    
    
    $
    5,600
    
    
    $
    3,800
    
    
    $
    1,800Distributor database
    
    
    619
    
    
    
    619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,219
    
    
    $
    3,619
    
    
    $
    2,600
    
    
    $
    5,600
    
    
    $
    3,800
    
    
    $
    1,800
  46




---



##### Table of Contents



2009
    
    $
    8002010
    
    
    8002011
    
    
    200$
    1,800
          47




---



##### Table of Contents



Operating Leases
   48




---



##### Table of Contents



2009
    
    $
    1,2962010
    
    
    7622011
    
    
    5932012
    
    
    2612013
    
    
    261Thereafter
    
    
    396Total minimum lease obligations
    
    $
    3,569
 Purchase Commitments
 Alura ®
 Employment Agreements
  Consumer Indemnity
  Registration Payment Arrangements
   49




---



##### Table of Contents



Legal Matters
    50




---



##### Table of Contents



th
    Authorized Shares
  
    
    Priority the Series A preferred stock shall rank, in all respects, including the
payment of dividends and upon liquidation, senior and prior to the common stock and other
equity of the Company not expressly made senior or pari passu with the Series A preferred
stock.
 
    
    Dividends dividends at the rate per annum of $0.119 per share shall accrue from the
date of issuance of any shares of Series A preferred stock, payable upon declaration by the
Board of Directors. Accruing dividends shall be cumulative; provided, however, that except
as set forth below for the liquidation preference, the Corporation shall be under no
obligation to pay such dividends.
 
    
    Liquidation preference in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, then, before any distribution or
payment shall be made to the holders of any junior securities, the holders of the Series A
preferred stock then outstanding shall be entitled to be paid in cash out of the assets of
the Company available for distribution to its stockholders (on a pari passu basis with the
holders of any series of preferred stock ranking on liquidation on a parity with the Series
A preferred stock) an amount per share equal to the sum of the Series A Original Issue
Price plus any dividends accrued but unpaid thereon, whether or not declared, together with
any other dividends declared but unpaid thereon. If the assets of the Company are
insufficient to pay the aggregate liquidation preference and the liquidation preference of
any series of preferred stock ranking on liquidation on a parity with the Series A
preferred stock, the holders of the Series A preferred stock and the holders of any series of preferred stock ranking on
liquidation on a parity with the Series A preferred stock shall share ratably with one
another in any such distribution or payment in proportion to the full amounts to which they
would otherwise be respectively entitled before any distribution shall be made to the holders
of the junior securities. The Series A Original Issue Price shall mean $1.70 per share,
subject to adjustment.
  51




---



##### Table of Contents




    
    Voting rights the holders of shares of Series A preferred stock shall be entitled to
vote with the holders of the common stock, and with the holders of any other series of
preferred stock, voting together as a single class, upon all matters submitted to a vote of
stockholders of the Company. Each holder of shares of Series A preferred stock shall be
entitled to the number of votes equal to the product (rounded down to the nearest number of
whole shares) of 0.729 times the largest number of shares of common stock into which all
 shares of Series A preferred stock held of record by such holder could then be converted.
 
    
    Conversion each share of Series A preferred stock shall be convertible, subject to
adjustment only in the event of stock splits, stock dividends, recapitalizations and
similar events that would affect all of stockholders, at the option of the holder thereof,
at any time and from time to time, into such number of fully paid and nonassessable shares
of common stock as determined by dividing the Series A Original Issue Price by the Series A
Conversion Price (as defined) in effect at the time of conversion. The Series A
Conversion Price shall initially be equal to $1.70.
 Private Equity Placement
       52




---



##### Table of Contents



Common Stock Purchase Warrants
  Private Equity Placement
        53




---



##### Table of Contents



54




---



##### Table of Contents



Valuation and Expense Information under SFAS No. 123(R)
    Wtd. Avg.Wtd. Avg.
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Life
    
    
    Value1Outstanding at December 31, 2006
    
    
    1,041,458
    
    
    $
    8.88Exercised
    
    
    (60,000
    )
    
    
    1.50Cancelled, forfeited or expired
    
    
    (910,958
    )
    
    
    9.91Outstanding at December 31, 2007
    
    
    70,500
    
    
    
    1.80Cancelled, forfeited or expired
    
    
    (28,000
    )
    
    
    1.80Outstanding at December 31, 2008
    
    
    42,500
    
    
    
    1.80
    
    
    
    2.9
    
    
    $
    Vested and expected to vest at December 31, 2008
    
    
    34,918
    
    
    
    1.80
    
    
    
    2.9
    
    
    
    Exercisable at December 31, 2008
    
    
    28,334
    
    
    
    1.80
    
    
    
    2.9
    
    
    
    
 
 1
    
    Aggregate intrinsic value is defined as the positive
difference between the current market value and the exercise price and is
estimated using the closing price of the Companys common stock on the last
trading day of the periods ended as of the dates indicated (in thousands).  55




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##### Table of Contents



Wtd. Avg.Price atDate ofShares
    
    
    IssuanceOutstanding at December 31, 2006
    
    
    
    
    
    $
    Granted
    
    
    1,197,020
    
    
    
    2.18Vested
    
    
    (321,048
    )
    
    
    2.69Forfeited
    
    
    (107,844
    )
    
    
    2.28Outstanding at December 31, 2007
    
    
    768,128
    
    
    
    1.94Granted
    
    
    487,350
    
    
    
    0.54Vested
    
    
    (324,834
    )
    
    
    1.77Forfeited
    
    
    (123,173
    )
    
    
    1.87Outstanding at December 31, 2008
    
    
    807,471
    
    
    
    1.18
    Year Ended December 31,2007
    
    
    2008Domestic
    
    $
    (16,881
    )
    
    $
    (10,014
    )Foreign
    
    
    (8,200
    )
    
    
    6,606Loss before income taxes
    
    $
    (25,081
    )
    
    $
    (3,408
    )
  Year Ended December 31,2007
    
    
    2008Current taxes:Federal
    
    $
    
    
    
    $
    63State
    
    
    
    
    
    
    9Foreign
    
    
    200
    
    
    
    33200
    
    
    
    105Deferred taxes
    
    
    
    
    
    
    351Provision for income taxes
    
    $
    200
    
    
    $
    456
  56




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##### Table of Contents



Year Ended December 31,2007
    
    
    2008Income tax at federal statutory rate
    
    $
    (8,527
    )
    
    $
    (1,159
    )Effect of permanent differences
    
    
    4,171
    
    
    
    (23
    )Increase in valuation allowance
    
    
    4,479
    
    
    
    3,234Foreign rate differential
    
    
    
    
    
    
    (2,244
    )State income taxes, net of federal benefit
    
    
    
    
    
    
    (168
    )Change in enacted foreign rates
    
    
    
    
    
    
    792Other reconciling items
    
    
    77
    
    
    
    24Income tax provision
    
    $
    200
    
    
    $
    456
  December 31,2007
    
    
    2008Deferred tax assets:Net operating losses
    
    $
    8,258
    
    
    $
    11,327Stock-based compensation
    
    
    88
    
    
    
    207Accrued expenses
    
    
    503
    
    
    
    69Tax credits
    
    
    95
    
    
    
    501Provision for KGC receivable
    
    
    268
    
    
    
    268Impairment of long-lived assets
    
    
    91
    
    
    
    90Other
    
    
    6
    
    
    
    81Total deferred tax assets
    
    
    9,309
    
    
    
    12,543Valuation allowance
    
    
    (8,131
    )
    
    
    (11,791
    )1,178
    
    
    
    752Deferred tax liabilities:Intangible assets
    
    
    (884
    )
    
    
    (655
    )Accrued expenses
    
    
    
    
    
    
    (351
    )Depreciation
    
    
    (15
    )
    
    
    (36
    )Prepaids
    
    
    (71
    )
    
    
    (49
    )Other
    
    
    
    
    
    
    (12
    )Total deferred tax liabilities
    
    
    (970
    )
    
    
    (1,103
    )Net deferred tax assets (liability)
    
    $
    208
    
    
    $
    (351
    )
     57




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##### Table of Contents



Year Ended December 31,2007
    
    
    2008(In Thousands)Cash paid during the year for:Income taxes, net of refunds
    
    $
    288
    
    
    $
    (89
    )Interest
    
    
    9
    
    
    
    483Non-cash investing and financing activities:Warrants issued to placement agent in connection with private equity placement
    
    
    255
    
    
    
    Beneficial conversion feature on preferred stock
    
    
    1,574
    
    
    
    Conversion of preferred stock
    
    
    1,450
    
    
    
    Warrant issued to placement agent in conjunction with convertible debentures
    
    
    433
    
    
    
    Beneficial conversion feature on convertible debentures
    
    
    1,682
    
    
    
    
        58




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##### Table of Contents



Year Ended December 31,2007
    
    
    2008Net sales to external customers:North America
    
    $
    7,743
    
    
    $
    3,247Hong Kong
    
    
    47,240
    
    
    
    30,272China
    
    
    538
    
    
    
    1,328Taiwan
    
    
    5,861
    
    
    
    4,444South Korea
    
    
    9,334
    
    
    
    3,805Japan
    
    
    2,196
    
    
    
    1,244Europe
    
    
    
    
    
    
    1,223Other1
    
    
    3,589
    
    
    
    243Total net sales
    
    $
    76,501
    
    
    $
    45,806
 
 1
    
    Represents product sales to KGC Networks Ptd. Ltd. as
part of a separate agreement entered into effective December 31, 2005 upon the
sale of the Companys 51% interest in KGC to Bannks Foundation. Also included
are sales from the Latin America, Australia, New Zealand, and Southeast Asia
markets.  59




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##### Table of Contents



December 31,2007
    
    
    2008Long-lived assets:North America
    
    $
    5,660
    
    
    $
    4,353Hong Kong
    
    
    260
    
    
    
    346China
    
    
    3,702
    
    
    
    3,630Taiwan
    
    
    150
    
    
    
    130South Korea
    
    
    2,879
    
    
    
    1,321Japan
    
    
    44
    
    
    
    51Europe
    
    
    13
    
    
    
    16Other
    
    
    81
    
    
    
    Total long-lived assets
    
    $
    12,789
    
    
    $
    9,847
       60




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##### Table of Contents



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 Item 9A(T). CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control over Financial Reporting
  
    
    pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
 
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
 
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect
on the financial statements.
    Changes in Internal Control over Financial Reporting
   61




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##### Table of Contents



Item 9B. OTHER INFORMATION
  
 Part III
 
 Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 Item 11. EXECUTIVE COMPENSATION
  
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
   62




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##### Table of Contents



Part IV
 
 Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  1.
    
    Financial Statements. See Index to Consolidated Financial Statements under
Item 8 of Part II.
 2.
    
    Financial Statement Schedules. Except as provided below, all financial
statement schedules have been omitted because they are not required, not applicable, or
because the required information is shown in the financial statements or notes thereto.
  Column A
    
    Column B
    
    
    Column C
    
    
    Column D
    
    
    Column EBalance at
    
    
    Charged to Costs andBeginning
    
    
    Expenses/Against
    
    
    
    
    
    
    Balance at EndDescription
    
    of Period
    
    
    Net Sales (1)
    
    
    Deductions (2)
    
    
    of Period(In Thousands)Reserve for obsolete inventoryYear ended December 31, 2008
    
    $
    1,822
    
    
    $
    (86
    )
    
    $
    (1,497
    )
    
    $
    239Year ended December 31, 2007
    
    $
    3,320
    
    
    $
    489
    
    
    $
    (1,987
    )
    
    $
    1,822Reserve for KGC receivableYear ended December 31, 2008
    
    $
    789
    
    
    $
    
    
    
    $
    (789
    )
    
    $
    Year ended December 31, 2007
    
    $
    1,354
    
    
    $
    
    
    
    $
    (565
    )
    
    $
    789Accrual for sales returnsYear ended December 31, 2008
    
    $
    754
    
    
    $
    1,474
    
    
    $
    (1,711
    )
    
    $
    517Year ended December 31, 2007
    
    $
    1,797
    
    
    $
    2,898
    
    
    $
    (3,941
    )
    
    $
    754
 
 (1)
    
    Additions to the reserve for obsolete inventory are charged to cost of sales. Additions to the accrual for sales returns
are recorded as a reduction to net sales.(2)
    
    Deductions to the reserve for obsolete inventory reflect disposals of obsolete inventory. Deductions to the accrual for
sales returns reflect amounts refunded. 3.
    
    Exhibits. The exhibits listed on the accompanying Exhibit Index are filed as a
part of, and are incorporated by reference into, this report.
  63




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##### Table of Contents



SIGNATURES
  NATURAL HEALTH TRENDS CORP.Date: March 23, 2009
    /s/ Chris T. SharngChris T. SharngPresident
(Principal Executive Officer) POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Chris T. Sharng

Chris T. Sharng
    
    President
(Principal Executive Officer)
    
    March 23, 2009/s/ Timothy S. Davidson

Timothy S. Davidson
    
    Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    March 23, 2009/s/ Randall A. Mason

Randall A. Mason
    
    Chairman of the Board and Director
    
    March 23, 2009/s/ Stefan W. Zuckut

Stefan W. Zuckut
    
    Director
    
    March 23, 2009/s/ George K. Broady

George K. Broady
    
    Director
    
    March 23, 2009
  64




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description3.1
    
    
    Certificate of Incorporation of Natural Health Trends Corp. (incorporated by reference to Exhibit 3.01 to
Current Report on Form 8-K filed on July 12, 2005).3.2
    
    
    Certificate of Designations, Rights and Preferences of the Series A Convertible Preferred Stock of the Company
(incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on May 9, 2007).3.3
    
    
    By-Laws of Natural Health Trends Corp. (incorporated by reference to Exhibit 3.02 to Current Report on Form 8-K
filed on July 12, 2005).4.1
    
    
    Specimen Certificate for shares of common stock, $.001 par value per share, of Natural Health Trends Corp.
(incorporated by reference to Exhibit 4.01 to Annual Report on Form 10-K filed on May 8, 2006).10.1
    
    
    Form of Common Stock Purchase Warrant issued in October 2004 Private Placement (incorporated by reference to
Exhibit 4.1 to Quarterly Report on Form 10-Q filed on November 12, 2004).10.2
    
    
    Form of Stock and Warrant Purchase Agreement (U.S. Purchaser) dated May 4, 2007 between the Company and certain
Purchasers (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 9, 2007).10.3
    
    
    Form of Stock and Warrant Purchase Agreement (Non-U.S. Purchaser) dated May 4, 2007 between the Company and
certain Purchasers (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on May 9,
2007).10.4
    
    
    Form of Warrant to Purchase Shares of Common Stock of the Company, dated May 4, 2007 and issued to certain
Purchasers (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on May 9, 2007).10.5
    
    
    Securities Purchase Agreement dated October 19, 2007 between the Company and certain Purchasers (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on October 22, 2007).10.6
    
    
    Form of Registration Rights Agreement signed by the Company and the Purchasers named in the Securities Purchase
Agreement dated October 19, 2007 between the Company and the Purchasers named therein (incorporated by reference
to Exhibit 10.2 to Current Report on Form 8-K filed on October 22, 2007).10.7
    
    
    Form of Variable Rate Convertible Debenture issued to the Purchasers named in the Securities Purchase Agreement
dated October 19, 2007 between the Company and the Purchasers named therein (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K filed on October 22, 2007).10.8
    
    
    Form of Seven Year and One Year Warrants to Purchase Shares of Common Stock of the Company issued by the Company
to the Purchasers named in the Securities Purchase Agreement dated October 19, 2007 between the Company and the
Purchasers named therein (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed on
October 22, 2007).10.9
    
    
    Settlement agreement dated as of October 31, 2006, by and among Terry LaCore, Mark D. Woodburn and Natural
Health Trends Corp. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on November
1, 2006).10.10
    
    
    Indemnification agreement effective as of October 31, 2006 by and among Natural Health Trends Corp., Terry
LaCore and Mark D. Woodburn (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on
November 1, 2006).10.11
    
    
    Voting agreement, dated as of October 31, 2006, by and among Natural Health Trends Corp., Terry L. LaCore and
Mark D. Woodburn (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed on November 1,
2006).10.12
    
    
    Lease by and between CLP Properties Texas, LLP and Natural Health Trends Corp. dated as of June 18, 2005
(incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on June 24, 2005).+10.13
    
    
    2002 Stock Plan, as amended (incorporated by reference to Appendix C to Definitive Proxy Statement filed on
April 27, 2005).+10.14
    
    
    Form of Notice of Grant of Stock Option Agreement under the Companys 2002 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed on December 1, 2005).+10.15
    
    
    2007 Annual Incentive Plan (incorporated by reference to Appendix A to Definitive Proxy Statement filed on
October 20, 2006).+10.16
    
    
    2007 Equity Incentive Plan, as amended and restated as of November 13, 2008 (incorporated by reference to
Appendix A to Definitive Proxy Statement filed on November 25, 2008).+10.17
    
    
    Form of Notice of Restricted Stock Grant and Restricted Stock Agreement under the Companys 2007 Equity
Incentive Plan (incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q filed on May 11,
2007).+10.18
    
    
    Employment Agreement (including form of Non-Competition and Proprietary Rights Assignment Agreement) for Chris
Sharng, dated April 23, 2007 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on
April 26, 2007).




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description+10.19
    
    
    Employment Agreement (including form of Non-Competition and Proprietary Rights Assignment Agreement) for Timothy
S. Davidson dated April 23, 2007 (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed
on April 26, 2007).+10.20
    
    
    Employment Agreement (including form of Non-Competition and Proprietary Rights Assignment Agreement) for Gary C.
Wallace dated April 23, 2007 (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed on
April 26, 2007).+10.21
    
    
    Employment letter agreement dated as of December 8, 2006 between Natural Health Trends Corp. and John Cavanaugh
(incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on December 13, 2006).+10.22
    
    
    Form of Indemnification Agreement dated December 13, 2005, between Natural Health Trends Corp. and each of its
directors (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on December 13, 2005).+10.23
    
    
    Founder Compensation Agreement by and among Lexxus International, Inc., Natural Health Trends Corp., Rodney
Sullivan and Pam Sullivan, Michael Bray, and Jeff Provost (incorporated by reference to exhibit to Annual Report
on Form 10-KSB filed on April 16, 2002).+10.24
    
    
    Amendment No. 1 to Founder Compensation Agreement by and among Lexxus International, Inc., Natural Health Trends
Corp., Rodney Sullivan and Pam Sullivan, Michael Bray, and Jeff Provost (incorporated by reference to Exhibit
10.7 to Annual Report on Form 10-K filed on March 31, 2005).14.1
    
    
    Worldwide Code of Business Conduct, as revised (incorporated by reference to Exhibit 14.1 to Annual Report on
Form 10-K filed on March 28, 2007).14.2
    
    
    Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.2 to Annual Report on Form
10-K filed on March 31, 2005).21.1
    
    
    Subsidiaries of the Company (filed herewith).23.1
    
    
    Consent of Lane Gorman Trubitt, L.L.P. (filed herewith).24.1
    
    
    Power of Attorney (see signature page).31.1
    
    
    Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended (the Exchange Act) (filed herewith).31.2
    
    
    Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act (filed herewith).32.1
    
    
    Certification of the Principal Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.2
    
    
    Certification of the Principal Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 +
    
    Management contract or compensatory plan