##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 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
    
    (I.R.S. Employerincorporation or organization)
    
    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 Global Market)
  None
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller 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
    
    
    22Item 2.
    
    Properties
    
    
    22Item 3.
    
    Legal Proceedings
    
    
    23Item 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
    
    
    63Item 9A(T).
    
    Controls and Procedures
    
    
    64Item 9B.
    
    Other Information
    
    
    65PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    66Item 11.
    
    Executive Compensation
    
    
    66Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    66Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    66Item 14.
    
    Principal Accounting Fees and Services
    
    
    66PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    67Signatures
    
    
    
    
    68Subsidiaries of the CompanyConsent of Lane Gorman Trubitt, L.L.P.Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)Certification of Principal Executive Officer Pursuant to Rule 13a-14(b)Certification of Principal Financial Officer Pursuant to Rule 13a-14(b)




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FORWARD-LOOKING STATEMENTS
    
    
    we may continue to experience substantial negative cash flows;
    
    we may need to seek additional debt or equity financing;
    
    we face risks related to an SEC investigation and securities and other litigation;
    
    we could be adversely affected by additional audit committee investigations;
    
    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;
    
    claims against us that could arise from the misconduct of some of our former officers
and directors;
    
    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 dependence on our Hong Kong and China market for most of our revenue;
    
    regulatory matters pertaining to direct-selling laws, particularly in China;
    
    we could be required to modify our compensation plan in China in a way that could
adversely affect our business;
    
    activities of our members in China could adversely affect our Hong Kong e-commerce
model;
    
    our inability to obtain a direct-selling license in China;
    
    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 rely on our suppliers product liability insurance and product liability claims could
hurt our business;




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
    
    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;
    
    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;
    
    adverse consequences if securities analysts publish adverse research or reports, or
otherwise fail to cover us at all;
    
    our failure to wisely apply the proceeds derived from our May and October 2007
financings effectively;
    
    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;
    
    failure to maintain the registration statements covering the resale of shares of common
stock for certain investors will result in liquidated damages;
    
    covenants and restrictions in certain investor agreements could restrict our ability to
operate our business;
    
    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.
    
    LexLipsis a lip enhancing gloss designed to create the effect of fuller lips and to
help reduce fine lines and wrinkles around the mouth.
    
    La Vieis an energy-boosting dietary supplement described as a non-alcoholic red wine.
    
    180° Life System®CarbBlockeris a weight management product.
    
    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.
 1




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
    
    TriFusion PlusTM 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.
  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 ® Alura ® Premium Noni
Juice
 Marketing and Distribution
  2




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Year Ended December 31,2006
    
    2007North America
    
    
    8,840
    
    
    
    3,900Hong Kong
    
    
    59,970
    
    
    
    33,470Taiwan
    
    
    3,620
    
    
    
    4,650Southeast Asia
    
    
    1,380
    
    
    
    860South Korea
    
    
    9,250
    
    
    
    7,130Australia/New Zealand
    
    
    570
    
    
    
    340Japan
    
    
    6,240
    
    
    
    2,440Latin America
    
    
    4,300
    
    
    
    1,410Europe
    
    
    1,880
    
    
    
    2,800Total
    
    
    96,050
    
    
    
    57,000
  .
   Management Information Systems
  Employees
  Seasonality
  3




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Intellectual Property
  Alura ® 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.
 5




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
    
    Internet  we maintain our main website at www.naturalhealthtrendscorp.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.
 Technology and Internet Initiatives
 www.naturalhealthtrendscorp.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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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.
  We Face Risks Related To An SEC Investigation, Securities Litigation and Other Litigation That
Could Have A Material Adverse Effect On Our Relationships With Our Distributors, Business,
Financial Condition And Results Of Operations. We May Face Additional Litigation In The Future That
Could Also Harm Our Business.
      We Could Be Adversely Affected By Additional Audit Committee Investigations.
  Continued Adverse News About Us Could Have A Material Adverse Effect On Our Ability To Attract And
Maintain Distributors.
  9




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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.
  10




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Claims May Arise Against Us From Unknown Oral Agreements And Misconduct of Former Officers and
Directors.
  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.
   11




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Changes to Our Distributor Compensation Plan May Not Gain Acceptance
   Because Our Hong Kong Operations Account For A Majority Of Our Business, Any Adverse Changes In Our
Business Operations In Hong Kong Would Materially Harm Our Business.
  Our Business In Hong Kong, Which Represented 62% Of Our Revenue In 2007, May Be Harmed By The
Results Of Increased Government Scrutiny Of Our Current And Proposed Operations In China.
  We Could Be Required To Modify Our Compensation Plan In China In A Way That Could Make It Less
Attractive To Members, And This Could Have A Significant Adverse Effect On Our Revenue.
  12




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Our E-Commerce Business In Hong Kong, Which Represents A Significant Portion Of Our Total Revenue,
Could Be Adversely Affected By The Activities Of The Members in China, If Members In China Engage
In Activities That Are Deemed To Violate Chinas Anti-Multilevel Marketing Laws.
     If We Fail To Obtain A Direct Selling License In China, Our Future Business Could Be Harmed.
  Failure To Properly Pay Business Taxes Or Customs Duties, Including Those In China, Could Have A
Material Adverse Effect.
  13




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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 Do Not Have Product Liability Insurance And Product Liability Claims Could Hurt Our Business.
  14




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
    
    our products contain contaminants;
    
    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.
   15




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Regulatory Matters Governing Our Industry Could Have A Significant Negative Effect On Our Business.
  Direct Selling System
    16




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Product Regulations
   Product Claims, Advertising and Distributor Activities
  Transfer Pricing and Similar Regulations
     Taxation Relating To Distributors
  17




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Other Regulations
   Currency Exchange Rate Fluctuations Could Lower Our Revenue And Net Income.
    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
 18




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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.
   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.
  19




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If We Fail To Regain Compliance With Nasdaqs Independent Director, Audit Committee And
Compensation Committee Requirements, Our Common Stock May Be Delisted From The Nasdaq Global
Market, Which May Reduce The Price Of Our Common Stock And Levels Of Liquidity Available To Our
Stockholders.
  If Securities Analysts Do Not Publish Research Or Reports About Our Business Or If They Downgrade
Our Stock, The Price Of Our Stock Could Decline.
  We Have Broad Discretion To Use The Proceeds Of Our Recent Private Placement Financings.
  Leverage And Debt Service Obligations May Adversely Affect Our Cash Flows.
  
    
    require us to dedicate a substantial portion of our future cash flows from operations
and other capital resources to debt service, especially if the debentures are not converted
into shares of common stock or we are otherwise unable to make payments of principal and
interest in shares of common stock;
    
    make it difficult for us to obtain necessary financing in the future for working
capital, acquisitions or other purposes on favorable terms, if at all;
    
    make it more difficult for us to be acquired;
    
    make us more vulnerable to industry downturns and competitive pressures; and
    
    limit our flexibility in planning for, or reacting to changes in, our business.
  20




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We Could Be Required To Make Substantial Cash Payments Upon An Event Of Default Under Our Variable
Rate Convertible Debentures.
  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 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 Our Business.
  
    
    until the first anniversary of the closing of the October 2007 financing, we are
required to offer to the investors participating therein the opportunity to participate in
subsequent equity securities offerings by us, subject to certain exceptions for, among
other things, strategic investments;
    
    until 60 days after the effective date of the registration statement covering the resale
of the related shares of common stock (May 16, 2008), we cannot issue shares of common
stock or equivalent securities, subject to certain exceptions for, among other things,
strategic investments and the issuance of shares of common stock covered by the
registration statement of which this prospectus forms a part;
    
    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
(iii) any agreement to sell securities at a future-determined price;
 21




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
    
    until the earlier of the date that we obtain stockholder approval of the issuance of all
of the shares of common stock underlying the debentures and warrants issued in the October
2007 financing or none of such debentures or warrants are any longer outstanding, neither
we nor any of our subsidiaries may issue common stock or equivalent securities at an
effective price that is less than $3.52 per share; 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 then 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 then our Series A
preferred stock, or enter into certain transactions with affiliates.
  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
  
 Item 2. PROPERTIES
   22




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Item 3. LEGAL PROCEEDINGS
      
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  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, 2006
    
    $
    12.09
    
    
    $
    6.35June 30, 2006
    
    
    7.45
    
    
    
    3.25September 30, 2006
    
    
    3.99
    
    
    
    2.35December 31, 2006
    
    
    2.75
    
    
    
    1.26March 31, 2007
    
    $
    3.15
    
    
    $
    1.48June 30, 2007
    
    
    3.87
    
    
    
    1.71September 30, 2007
    
    
    5.33
    
    
    
    1.95December 31, 2007
    
    
    7.31
    
    
    
    1.00
 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 31,2006
    
    
    2007North America
    
    $
    13,637
    
    
    
    10.2
    %
    
    $
    7,743
    
    
    
    10.1
    %Hong Kong
    
    
    88,835
    
    
    
    66.6
    
    
    
    47,240
    
    
    
    61.8China
    
    
    
    
    
    
    
    
    
    
    538
    
    
    
    0.7Taiwan
    
    
    4,367
    
    
    
    3.3
    
    
    
    5,861
    
    
    
    7.7Southeast Asia
    
    
    1,710
    
    
    
    1.3
    
    
    
    883
    
    
    
    1.1South Korea
    
    
    12,538
    
    
    
    9.4
    
    
    
    9,334
    
    
    
    12.2Australia/New Zealand
    
    
    1,100
    
    
    
    0.8
    
    
    
    686
    
    
    
    0.9Japan
    
    
    6,761
    
    
    
    5.1
    
    
    
    2,196
    
    
    
    2.9Latin America
    
    
    3,496
    
    
    
    2.6
    
    
    
    990
    
    
    
    1.3Other1
    
    
    293
    
    
    
    0.2
    
    
    
    1,030
    
    
    
    1.3Total NHT Global
    
    
    132,737
    
    
    
    99.5
    
    
    
    76,501
    
    
    
    100North America
    
    
    507
    
    
    
    0.4
    
    
    
    
    
    
    
    Australia/New Zealand
    
    
    184
    
    
    
    0.1
    
    
    
    
    
    
    
    Total eKaire2
    
    
    691
    
    
    
    0.5
    
    
    
    
    
    
    
    $
    133,428
    
    
    
    100
    %
    
    $
    76,501
    
    
    
    100
    %
 
 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.2
    
    The Company no longer consolidates the operating
results of the eKaire.com and other subsidiaries that distribute Kaire
branded products (the Kaire Entities) for periods beginning after June 30,
2006 as it sold its interests in the Kaire Entities to Kaire International
(Canada) Ltd. Effective July 1, 2006. 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.
    Critical Accounting Policies and Estimates
  27




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TM
     28




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TM TM TM
   Results of Operations
  Year Ended December 31,2006
    
    
    2007Net sales
    
    
    100
    %
    
    
    100
    %Cost of sales
    
    
    24.8
    
    
    
    26.5Gross profit
    
    
    75.2
    
    
    
    73.5Operating expenses:Distributor commissions
    
    
    51.2
    
    
    
    45.9Selling, general and administrative expenses
    
    
    34.3
    
    
    
    45.1Impairment
of goodwill
    
    
    
    
    
    
    16.2Provision for KGC receivable
    
    
    (1.1
    )
    
    
    (0.7
    )Total operating expenses
    
    
    84.4
    
    
    
    106.5Loss from operations
    
    
    (9.2
    )
    
    
    (33.0
    )Other income, net
    
    
    0.7
    
    
    
    0.2Loss before income taxes and minority interest
    
    
    (8.5
    )
    
    
    (32.8
    )Income tax provision
    
    
    (0.1
    )
    
    
    (0.3
    )Minority interest
    
    
    
    
    
    
    Net loss
    
    
    (8.6
    )%
    
    
    (33.1
    )%
  29




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TM
    
    
    lower credit card charges and assessments ($1.0 million) in Hong Kong;
    
    lower employee-related expense ($0.5 million), travel-related costs ($0.4 million),
legal and accounting fees ($2.9 million), litigation settlement costs ($0.1 million),
credit card charges and assessments ($0.2 million), and other general expenses (0.9
million) in North America;
    
    lower convention costs in North America primarily due to the North American
Convention held in the first quarter of 2006 ($1.1 million);
    
    lower overall expense, including impairment loss, in Japan ($4.4 million) and Mexico
($1.3 million) due to expense reduction programs executed in both markets during the
first nine months of 2007;
    
    lower operating costs in Australia due to office closure ($0.3 million);
    
    the elimination of operating expense incurred by the Kaire Entities, which was sold
effective July 1, 2006 ($0.3 million);
 30




---



##### Table of Contents




    
    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 ($0.2 million); partly offset by
    
    cost of expansion into Europe ($1.0 million); and
    
    higher professional fees ($1.0 million) and distributor-related costs ($0.5 million)
in Asia.
 Recovery of KGC Receivable.
 Other Income, Net.
 Income Taxes.
  Net Loss.
 Liquidity and Capital Resources
    31




---



##### Table of Contents



Concentrate
  32




---



##### Table of Contents



TM
 Recent Accounting Pronouncements
    
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  33




---



##### Table of Contents



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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##### Table of Contents



35




---



##### Table of Contents



December 31,2006
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,936
    
    
    $
    6,282Restricted cash
    
    
    455
    
    
    
    298Certificates of deposit
    
    
    1,277
    
    
    
    Accounts receivable
    
    
    462
    
    
    
    418Inventories, net
    
    
    5,857
    
    
    
    3,585Other current assets
    
    
    2,639
    
    
    
    1,324Total current assets
    
    
    22,626
    
    
    
    11,907Property and equipment, net
    
    
    2,944
    
    
    
    1,537Goodwill
    
    
    14,145
    
    
    
    1,764Intangible assets, net
    
    
    3,400
    
    
    
    2,600Restricted cash
    
    
    3,503
    
    
    
    4,317Deferred tax assets
    
    
    208
    
    
    
    208Other assets
    
    
    1,759
    
    
    
    2,363Total assets
    
    $
    48,585
    
    
    $
    24,696LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,424
    
    
    $
    2,168Income taxes payable
    
    
    281
    
    
    
    363Accrued distributor commissions
    
    
    3,852
    
    
    
    2,018Other accrued expenses
    
    
    5,255
    
    
    
    3,599Deferred revenue
    
    
    5,641
    
    
    
    3,496Current portion of convertible debentures, net of discount of $151
    
    
    
    
    
    
    203Other current liabilities
    
    
    3,135
    
    
    
    3,254Total current liabilities
    
    
    21,588
    
    
    
    15,101Convertible debentures, net of discount of $3,896
    
    
    
    
    
    
    Total liabilities
    
    
    21,588
    
    
    
    15,101Commitments and contingenciesMinority interest
    
    
    22
    
    
    
    33Stockholders 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,
aggregate liquidation value of $246
    
    
    
    
    
    
    124Common stock, $0.001 par value; 50,000,000 shares authorized;
8,199,933 and 10,327,405 shares issued and outstanding at
December 31, 2006 and 2007, respectively
    
    
    8
    
    
    
    10Additional paid-in capital
    
    
    70,042
    
    
    
    79,158Accumulated deficit
    
    
    (44,128
    )
    
    
    (70,989
    )Accumulated other comprehensive income:Foreign currency translation adjustments
    
    
    1,053
    
    
    
    1,259Total stockholders equity
    
    
    26,975
    
    
    
    9,562Total liabilities and stockholders equity
    
    $
    48,585
    
    
    $
    24,696
  36




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##### Table of Contents



Year Ended December 31,2006
    
    
    2007Net sales
    
    $
    133,428
    
    
    $
    76,501Cost of sales
    
    
    33,066
    
    
    
    20,290Gross profit
    
    
    100,362
    
    
    
    56,211Operating expenses:Distributor commissions
    
    
    68,265
    
    
    
    35,095Selling, general and administrative expenses
    
    
    45,735
    
    
    
    34,524Impairment of goodwill
    
    
    
    
    
    
    12,381Recovery of KGC receivable
    
    
    (1,405
    )
    
    
    (565
    )Total operating expenses
    
    
    112,595
    
    
    
    81,435Loss from operations
    
    
    (12,233
    )
    
    
    (25,224
    )Other income, net
    
    
    946
    
    
    
    143Loss before income taxes and minority interest
    
    
    (11,287
    )
    
    
    (25,081
    )Income tax provision
    
    
    (182
    )
    
    
    (200
    )Minority interest
    
    
    9
    
    
    
    (6
    )Net loss
    
    
    (11,460
    )
    
    
    (25,287
    )Beneficial conversion feature on preferred stock
    
    
    
    
    
    
    (1,574
    )Preferred stock dividends
    
    
    
    
    
    
    (91
    )Net loss attributable to common stockholders
    
    $
    (11,460
    )
    
    $
    (26,952
    )Loss per share  basic and diluted
    
    $
    (1.42
    )
    
    $
    (3.15
    )Weighted-average number of shares outstanding
    
    
    8,079
    
    
    
    8,555
  37




---



##### Table of Contents



AccumulatedAdditional
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBALANCE, December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    7,108,867
    
    
    $
    7
    
    
    $
    69,417
    
    
    $
    (32,668
    )
    
    $
    413
    
    
    $
    37,169Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,460
    )
    
    
    
    
    
    
    (11,460
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    640Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,820
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    1,091,066
    
    
    
    1
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    18Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    608
    
    
    
    
    
    
    
    
    
    
    
    608BALANCE, 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
    
    
    $
    9,562
  38




---



##### Table of Contents



Year Ended December 31,2006
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (11,460
    )
    
    $
    (25,287
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment
    
    
    1,152
    
    
    
    1,008Amortization of intangibles
    
    
    958
    
    
    
    800Amortization of debt issuance costs
    
    
    
    
    
    
    42Accretion of debt discount
    
    
    
    
    
    
    203Minority interest
    
    
    (9
    )
    
    
    6Stock-based compensation
    
    
    608
    
    
    
    845Imputed interest on KGC installment payable
    
    
    (671
    )
    
    
    (228
    )Recovery of KGC receivable
    
    
    (1,405
    )
    
    
    (565
    )Impairment of long-lived assets
    
    
    1,063
    
    
    
    795Impairment of goodwill
    
    
    
    
    
    
    12,381Deferred income taxes
    
    
    (215
    )
    
    
    7Changes in assets and liabilities, net of dispositions:Accounts receivable
    
    
    (136
    )
    
    
    47Inventories, net
    
    
    7,067
    
    
    
    2,312Other current assets
    
    
    780
    
    
    
    927Other assets
    
    
    (120
    )
    
    
    250Accounts payable
    
    
    1,446
    
    
    
    (1,268
    )Income taxes payable
    
    
    (1,036
    )
    
    
    64Accrued distributor commissions
    
    
    (122
    )
    
    
    (1,829
    )Other accrued expenses
    
    
    (1,599
    )
    
    
    (1,693
    )Deferred revenue
    
    
    (4,280
    )
    
    
    (2,143
    )Other current liabilities
    
    
    575
    
    
    
    110Net cash used in operating activities
    
    
    (7,404
    )
    
    
    (13,216
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (1,815
    )
    
    
    (341
    )Decrease (increase) in restricted cash
    
    
    363
    
    
    
    (475
    )Decrease in certificate of deposit
    
    
    105
    
    
    
    1,283Proceeds from KGC receivable (see Note 5)
    
    
    2,028
    
    
    
    1,183Net cash reduction from sale of subsidiary
    
    
    (28
    )
    
    
    Net cash provided by investing activities
    
    
    653
    
    
    
    1,650CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of convertible debentures and warrants
    
    
    
    
    
    
    3,740Debt issuance costs
    
    
    
    
    
    
    (442
    )Payments on debt
    
    
    (23
    )
    
    
    Proceeds from issuance of preferred stock and warrants, net
    
    
    
    
    
    
    2,560Proceeds from issuance of common stock
    
    
    18
    
    
    
    90Net cash provided by (used in) financing activities
    
    
    (5
    )
    
    
    5,948Effect of exchange rates on cash and cash equivalents
    
    
    222
    
    
    
    (36
    )Net decrease in cash and cash equivalents
    
    
    (6,534
    )
    
    
    (5,654
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    18,470
    
    
    
    11,936CASH AND CASH EQUIVALENTS, end of period
    
    $
    11,936
    
    
    $
    6,282
  39




---



##### Table of Contents



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




---



##### Table of Contents



Restricted Cash
   Certificates of Deposit
  Inventories
 TM
 Property and Equipment
  Goodwill and Other Intangible Assets
   Impairment of Long-Lived Assets
  41




---



##### Table of Contents



Income Taxes
     Foreign Currency
  Revenue Recognition
   TM TM TM
 42




---



##### Table of Contents



Income Per Share
    Year Ended December 31,2006
    
    2007Options to purchase common stock
    
    
    2,295,624
    
    
    
    1,041,458Warrants to purchase common stock
    
    
    1,080,504
    
    
    
    6,281,310Non-vested restricted stock
    
    
    
    
    
    
    1,044,186Convertible preferred stock
    
    
    
    
    
    
    1,759,307Convertible debentures
    
    
    
    
    
    
    1,700,000
  Certain Risks and Concentrations
  43




---



##### Table of Contents



Premium Noni Juice, Skindulgence Alura La Vie Skindulgence La Vie Premium Noni Juice Alura
  Fair Value of Financial Instruments
   Recent Accounting Pronouncements
      Year Ended December 31,2006
    
    
    2007Gain (loss) on foreign exchange
    
    $
    (204
    )
    
    $
    11Interest income
    
    
    1,154
    
    
    
    477Interest expense (see Note 6)
    
    
    (9
    )
    
    
    (352
    )Other
    
    
    5
    
    
    
    7$
    946
    
    
    $
    143
 44




---



##### Table of Contents



December 31,2006
    
    
    2007Property and equipment:Office equipment
    
    $
    1,640
    
    
    $
    1,507Office software
    
    
    1,062
    
    
    
    805Furniture and fixtures
    
    
    457
    
    
    
    380Plant equipment
    
    
    149
    
    
    
    185Leasehold improvements
    
    
    2,025
    
    
    
    1,772Property and equipment, at cost
    
    
    5,333
    
    
    
    4,649Accumulated depreciation and amortization
    
    
    (2,389
    )
    
    
    (3,112
    )$
    2,944
    
    
    $
    1,537Noncurrent restricted cash:Funds held for direct selling license application in China
    
    $
    2,587
    
    
    $
    2,806Funds held for consumer indemnity insurance in South Korea (see Note 7)
    
    
    
    
    
    
    641Reserve for credit card processor in South Korea (see Note 1)
    
    
    867
    
    
    
    870Other
    
    
    49
    
    
    
    $
    3,503
    
    
    $
    4,317Other accrued expenses:Sales returns
    
    $
    1,797
    
    
    $
    754Employee-related expense
    
    
    1,283
    
    
    
    1,100Professional fees
    
    
    478
    
    
    
    493Warehousing and inventory-related expense
    
    
    525
    
    
    
    203Other
    
    
    1,172
    
    
    
    1,049$
    5,255
    
    
    $
    3,599Deferred revenue:Unshipped product
    
    $
    1,059
    
    
    $
    705Enrollment package revenue
    
    
    4,582
    
    
    
    2,791$
    5,641
    
    
    $
    3,496Other current liabilities:Unclaimed checks
    
    $
    2,349
    
    
    $
    2,636Other taxes payable
    
    
    496
    
    
    
    351Other
    
    
    290
    
    
    
    267$
    3,135
    
    
    $
    3,254
 45




---



##### Table of Contents



Balance, December 31, 2006
    
    $
    14,145Impairment loss
    
    
    (12,381
    )Balance, December 31, 2007
    
    $
    1,764
    December 31, 2006
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetComputer software and programs
    
    $
    5,600
    
    
    $
    2,200
    
    
    $
    3,400
    
    
    $
    5,600
    
    
    $
    3,000
    
    
    $
    2,600Distributor database
    
    
    619
    
    
    
    619
    
    
    
    
    
    
    
    619
    
    
    
    619
    
    
    
    $
    6,219
    
    
    $
    2,819
    
    
    $
    3,400
    
    
    $
    6,219
    
    
    $
    3,619
    
    
    $
    2,600
   2008
    
    $
    8002009
    
    
    8002010
    
    
    8002011
    
    
    200$
    2,600
 46




---



##### Table of Contents



KGC
Networks
  Kaire Entities
      
    
    until the one year anniversary of the closing of the sale of the Securities the Company
shall offer to the Purchasers the opportunity to participate in subsequent securities
offerings by the Company (up to 100% of such offerings), subject to certain exceptions for,
among other things, strategic investments;
    
    for 60 days after the effective date of the initial registration statement covering the shares of common stock underlying the Securities, the Company will not issue common stock
or equivalent securities, subject to certain exceptions for, among other things, strategic
investments;
    
    until such time as no Purchaser holds any of the Securities, the Company is prohibited
from effecting or entering into an agreement to effect any financing involving (a) 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 upon trading prices of or quotations for shares of common stock, the market for the
common stock, or the business of the Company or (b) any agreement to sell securities at a
future determined price;
 47




---



##### Table of Contents




    
    until the earlier of the date that shareholder approval is obtained or the Securities
are no longer outstanding, neither the Company nor any of its subsidiaries may issue common
stock or equivalent securities at an effective price that is less than $3.52;
    
    until the one year anniversary of the effective date of the initial registration
statement, the Company shall not undertake a reverse or forward stock split or
reclassification of the common stock without the prior written consent of the Purchasers
holding a majority in principal amount outstanding of the debentures; and
    
    the Companys agreement to seek shareholder approval of the issuance of all of the shares of common stock underlying the Securities no later than the date of the Companys
2008 annual shareholder meeting.
     2008
    
    $
    3542009
    
    
    3,896$
    4,250
    48




---



##### Table of Contents



49




---



##### Table of Contents



Operating Leases
   2008
    
    $
    1,5562009
    
    
    7032010
    
    
    5372011
    
    
    5092012
    
    
    245Thereafter
    
    
    592Total minimum lease obligations
    
    $
    4,142
 Purchase Commitments
 Cluster
Concentrate
 Employment Agreements
  Consumer Indemnity
  50




---



##### Table of Contents



Legal Matters
      51




---



##### Table of Contents



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.
    
    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




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Common
Stock Purchase Warrants
  Private Equity Placement
  53




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54




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55




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Valuation and Expense Information under SFAS No. 123(R)
     Wtd. Avg.Wtd. Avg.
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Life
    
    Value1Outstanding at December 31, 2005
    
    
    1,922,124
    
    
    $
    5.17Granted
    
    
    373,500
    
    
    
    2.60Exercised
    
    
    (1,091,066
    )
    
    
    1.01Forfeited or expired
    
    
    (163,100
    )
    
    
    3.45Outstanding 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
    
    
    
    1.80
    
    
    
    3.9
    
    
    $
    Vested and expected to vest at December 31, 2007
    
    
    43,076
    
    
    
    1.80
    
    
    
    3.9
    
    
    
    Exercisable at December 31, 2007
    
    
    23,501
    
    
    
    1.80
    
    
    
    3.9
    
    
    
    
 
 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). 56




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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
    
    
    
    1.94
    Year Ended December 31,2006
    
    
    2007Domestic
    
    $
    (2,279
    )
    
    $
    (16,881
    )Foreign
    
    
    (9,008
    )
    
    
    (8,200
    )Loss before income taxes
    
    $
    (11,287
    )
    
    $
    (25,081
    )
  Year Ended December 31,2006
    
    
    2007Current taxes:Federal
    
    $
    29
    
    
    $
    State
    
    
    (176
    )
    
    
    Foreign
    
    
    537
    
    
    
    200390
    
    
    
    200Deferred taxes
    
    
    (208
    )
    
    
    Provision for income taxes
    
    $
    182
    
    
    $
    200
 57




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##### Table of Contents



Year Ended December 31,2006
    
    
    2007Income tax at federal statutory rate
    
    $
    (3,838
    )
    
    $
    (8,527
    )Effect of permanent differences
    
    
    1,558
    
    
    
    4,171Increase in valuation allowance
    
    
    1,630
    
    
    
    4,479Foreign rate differential
    
    
    1,093
    
    
    
    State income taxes, net of federal benefit
    
    
    (116
    )
    
    
    Other reconciling items
    
    
    (145
    )
    
    
    77Income tax provision
    
    $
    182
    
    
    $
    200
  December 31,2006
    
    
    2007Deferred tax assets:Net operating losses
    
    $
    2,761
    
    
    $
    8,258Stock-based compensation
    
    
    488
    
    
    
    88Accrued expenses
    
    
    645
    
    
    
    503Tax credits
    
    
    124
    
    
    
    95Provision for KGC receivable
    
    
    460
    
    
    
    268Impairment of long-lived assets
    
    
    
    
    
    
    91Other
    
    
    12
    
    
    
    6Total deferred tax assets
    
    
    4,490
    
    
    
    9,309Valuation allowance
    
    
    (2,949
    )
    
    
    (8,131
    )1,541
    
    
    
    1,178Deferred tax liabilities:Intangible assets
    
    
    (1,156
    )
    
    
    (884
    )Depreciation
    
    
    (16
    )
    
    
    (15
    )Prepaids
    
    
    (161
    )
    
    
    (71
    )Total deferred tax liabilities
    
    
    (1,333
    )
    
    
    (970
    )Deferred tax assets, net
    
    $
    208
    
    
    $
    208
    58




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##### Table of Contents



Year Ended December 31,2006
    
    
    2007(In Thousands)Cash paid during the year for:Income taxes
    
    $
    1,453
    
    
    $
    288Interest
    
    
    1
    
    
    
    9Non-cash investing and financing activities:Warrants issued to placement agent in connection with private equity placement
    
    
    
    
    
    
    255Beneficial conversion feature on preferred stock
    
    
    
    
    
    
    1,574Conversion of preferred stock
    
    
    
    
    
    
    1,450Warrant issued to placement agent in conjunction with convertible debentures
    
    
    
    
    
    
    433Beneficial conversion feature on convertible debentures
    
    
    
    
    
    
    1,682
       59




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Skindulgence ® LaVie
        60




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61




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Year Ended December 31,2006
    
    
    2007Net sales to external customers:North America
    
    $
    14,144
    
    
    $
    7,743Hong Kong
    
    
    88,835
    
    
    
    47,240China
    
    
    
    
    
    
    538Taiwan
    
    
    4,367
    
    
    
    5,861Southeast Asia
    
    
    1,710
    
    
    
    883South Korea
    
    
    12,538
    
    
    
    9,334Australia/New Zealand
    
    
    1,284
    
    
    
    686Japan
    
    
    6,761
    
    
    
    2,196Latin America
    
    
    3,496
    
    
    
    990Other1
    
    
    293
    
    
    
    1,030Total net sales
    
    $
    133,428
    
    
    $
    76,501
 
 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. 62




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##### Table of Contents



December 31,2006
    
    
    2007Long-lived assets:North America
    
    $
    18,259
    
    
    $
    5,660Hong Kong
    
    
    393
    
    
    
    260Taiwan
    
    
    157
    
    
    
    150Southeast Asia
    
    
    151
    
    
    
    65China
    
    
    3,550
    
    
    
    3,702South Korea
    
    
    2,200
    
    
    
    2,879Australia/New Zealand
    
    
    26
    
    
    
    Japan
    
    
    649
    
    
    
    44Latin America
    
    
    562
    
    
    
    16Other
    
    
    12
    
    
    
    13Total long-lived assets
    
    $
    25,959
    
    
    $
    12,789
      
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  63




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##### Table of Contents



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.
     64




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
    
    Significant staff and supervisor turnover of the accounting and finance staff in Taiwan
resulted in the deficiency described above. Management believes the employee turnover was
due to a poorly defined reporting relationship within the region. A new line of reporting
was established during December 2007. The Company is currently taking steps to remediate
the deficiency by hiring a new, qualified finance manager and developing an action plan for
reconciliation and review of each account balance. Additionally, management believes the
action plan will include an initiative to improve efficiency and eliminate redundant tasks
currently performed by the accounting and finance staff in Taiwan.
    
    As part of the Companys efforts to reduce operating costs and regain profitability, the
Company eliminated management-level positions in Greater China, terminated certain of its
Corporate accounting and finance staff and discontinued its subscription to compliance
training programs provided by WeComply, Inc. concerning fraud awareness, insider trading,
and the Foreign Corrupt Practices Act. Management believes that the cost savings from such
actions outweigh any increase in control risk.
  
    
    Control Environment the Companys control environment is overseen by its principal
executive officer and principal financial officer whose appointments, as well as the new
policies since instituted, have set the tone for a greater level of emphasis on business
ethics and internal control. Both of these individuals were responsible for detecting and
reporting improper activities committed by two of the Companys previous executive officers
prior to fiscal 2006.
    
    Internal Audit Function Management has determined that its existing corporate
governance controls are sufficient and do not warrant supplementing with an internal audit
function.
    
    Related Party Transactions the Company has not allowed any additional related party
transactions since fiscal 2005. The Companys new procedure for director and officer
questionnaires is to annually survey its directors and officers for the existence of any
related party transactions or conflicts-of-interest.
    
    Subsidiary Operations the Company incorporated subsidiary period-end checklists and
questionnaires into its financial reporting close process to ensure that subsidiary
operating activity is recorded, processed, summarized and reported within the appropriate
time period.
    
    Expense Reimbursement Procedures the Company has enhanced its policies and procedures
regarding expense reimbursement procedures at its corporate office. Scrutiny of expense
reimbursement procedures have been tightened to require multiple approvals for each
submitted expense report and corporate credit cards involving executive officers have been
cancelled.
    
    Independent Distributor Relationships from time to time the Company enters into
agreements for business or market development, which may result in additional compensation
to specific distributors. The Company requires that each of these arrangements is
substantiated by documentation which includes the underlying terms and conditions.
 
 Item 9B. OTHER INFORMATION
  65




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##### Table of Contents



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
  66




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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 CostsBeginning
    
    and Expenses/
    
    
    
    
    
    Balance at EndDescription
    
    of Period
    
    Against Net Sales (1)
    
    Deductions (2)
    
    of Period(In Thousands)Reserve for obsolete inventoryYear ended December 31, 2007
    
    $
    3,320
    
    
    $
    489
    
    
    $
    (1,987
    )
    
    $
    1,822Year ended December 31, 2006
    
    $
    693
    
    
    $
    2,823
    
    
    $
    (196
    )
    
    $
    3,320Reserve for KGC receivableYear ended December 31, 2007
    
    $
    1,354
    
    
    $
    
    
    
    $
    (565
    )
    
    $
    789Year ended December 31, 2006
    
    $
    2,759
    
    
    $
    
    
    
    $
    (1,405
    )
    
    $
    1,354Accrual for sales returnsYear ended December 31, 2007
    
    $
    1,797
    
    
    $
    2,898
    
    
    $
    (3,941
    )
    
    $
    754Year ended December 31, 2006
    
    $
    1,743
    
    
    $
    6,472
    
    
    $
    (6,418
    )
    
    $
    1,797
 
 (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.
 67




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SIGNATURES
  NATURAL HEALTH TRENDS CORP.Date: March 31, 2008
    /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 31, 2008/s/ Timothy S. Davidson

Timothy S. Davidson
    
    Senior Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 31, 2008/s/ Randall A. Mason
    
    Chairman of the Board and Director
    
    March 31, 2008Randall A. Mason/s/ Stefan W. Zuckut
    
    Director
    
    March 31, 2008Stefan W. Zuckut
 68




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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
    
    Stockholders Agreement, dated as of March 31, 2004, by and among the Company, John Cavanaugh, Terry LaCore and
Jason Landry (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on April 15, 2004).10.13
    
    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).10.14
    
    Agreement dated December 21, 2005 between Natural Health Trends Corp. and KGC Networks Pte Ltd. (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed on December 28, 2005).+10.15
    
    2002 Stock Plan, as amended (incorporated by reference to Appendix C to Definitive Proxy Statement filed on
April 27, 2005).+10.16
    
    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).+10.17
    
    2007 Annual Incentive Plan (incorporated by reference to Appendix A to Definitive Proxy Statement filed on
October 20, 2006).+10.18
    
    2007 Equity Incentive Plan (incorporated by reference to Appendix B to Definitive Proxy Statement filed on
October 20, 2006).




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description+10.19
    
    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).+10.20
    
    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).+10.21
    
    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).+10.22
    
    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).+10.23
    
    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).+10.24
    
    Non-competition and proprietary rights assignment agreement dated as of December 8, 2006 between Natural Health
Trends Corp. and John Cavanaugh (incorporated by reference to Exhibit 10.2to Current Report on Form 8-K filed on
December 13, 2006).+10.25
    
    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).+10.26
    
    Employment Agreement (including form of Non-Competition and Proprietary Rights Assignment Agreement) for Curtis
Broome dated April 23, 2007 (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed on
April 26, 2007).+10.27
    
    Employment letter agreement dated as of July 31, 2006 between Natural Health Trends Corp. and Stephanie Hayano
(incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 3, 2006).+10.28
    
    Non-competition and proprietary rights assignment agreement dated as of July 31, 2006 between Natural Health
Trends Corp. and Stephanie Hayano (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed
on August 3, 2006).+10.29
    
    Severance Agreement dated as of February 21, 2007 between Natural Health Trends Corp. and Stephanie Hayano
(incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on February 26, 2007).+10.30
    
    Letter agreement dated as of March 1, 2006 between Natural Health Trends Corp. and Robert H. Hesse (incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K filed on March 16, 2006).+10.31
    
    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).+10.32
    
    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