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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x      Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2009

OR

o         Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                  to                .

Commission file number  0-8707

NATURE’S SUNSHINE PRODUCTS, INC.

(Exact name of Registrant as specified in its charter)

75 East 1700 South

Provo, Utah 84606

(Address of principal executive offices and zip code)

(801) 342-4300

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, no par value.

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

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

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes o No x.

The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2009 was approximately $36,116,631 based on the closing price of $5.25 as quoted by Nasdaq Capital Market on June 30, 2009.

The number of shares of Common Stock, no par value, outstanding on March 5, 2010 is 15,510,159 shares.

EXPLANATORY NOTES

Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2009, are incorporated by reference in Part III of this Annual Report on Form 10-K.

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NATURE’S SUNSHINE PRODUCTS, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2009

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information included or incorporated herein by reference in this report may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies. All statements (other than statements of historical fact) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These statements are often characterized by terminology such as “believe,” “hope,” “may,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy” and similar expressions, and are based on assumptions and assessments made by management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in this report, including the risks set forth under “Risk Factors” in Item 1A.

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

PART 1

Item 1. Business

The Company

Nature’s Sunshine Products, Inc., founded in 1972 and incorporated in Utah in 1976, together with our subsidiaries, is primarily engaged in the manufacturing and marketing of nutritional and personal care products. We sell our products worldwide to a sales force of independent Distributors (as defined below) who use the products themselves or resell them to other Distributors or consumers.

Our operations are conducted in the United States as well as in various other countries. Our subsidiaries are located in Mexico, Central America, Canada, Venezuela, the Dominican Republic, Japan, Ecuador, the United Kingdom, Colombia, Peru, Israel, Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia, Belarus, China, Poland and Brazil. We export our products to several other countries, including Argentina, Australia, Chile, New Zealand and Norway.

We also sell our products through a separate division, Synergy Worldwide. Synergy Worldwide sells products in the United States, Japan, South Korea, Singapore, Thailand, Taiwan, Malaysia, Hong Kong, the Philippines, Indonesia, the United Kingdom, Germany, Austria, the Netherlands, Norway, Sweden, Australia, Canada, Mexico, and the Czech Republic.

Business Segments

We are principally engaged in one line of business: the manufacturing and marketing of nutritional and personal care products. We conduct our business through three reportable business segments. Two of the reportable business segments operate under the Nature’s Sunshine Products name and are divided based on geographic operations: a United States segment (“NSP United States”) and an international segment (“NSP International”). Our third reportable business segment operates under the Synergy Worldwide name, a division that was acquired by us in 2000. Synergy Worldwide offers products with formulations that are sufficiently different from those of the Nature’s Sunshine Products offerings to warrant its treatment as a separate reportable segment . In addition, Synergy Worldwide’s marketing and Distributor compensation plans are sufficiently different from those of Nature’s Sunshine Products. Information by business segment for each of our last three fiscal years regarding net sales revenue and operating income, and information by business segment as of the end of our last two fiscal years regarding identifiable assets, are set forth in Note 12 of the Notes to Consolidated Financial Statements set forth in Item 8 of this report.

Products and Manufacturing

Our line of over 700 products includes herbal products, vitamins and mineral supplements, personal care products, nutritional drinks, and miscellaneous other products. We purchase herbs and other raw materials in bulk and, after quality control testing, we formulate, encapsulate, tablate or concentrate them, and package them for shipment. Most of our products are manufactured at our facility in Spanish Fork, Utah. Contract manufacturers produce some of our personal care and other miscellaneous products for us in accordance with our specifications and standards. We have implemented stringent quality control procedures to verify that our contract manufacturers have complied with our specifications and standards. Our product lines are described below.

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Herbal Products

We manufacture a wide selection of herbal products, which are sold in the form of capsules or tablets. These capsules or tablets contain herb powder or a combination of two or more herb powders. We also produce both single herbs and herb combinations in the form of liquid herbs and extracts. Liquid herbs are manufactured by concentrating herb constituents in a vegetable glycerin base. Extracts are created by dissolving powdered herbs into liquid solvents that separate the key elements of the herbs from the fibrous plant material. For the years ended December 31, 2009, 2008 and 2007, herbal products accounted for approximately 48.5, 49.6 and 52.9 percent of net sales revenue for NSP United States, respectively.  We believe these percentages reasonably reflect the proportions experienced by the Company on a consolidated basis.

Vitamins and Mineral Supplements

We manufacture a wide variety of single vitamins, which are sold in the form of chewable or non-chewable tablets. We also manufacture several multiple vitamins and mineral supplements, including a line containing natural antioxidants. Generally, mineral supplements are sold in the form of tablets; however, certain minerals are offered only in liquid form. For the years ended December 31, 2009, 2008, and 2007, vitamins and mineral supplements accounted for approximately 44.1, 44.4, and 41.6 percent of  net sales revenue for NSP United States, respectively. We believe these percentages reasonably reflect the proportions experienced by the Company on a consolidated basis.

Personal Care Products

We manufacture or contract with independent manufacturers to supply a variety of personal care products for external use, including oils and lotions, aloe vera gel, herbal shampoo, herbal skin treatment, toothpaste, and skin cleanser. For the years ended December 31, 2009, 2008, and 2007, personal care products accounted for approximately 3.1, 2.8, and 2.3 percent of net sales revenue for NSP United States, respectively. We believe these percentages reasonably reflect the proportions experienced by the Company on a consolidated basis.

Other Products

We manufacture or contract with independent manufacturers to supply a variety of other products, including a variety of nutritional drinks, homeopathic products, and powders. For the years ended December 31, 2009, 2008, and 2007, other products accounted for approximately 4.3, 3.2, and 3.2 percent of net sales revenue for NSP United States, respectively. We believe these percentages reasonably reflect the proportions experienced by the Company on a consolidated basis.

Distribution and Marketing

Our independent Distributors market our products to consumers through direct-selling techniques, as well as sponsoring other Distributors. We seek to motivate and provide incentives to our independent Distributors by offering high quality products and providing our Distributors with product support, training seminars, sales conventions, travel programs, and financial benefits.

Our products sold in the United States are shipped directly from our manufacturing and warehouse facilities located in Spanish Fork, Utah, as well as from our regional warehouses located in Columbus, Ohio; Dallas, Texas; and Atlanta, Georgia. Most of our international operations maintain warehouse facilities with inventory to supply their customers.

Demand for our products is created primarily from our independent Distributors. As of December 31, 2009, we had approximately 697,200 active Distributors worldwide, which included approximately 253,400 Distributors in the United States. A person who joins our independent sales force begins as a “Distributor.” An individual can become a Distributor by signing up under the sponsorship of someone who is already a Distributor or by signing up through the Company, where they will then be assigned a sponsor. Each Distributor is required to renew his or her distributorship on a yearly basis; our experience indicates that, on average, approximately 45 percent of our Distributors renew annually. Many Distributors sell our products on a part-time basis to friends or associates or use the products themselves. An independent Distributor interested in earning additional income by committing more time and effort to selling our products may earn “Manager” status. Manager status is contingent upon attaining certain purchase volume levels, recruiting additional Distributors, and demonstrating leadership abilities. As of December 31, 2009, we had approximately 28,700 independent Managers worldwide, including approximately 6,900 independent Managers in the United States. Managers resell our products to Distributors within their sales group, sell our products directly to consumers, or use the products themselves. Historically, on average, approximately 63 percent of Distributors appointed as Managers have continued to maintain that status annually.

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In the United States, we generally sell our products on a cash or credit card basis. From time to time, our United States operation extends short-term credit associated with product promotions. For certain of our international operations, we use independent distribution centers and offer credit terms that are generally consistent with industry standards within each respective country.

We pay sales commissions (“Volume Incentives”) to our independent Managers and Distributors based upon the amount of sales group product purchases. Generally, a portion of these Volume Incentives are paid to the applicable Manager as a rebate for product purchases made by the Manager and the Manager’s down-line Distributors. Volume Incentives are recorded as an expense in the year earned. The remaining portion of these Volume Incentives is paid in the form of commissions for purchases made by the Manager’s down-line Distributors. The amounts of Volume Incentives that we paid during the years ended December 31, 2009, 2008, and 2007 are set forth in our Consolidated Financial Statements in Item 8 of this report. In addition to the opportunity to receive Volume Incentives, Managers who qualify by attaining certain levels of monthly product purchases are eligible for additional incentive programs including automobile allowances, sales convention privileges, and travel awards.

Source and Availability of Raw Materials

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

Trademarks and Trade Names

We have obtained trademark registrations of our basic trademark, Nature’s Sunshine®, and the landscape logo for all of our Nature’s Sunshine Products product lines. We have also obtained trademark registrations for Synergy® for all of our Synergy Worldwide product lines. We hold trademark registrations in the United States and in many other countries. Our customers’ recognition and association of our brands and trademarks with quality is an important element of our operating strategy.

Seasonality

Our business does not reflect significant seasonality.

Inventories

In order to provide a high level of product availability to our independent Distributors and Managers, we maintain a considerable inventory of raw materials in the United States and of finished goods in most countries in which we sell our products. Due to different regulatory requirements across the countries in which we sell our products, our finished goods inventories reflect product labels and sometimes product formulations specific for each country. Our inventories are subject to obsolescence due to finite shelf lives.

Dependence upon Customers

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

Backlog

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

Competition

Our products are sold in competition with other companies, some of which have greater sales volumes and financial resources than we do, and sell brands that are, through advertising and promotions, better known to consumers. We compete in the nutritional and personal care industry against companies that sell through retail stores as well as against other direct selling companies. For example, we compete against manufacturers and retailers of nutritional and personal care products, which are distributed through supermarkets, drug stores, health food stores, discount stores, etc. In addition to competition with these manufacturers and retailers, we compete for product sales and independent distributors with many other direct sales companies, including Herbalife, Pharmanex

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(NuSkin), USANA, Shaklee, Mannatech and Amway, among others. The principal competitors in the retail encapsulated and tableted herbal products market include Nature’s Way, NOW, Rexall Sundown, and Nutraceuticals. We believe that the principal components of competition in the direct sales marketing of nutritional and personal care products are quality, price, and brand recognition. In addition, the recruitment, training, travel, and financial incentives for the independent sales force are important factors.

Research and Development

We conduct research and development activities at our manufacturing facility located in Spanish Fork, Utah. Our principal emphasis in our research and development activities is the development of new products and the enhancement of existing products. The amount, excluding capital expenditures, spent on research and development activities was approximately $2.0 million in 2009, $2.0 million in 2008, and $1.9 million in 2007. During the three years in the period ended December 31, 2009, we did not contract for any third-party research and development.

Compliance with Environmental Laws and Regulations

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

Regulation

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

FDA regulations relating specifically to foods and dietary supplements for human use are set forth in Title 21 of the Code of Federal Regulations. These regulations include basic labeling requirements for both foods and dietary supplements. Additionally, FDA regulations require us to meet relevant good manufacturing practice regulations for the preparation, packaging and storage of our food and dietary supplements.

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

In foreign markets, prior to commencing operations and prior to making or permitting sales of our products in the market, we may be required to obtain an approval, license or certification from the country’s ministry of health or comparable agency.  Prior to entering a new market in which a formal approval, license or certificate is required, we work extensively with local authorities in order to obtain the requisite approvals.  We must also comply with product labeling and packaging regulations that vary from country to country.  Our failure to comply with these regulations can result in a product being removed from sale in a particular market, either temporarily or permanently.

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International Operations

A significant portion of our net sales are concentrated within the United States, which represented 45.0 percent of net sales in 2009. Outside of the United States, Russia is our largest market, representing 8.8 percent of net sales during 2009, while Japan follows close behind, representing 8.2 percent of net sales during 2009. As we continue to expand internationally, our operating results will likely become more sensitive to economic and political conditions in foreign markets, as well as to foreign currency fluctuations.  A breakdown of net sales revenue by region in 2009, 2008, and 2007 is set forth below.

(Dollar amounts in thousands)

Our sales of nutritional and personal care products are established internationally in Mexico, Central America, Canada, Venezuela, the Dominican Republic, Japan, Ecuador, the United Kingdom, Colombia, Peru, Israel, Russia, Ukraine, Latvia, Lithuania, Kazakhstan, Mongolia, Belarus, China, Poland, Brazil, South Korea, Singapore, Thailand, Taiwan, Malaysia, Hong Kong, the Philippines, Indonesia, Germany, Austria, the Netherlands, Norway, Sweden, and the Czech Republic. We also export our products to several other countries, including Argentina, Australia, Chile, New Zealand, and Norway.

Our international operations are conducted in a manner we believe is comparable with those conducted in the United States; however, in order to conform to local variations, economic realities, market customs, consumer habits, and regulatory environments, differences often exist in the products and in the distribution and marketing programs.

Our international operations are subject to many of the same risks faced by our United States operations, including competition and the strength of the local economy. In addition, our international operations are subject to certain risks inherent in carrying on business abroad, including foreign regulatory restrictions, fluctuations in monetary exchange rates, import-export controls and the economic and political policies of foreign governments. The significance of these risks increases as our international operations continue to expand. A significant portion of our long-lived assets are located in the United States and Venezuela.  Information by region for each of our last two fiscal years regarding our long-lived assets is set forth in Note 12 of the Notes to the Consolidated Financial Statements set forth in Item 8 of this report.

Executive Officers

The Company’s executive officers, as of the date of this report, are as follows:

Douglas Faggioli.  Mr. Faggioli is the President and Chief Executive Officer of our Company. Prior to his appointment as President and Chief Executive Officer in November 2003, Mr. Faggioli served as Executive Vice President and Chief Operating

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Officer of our Company. He began his employment with us in 1983 and has served as one of our officers since 1989 and currently serves as a director of our Company. He is a Certified Public Accountant. On March 12, 2010, Mr. Faggioli informed the Board of Directors of his intent to step down as President and Chief Executive Officer, as well as a Member of the Company’s Board of Directors effective June 30, 2010.

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

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

Greg Halliday.  Mr. Halliday is the President—U.S. Sales for Nature’s Sunshine Products. He has served in this position since April 2006 and previously served as Vice President—Nature’s Sunshine Products U.S. Sales from May 2001 to March 2006. Mr. Halliday received his B.S. in 1989 and M.B.A. with an emphasis in Marketing in 1991 from the Marriott School of Management at Brigham Young University.

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

John R. DeWyze.  Mr. DeWyze is the Executive Vice President—Operations for Nature’s Sunshine Products and has served in this position since 2002. Mr. DeWyze received his B.S. in Chemistry in 1981 from Grand Valley State University and his M.B.A. in 1994 from the University of Southern Indiana.

William J. Keller.  Dr. Keller is the Vice President—Health Sciences and Educational Services for Nature’s Sunshine Products. He was appointed to serve in this capacity in April 2001. Prior to joining our Company, Dr. Keller was the Department Chair/Professor in the School of Pharmacy at Samford University and Northeast Louisiana University. Dr. Keller received his B.S. in Pharmacy and M.S. in Pharmaceutical Sciences from Idaho State University. In 1972, the University of Washington awarded him a Ph.D. in Pharmacognosy.

Lynda Marie Hammons.  Ms. Hammons is the Vice President—Quality and Regulatory Affairs for Nature’s Sunshine Products. She has served in this capacity since June 2001. Ms. Hammons received her B.S. in Chemistry and Microbiology from Bowling Green State University and her M.B.A. with an emphasis on Quality Management from the University of Cincinnati. Ms. Hammons is also a Certified Quality Engineer, a Certified Quality Technician and a Certified Quality Auditor—American Society for Quality.

Employees

The number of individuals we employed as of December 31, 2009 was 1,191. We believe that our relations with our employees are satisfactory.

Available Information

Our principal executive office is located at 75 East 1700 South, Provo, Utah 84606. Our telephone number is (801) 342-4300 and our Internet website address is http://www.natr.com. We make available free of charge on our website our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as practicable after we electronically file these documents with, or furnish them to, the Securities and Exchange Commission (the “SEC”). The SEC also maintains an Internet website that contains reports, and other information regarding issuers that file electronically with the SEC at www.sec.gov. We also make available free of charge on our website our Corporate Governance Guidelines, our Code of Business Conduct and Ethics, and the Charters of our Audit Committee, Corporate Governance and Nominating Committee, and Compensation Committee.

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Item 1A. Risk Factors

You should carefully consider the following risks in evaluating our Company and our business. The risks described below are the risks that we currently believe are material to our business. However, additional risks not presently known to us, or risks that we currently believe are not material, may also impair our business operations. You should also refer to the other information set forth in this report, including the information set forth in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our consolidated financial statements and the related notes. Our business prospects, financial condition, or results of operations could be adversely affected by any of the following risks. If we are adversely affected by such risks, then the trading price of our common stock could decline.

Changes in laws and regulations regarding network marketing may prohibit or restrict our ability to sell our products in some markets.

Network marketing systems are frequently subject to laws and regulations by various government agencies throughout the world. These laws and regulations are generally intended to prevent fraudulent or deceptive practices and ensure that sales are made to consumers of the products and that compensation, recognition, and advancement within the marketing organization are based upon sales of the product. Failure to comply with these laws and regulations could result in significant penalties. Violations could result from misconduct by an associate, ambiguity in statutes, changes or new laws and regulations affecting our business, and court related decisions. Furthermore, we may be restricted or prohibited from using network marketing plans in some foreign countries.

Our products and manufacturing activities are subject to extensive government regulations and could be subject to additional laws and regulations.

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

In the future, we may be subject to additional laws or regulations administered by the FDA or other federal, state, local, or foreign regulatory authorities, the repeal or amendment of laws or regulations which we consider favorable and/or more stringent interpretations of current laws or regulations. We can neither predict the nature of such future laws, regulations, interpretations, or applications, nor what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business. They could, however, require reformulation of certain products to meet new standards, recall or discontinuance of certain products not able to be reformulated, imposition of additional record-keeping requirements, expanded documentation of the properties of certain products, expanded or altered labeling and/or scientific substantiation. Any or all such requirements could have a material negative impact on our financial position, results of operations, or cash flows.

If we are unable to attract and retain independent Distributors, our business could suffer.

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

Several factors affect our ability to attract and retain independent Distributors, including:

·                  any adverse publicity regarding us, our products, our distribution channels or our competitors;

·                  on-going motivation of our independent Distributors;

·                  public’s perceptions about the value and efficacy of our products;

·                  public’s perceptions and acceptance of network-marketing;

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·                  general and economic business conditions;

·                  changes to our compensation arrangements with our independent Distributors; and

·                  competition in recruiting and retaining independent Distributors and or market saturation.

We cannot provide any assurance that our independent Distributors will continue to maintain their current levels of productivity or that we will be able to continue to attract and retain Distributors in sufficient numbers to sustain future growth or to maintain present growth levels.

The economic slowdown in the markets in which we do business has reduced consumer demand for our products.

Consumer spending habits, including spending for our products, are affected by, among other things, prevailing economic conditions, levels of employment, fuel prices, salaries and wages, the availability of consumer credit, consumer confidence and consumer perception of economic conditions. For instance, in the last fiscal quarter of 2008, we began to see changes in our consumer spending habits in the United States, Russia, Asian and Latin American markets due to the current general economic slowdown, which has resulted in lower net sales of our products. The current general economic slowdown in the markets in which we do business and an uncertain economic outlook may continue to adversely affect consumer spending habits and customer traffic, which may result in lower net sales of our products.  A prolonged global economic downturn could have a material negative impact on our financial position, results of operation, or cash flows.

Currency exchange rate fluctuations have lowered our revenue and net income.

In 2009, we recognized approximately 55.0 percent of our revenue in markets outside the United States, of which 36.2 percent was recognized in each market’s respective local currency (other than the U.S. dollar). We purchase inventory primarily in the United States in U.S. dollars. In preparing our financial statements, we translate revenues and expenses in foreign countries from their local currencies into U.S. dollars using weighted-average exchange rates. Because a significant portion of our sales is in foreign countries, exchange rate fluctuations may have a significant effect on our sales and earnings. Our reported net earnings have in the past and are likely to continue to be significantly affected by fluctuations in currency exchange rates, with earnings generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. These fluctuations had a generally negative effect on our revenue in 2009 as compared to 2008 beginning in the fourth quarter 2008.  During the fourth quarter for the year ended December 31, 2008, we began to see a decline in our global net sales of our products of approximately 4.7 percent as a result of changes in global economic conditions in the markets in which our business segments operate.  The decline was primarily driven by strengthening of the U.S. dollar against most major currencies of the markets in which we operate. During 2009, we have experienced a continuing decline in our global net sales as a result of the U.S. dollar strengthening against most major currencies, which is a reversal of the trend for prior years.  For instance, the U.S. dollar increased approximately 26.2 percent from the end of the third quarter of 2008 to the end of the fourth quarter 2008 against the Mexican peso and the weighted average exchange rate used to translate revenues and expenses from Mexico has also weakened 22.7 percent for the year ended December 31, 2009 compared to 2008 as a result of the U.S. dollar strengthening against the Mexican peso.  However, during 2009, we began to see some stabilization in the average exchange rates used to translate revenues and expenses over the course of the year for most of the markets in which we operate. If exchange rates were to change in future periods relative to those experienced during the end of 2008 and the beginning of 2009, it could have a significant impact on our revenue in future periods. As operations expand in countries where foreign currency transactions may be made, our operating results will increasingly be subject to the risks of exchange rate fluctuations and we may not be able to accurately estimate the impact that these changes may have on our future results of operations or financial condition.

Some of the markets in which we operate may become highly inflationary.

Inflation is another risk associated with our international operations. For example, as of January 1, 2010, Venezuela has been designated as a highly inflationary economy under generally accepted accounting principles in the United States of America (“U.S. GAAP”). As a result, beginning January 1, 2010, the U.S. dollar will be the functional currency for our subsidiaries in Venezuela. Going forward, currency remeasurement adjustments for this subsidiary’s financial statements and other transactional foreign exchange gains and losses will be reflected in earnings, which could result in volatility within our earnings, rather than as a component of comprehensive income within shareholders’ equity.

Some of the markets in which we operate have currency controls in place which may restrict the repatriation of cash.

The possibility that foreign governments may impose currency remittance restrictions is another risk faced by our international operations. Due to the possibility of government restrictions on transfers of cash out of the country and control of exchange rates, we

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may not be able to repatriate cash at exchange rates beneficial to the Company, which could have a material adverse effect on our financial position, results of operations, or cash flows.

For example, as of December 31, 2009, we had approximately $2.0 million in cash denominated in Venezuelan bolivar fuertes. Currency restrictions enacted by the government of Venezuela require approval from the government’s currency control organization for our subsidiary in Venezuela to obtain U.S. dollars at an official exchange rate to pay for imported products or to repatriate dividends back to the Company. While to date we have been able to receive approval from the government of Venezuela to obtain U.S. dollars at the official exchange rate, no assurances can be given that we will continue to receive such approval, or that other markets in which we operate will enact similar restrictions.

Availability and integrity of raw materials could become compromised.

We depend on outside suppliers for raw materials. We acquire all of our raw materials for the manufacture of our products from third-party suppliers. We have many agreements for the supply of materials used in the manufacture of our products in order to hedge against shortages or potential spikes in material costs. We also contract with third-party manufacturers and suppliers for the production of some of our products. In the event we were to lose any significant suppliers and experience any difficulties in finding or transitioning to alternative suppliers, it could result in product shortages or product back orders, which could harm our business. There can be no assurance that suppliers will be able to provide us the raw materials in the quantities and at the appropriate level of quality we request or at a price we are willing to pay. We are also subject to the delays caused by any interruption in the production of these materials including weather, crop conditions, climate change, transportation interruptions, and natural disasters or other catastrophic events.

Occasionally, our suppliers have experienced production difficulties with respect to our products, including the delivery of materials or products that do not meet our quality control standards. These quality problems have in the past resulted in, and in the future could result in, stock outages or shortages of our products, and could harm our sales and create inventory write-offs for unusable product.

Geopolitical issues and conflicts could adversely affect our business.

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

Our business is subject to the effects of adverse publicity and negative public perception.

Our ability to attract and retain Distributors, as well as their ability to maintain or grow sales in the future, can be affected by either adverse publicity or negative public perception in regards to our industry, our competition, our direct marketing model, the quality or efficacy of nutritional product supplements and ingredients, and our business generally. There can be no assurance we will not be subject to adverse publicity or negative public perception in the future or that it would not have an adverse or material negative impact on our financial position, results of operations, or cash flows.

Taxation and transfer pricing affect our operations.

As a U.S. company doing business in many international markets, we are subject to foreign tax and intercompany pricing laws, including those relating to the flow of funds between our parent Company and our subsidiaries. These pricing laws are designed to ensure that appropriate levels of income and deductions are reported by our U.S. and foreign entities and that they are taxed appropriately. Regulators in the United States and in foreign markets closely monitor our corporate structures, intercompany transactions, and how we effectuate intercompany fund transfers. If regulators challenge our corporate structures, transfer pricing methodologies or intercompany transfers, our operations may be harmed, and our effective tax rate may increase. We are eligible to receive foreign tax credits in the United States for certain foreign taxes actually paid abroad. In the event any audits or assessments are concluded adversely to us, we may not be able to offset the consolidated effect of foreign income tax assessments through the use of U.S. foreign tax credits. Because the laws and regulations governing U.S. foreign tax credits are complex and subject to periodic legislative amendment, we cannot be sure that we would in fact be able to take advantage of any foreign tax credits in the future. The various customs, exchange control and transfer pricing laws are continually changing and are subject to the interpretation of governmental agencies.

In early 2006, the Internal Revenue Service began an audit of the Company’s income tax returns. This audit is ongoing and covers income tax returns for the years 2003 through 2008. See Item 3, “Legal Proceedings — Audit of U.S. Federal Tax Return 2003-2008”. We cannot predict what impact, if any, and the materiality of such impact, if any, the conclusion of these matters may have on our financial statements.

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We collect and remit sales tax in states in which we have determined that nexus exists.  Other states may, from time to time, claim we have state-related activities constituting a sufficient nexus to require such collection.

Despite our best efforts to be aware of and comply with such laws and changes to the interpretations thereof, there is a risk that we may not continue to operate in compliance with such laws. We may need to adjust our operating procedures in response to these changes, and such changes could have a material negative impact on our financial position, results of operation, or cash flows.

Our business is subject to intellectual property risks.

Most of our products are not protected by patents. Restrictive regulations governing the precise labeling of ingredients and percentages for nutritional supplements, the large number of manufacturers who produce products with many active ingredients in common, and the rapid change and frequent reformulation of products make patent protection impractical. As a result, we enter into confidentiality agreements with certain of our employees in our research and development activities, our independent associates, suppliers, directors, officers, and consultants to help protect our intellectual property, investment in research and development activities and trade secrets. We have also obtained trademarks for the Nature’s Sunshine Products name and logo as well as the Synergy Worldwide name. There can be no assurance that our efforts to protect our intellectual property and trademarks will be successful. Nor can there be any assurance that third parties will not assert claims against us for infringement of intellectual property rights, which could result in our business being required to obtain licenses for such rights, payment of royalties, or the termination of our manufacturing of infringing products, all of which could have a material negative impact on our financial position, results of operations, or cash flows.

Product liability claims could harm our business.

As a manufacturer and distributor of products that are ingested, we face an inherent risk of exposure to product liability claims in the event that, among other things, the use of our products results in alleged injury to consumers due to tampering by unauthorized third parties or product contamination and/or other causes. We have historically had a very limited number of product claims or reports from individuals who have asserted that they have suffered adverse consequences as a result of using our products. We have established a wholly-owned captive insurance company to provide us with product liability insurance coverage and have accrued an amount that we believe is sufficient to cover probable and reasonably estimable liabilities related to product liability claims based upon our history. There can be no assurance that these estimates will prove to be sufficient nor can there be any assurance that the ultimate outcome of any litigation for product liability will not have a material negative impact on our business prospects, financial position, results of operations, or cash flows.

Inventory obsolescence due to finite shelf lives could adversely affect our business.

In order to provide a high level of product availability to our independent Distributors and Managers, we maintain a considerable inventory of raw materials in the United States and of finished goods in most countries in which we sell our products. Our inventories of both raw materials and finished goods have finite shelf lives. If we overestimate the demand for our products, we could experience significant write-downs on our inventory due to obsolescence. Such write-downs could have a material negative impact on our financial position, results of operations, or cash flows.

System failures could harm our business.

Like many companies, our business is highly dependent upon our information technology infrastructure to effectively and efficiently manage our operations, including order entry, customer billing, accurately tracking purchases and volume incentives, and managing accounting, finance, and manufacturing operations. The occurrences of natural disasters or other unanticipated problems could result in interruptions in our day-to-day business that could adversely affect our business. We have a disaster recovery plan in place to mitigate the risk. Nevertheless, there can be no assurance that a long-term failure or impairment of any of our information systems would not adversely affect our ability to conduct our day-to-day business.

The Company could incur obligations relating to the activities of our Distributors.

We sell our products worldwide to a sales force of independent Distributors who use the products themselves or resell them to other independent Distributors or consumers. In the event that local laws and regulations or the interpretation of locals laws and regulations change and require us to treat our independent Distributors as employees, or if our Distributors are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors, under existing laws and interpretations, we may be held responsible for a variety of obligations that are imposed upon employers relating to their employees, including employment related taxes and penalties. Our Distributors also operate in jurisdictions where

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local legislation and governmental agencies require us to collect and remit taxes such as sales tax or value-added taxes. In addition, there is the possibility that some jurisdictions could seek to hold the Company responsible for false product claims or the negligent actions of an independent Distributor. However, to date the Company has had no such occurrences.  In addition, we believe we have strong legal defenses if such a claim were to arise. If the Company were found to be responsible for any of these issues related to our Distributors, it could have a material negative impact on our financial position, results of operations, or cash flows.

Changes in key management could materially adversely affect the Company.

We believe our success depends in part on our ability to retain our executive officers, and to continue to attract additional qualified individuals to our team. We have entered into employment agreements with each of our named executive officers, which we believe achieves two important goals crucial to our long-term financial success: the long-term retention of our senior executives and their commitment to the attainment of our strategic objectives. However, we cannot guarantee the continued service by our key officers. The loss or limitation of any of our executive officers or the inability to attract additional qualified management personnel could have a material negative impact on our financial position, results of operations, or cash flows. We do not carry key man insurance on the lives of any of our executive officers.

Our business is involved in an industry with intense competition.

Our business operates in an industry with numerous manufacturers, distributors, and retailers of nutritional products. The market for our products is intensely competitive. Many of our competitors are significantly larger, have greater financial resources and have better name recognition than we do. We also rely on our independent Distributors to market and sell our products through direct marketing techniques, as well as sponsoring other Distributors. Our ability to compete with other direct marketing companies depends greatly on our ability in attracting and retaining our Distributors. In addition, we currently do not have significant patent or other proprietary protection, and our competitors may introduce products with the same or similar ingredients that we use in our products. As a result, we may have difficulty differentiating our products from our competitors’ products, and competing products entering the nutritional market. There can be no assurance that our future operations would not be harmed as a result of changing market conditions and future competition.

We have had material weaknesses in our internal controls over financial reporting.

As discussed in Item 9A of this report, “Controls and Procedures,” our management team for financial reporting, under the supervision and with the participation of our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our internal controls. Management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2009, because of the continued existence of material weakness related to accounting for taxes.  A “material weakness” is defined under auditing rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.

The Company has taken various steps to remediate this remaining material weakness. With respect to our accounting for taxes, we hired a new Tax Director during 2008 and have utilized various outsourced service providers for tax consulting services to assist in our accounting for income taxes.  Although we have made and are continuing to make improvements in our internal controls, if we are unsuccessful in our focused effort to effectively remediate the weakness in our internal controls over financial reporting over time, it may adversely impact our ability to report our financial condition and results of operations in the future accurately and in a timely manner, and may adversely impact our reputation with stakeholders.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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

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

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We own approximately 60,000 square feet of office and warehouse space in Mexico and approximately 13,000 square feet of office and warehouse space in Venezuela. These facilities support NSP International.

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

We lease properties used primarily as distribution warehouses located in Columbus, Ohio; Dallas, Texas; Atlanta, Georgia; and Spanish Fork, Utah; as well as offices and distribution warehouses in Pleasant Grove, Utah; Japan; Mexico; Central America; Canada; Venezuela; South Korea; the Dominican Republic; Ecuador; the United Kingdom; Colombia; Thailand; Peru; Singapore; Israel; Brazil; Taiwan; Indonesia; Malaysia; the Philippines; Poland; China; and Australia. We believe these facilities are suitable for their respective uses and are, in general, adequate for our present and near-term future needs. During our fiscal years 2009, 2008, and 2007, we spent approximately $5.7 million, $5.9 million, and $5.2 million, respectively, for all of our leased facilities.

Item 3. Legal Proceedings

The Company is party to various legal proceedings, including those noted below. Management cannot predict the ultimate outcome of these proceedings, individually or in the aggregate, or their resulting effect on the Company’s business, financial position, results of operations or cash flows as litigation and related matters are subject to inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on the business, financial position, results of operations, or cash flows for the period in which the ruling occurs and/or future periods. The Company maintains directors’ and officers’ liability, product liability, general liability and excess liability insurance coverage. However, no assurances can be given that such insurance will continue to be available at an acceptable cost to the Company, that such coverage will be sufficient to cover one or more large claims, or that the insurers will not successfully disclaim coverage as to a pending or future claim.

Class-Action Litigation

Between April 3, 2006 and June 2, 2006, five separate shareholder class-action lawsuits were filed against the Company and certain of its present and former officers and directors in the United States District Court for the District of Utah. These matters were consolidated and on November 3, 2006, the plaintiffs filed a consolidated complaint (the “Consolidated Complaint”) against the Company, the Company’s Chief Executive Officer and a director, Douglas Faggioli, the Company’s former Chief Financial Officer, Craig D. Huff, and a former director and former Chair of the Company’s Audit Committee, Franz L. Cristiani. The Consolidated Complaint asserts three separate claims on behalf of purchasers of the Company’s common stock: (1) a claim against Mr. Faggioli and the Company for violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, alleging that Mr. Faggioli made a series of alleged material misrepresentations to the investing public; (2) a claim against Mr. Faggioli and the Company for violation of Section 10(b) and Rule 10b-5, alleging that Mr. Faggioli made a series of misrepresentations to the Company’s then independent auditor, KPMG, LLP (“KPMG”), for the purpose of obtaining unqualified or “clean” audit opinions and review opinions from KPMG concerning certain of the Company’s annual and quarterly financial statements; and (3) a claim against Messrs. Faggioli, Huff and Cristiani for violation of Section 20(a) of the Exchange Act, alleging that the individual defendants have “control person” liability for the previously-alleged violations by the Company. The Consolidated Complaint seeks an unspecified amount of compensatory damages, together with interest thereon, litigation costs and expenses, including attorneys’ fees and expert fees, and any such other and further relief as may be allowed by law.

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

On September 14, 2009, the parties and the Company’s directors’ and officers’ liability insurer signed a Stipulation of Settlement (“Stipulation”), which was filed with the Court on September 14, 2009.  The Stipulation set forth the complete terms of the parties’ proposed settlement.  The basic terms of the settlement were that the Company’s insurer would pay the settlement class, which is defined as all persons (except for defendants and specified related persons and entities) who purchased the Company’s common stock during the period from April 23, 2002 through April 5, 2006, $6 million in exchange for a dismissal with prejudice of the lawsuit and a release of all claims held by members of the settlement class.  As set forth in the Stipulation, the proposed settlement would not

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become final until a number of conditions were satisfied, including the Stipulation receiving both preliminary and final approval from the Court.  On October 8, 2009, the Court entered an order (i) granting preliminary approval of the Stipulation, (ii) requiring that notice of the proposed settlement and the proposed plan of allocation of the settlement proceeds be mailed to members of the settlement class by October 26, 2009, and (iii) setting a February 9, 2010 hearing.  At this hearing the Court considered, among other issues, (i) whether the Stipulation should receive final approval, (ii) whether the proposed plan of allocation for the settlement proceeds should be approved, (iii) whether the settlement class counsel’s application for an award of attorneys’ fees and reimbursement of costs and expenses should be approved, and (iv) whether the settlement class counsel’s application for incentive awards to the settlement class representatives should be approved.  The Court’s October 8, 2009 order also set January 19, 2010 as the deadline by which settlement class members must submit a valid proof of claim, if they wanted to share in the settlement proceeds, or a proper opt-out request, if they wanted to be excluded from the settlement class and thereby not be bound by the terms of the Stipulation.

On February 10, 2010, the day after it held the final approval hearing, the Court formally entered an Order and Final Judgment dated February 9, 2010 (“Final Judgment”), which gave final approval to the Stipulation and approved the proposed plan of allocation of the settlement proceeds, the application for an award of attorneys’ fees and reimbursement of costs and expenses by the settlement class counsel, and the application for incentive awards to the settlement class representatives.  Among other things, the Final Judgment also included findings by the Court that notice of the action and of the proposed settlement had been properly given to the class members and that no one had opted out of the class or objected to any of the terms of the Stipulation.  Furthermore, the Final Judgment provides that the Company and the individual defendants are released from all of the Released Claims, as defined by the Stipulation, and that the Consolidated Complaint is dismissed with prejudice.

Unless a party appeals the Final Judgment within 30 days following the entry of the Final Judgment, which the Company does not anticipate happening given the lack of any objection being filed to the Stipulation, the case will then be formally concluded and the Claims Administrator will proceed to distribute the settlement proceeds in accordance with the Stipulation.

Threatened Derivative Lawsuits

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

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

On May 21, 2008, the same shareholder filed a summons and complaint in the Fourth Judicial District Court for the State of Utah seeking an order compelling the Company to produce certain books and records to the shareholder. The Company filed its answer to the complaint on June 12, 2008, and the shareholder has taken no action since then to prosecute the case or otherwise pursue any derivative claim.

Although the Company and the other defendants are vigorously defending against the allegations in the threatened derivative lawsuit above, management believes that it is not possible at this time to predict the outcome of this litigation or whether the Company will incur any liability associated with the litigation, or to estimate the effect such outcome would have on the financial condition, results of operations, or cash flows of the Company.

SEC and DOJ Investigations

On July 31, 2009, the SEC filed a settled enforcement action against the Company, Douglas Faggioli, and Craig Huff, the Company’s former chief financial officer, relating to alleged violations of the Foreign Corrupt Practices Act (“FCPA”) by one of the Company’s foreign subsidiaries in 2000 and 2001. This settlement resolved an SEC investigation previously disclosed by the Company related to an independent investigation conducted by the Company’s Audit Committee.

Under the terms of the settlement with the SEC, without admitting or denying the allegations in the Commission’s complaint, the Company agreed to pay a civil penalty of $600,000 and to consent to the entry of an injunction against future violations of the FCPA as well as the antifraud, issuer reporting, books and records, and internal controls provisions of the federal securities laws. No additional undertakings are required of the Company under the terms of the settlement.

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In addition, Messrs. Faggioli and Huff, without admitting or denying the allegations in the Commission’s complaint, each agreed to pay a civil penalty of $25,000 and to consent to the entry of injunctions against future violations relating only to the books and records and internal control provisions of the federal securities laws.

The SEC’s complaint alleged that, in 2000 and 2001, former employees in the Company’s Brazilian subsidiary made undocumented cash payments to customs brokers, some of which were later paid to Brazilian customs officials in order to allow unregistered products to be imported and sold in Brazil.  The complaint further alleged that, in doing so, NSP’s subsidiary falsified its books, records and accounts to hide the nature of the payments and failed to disclose those payments to Brazilian customs agents in its filings with the Commission.  The complaint also alleged that the Company, during the time period in question, failed to implement an adequate system of internal controls to ensure proper reporting of the alleged payments.  No current officers, directors, or employees of the Company are alleged to have participated in or had knowledge of these actions.

The complaint further alleged that, in 2000 and 2001, Mr. Faggioli, the Company’s then chief operating officer (and current chief executive officer), and Mr. Huff, the Company’s then chief financial officer, as control persons, failed to adequately supervise the Company’s management and other personnel who were directly responsible for the Company’s books and records and internal controls related to the registration of product in one foreign subsidiary. As part of the settlement, the Company and the individual parties agreed to neither admit nor deny the allegations in the complaint.

The Company believes that all government investigations relating to potential FCPA violations by the Company or related persons have been resolved. The Company anticipates no additional action by the Department of Justice in relation to these events.

SEC Section 12(j) Proceeding

On July 12, 2007, the Company announced that the SEC had instituted administrative proceedings pursuant to Section 12 (j) of the Exchange Act to suspend or revoke the registration of its common stock under Section 12 of the Exchange Act. On November 8, 2007, an Administrative Law Judge in the administrative proceeding issued an Initial Decision to revoke the registration of the Company’s common stock because of its failure to file required periodic reports. Shortly thereafter, the Company filed a petition for review with the SEC. On December 5, 2007, the SEC granted the Company’s petition for review. The SEC heard oral argument from both the Company and the SEC staff on January 7, 2009. On January 21, 2009, the SEC issued a final order revoking the registration of the Company’s common stock. On February 12, 2009, the Company filed a registration statement on Form 10 to reregister its common stock under the Exchange Act. The Company’s registration statement became effective as a result of the passage of time on April 13, 2009. On May 26, 2009, the Company cleared all comments from the SEC related to its registration statement on Form 10. On October 12, 2009, the Company began trading its common stock on the NASDAQ Capital Market under the symbol “NATR.”

Prescott Matter

In April 2009, Prescott Group Aggressive Small Cap Master Fund, G.P. (“Prescott”) filed, but did not serve, a complaint in the Fourth Judicial District Court for Utah County, Utah, (Prescott Group Aggressive Small Cap Master Fund, G.P. v. Nature’s Sunshine Products, Inc, Civil No. 090401518).  Prescott’s filed complaint requested that the court compel the Company to hold an annual meeting of the Company’s shareholders.  The complaint did not request that the court award monetary damages other than the payment of attorneys’ fees.  On May 22, 2009, the Company and Kristine F. Hughes, Eugene L. Hughes and Pauline Hughes Francis in their capacity as shareholders of the Company (collectively, the “Hughes Parties”) entered into a settlement and voting agreement (the “Prescott Agreement”) with Prescott.  Contemporaneously with the Prescott Agreement, the Company and the Hughes Parties entered into voting agreements (collectively with the Prescott Agreement, the “Voting Agreements”) with each of the following shareholders of the Company:  Red Mountain Capital Partners II, L.P., Red Mountain Capital Partners III, L.P. and Paradigm Capital Management, Inc. (collectively with Prescott, the “Shareholder Parties”). As a result of the Prescott Agreement, the filed complaint was withdrawn.

Pursuant to the Voting Agreements, effective as of June 7, 2009, (i) the authorized number of directors of the Board was increased from six to eight directors in accordance with Section 3.2 of the Bylaws of the Company, creating two additional vacancies in addition to one previously unfilled vacancy on the Board, (ii) with the exception of Kristine F. Hughes, all of the current members of the Company’s Board of Directors (the “Board”) resigned as members of the Board, resulting in a total of seven vacancies on the Board and (iii) Michael D. Dean, Albert R. Dowden, Douglas Faggioli, Pauline Hughes Francis, Willem Mesdag, Jeffrey D. Watkins and Candace K. Weir were appointed, without any specific Board class designation, to fill such vacancies on the Board to serve as directors until the next annual meeting of shareholders at which directors are elected and until their respective successors are duly elected and qualified, unless they resign, are removed or are otherwise disqualified from serving as a director of the Company.

The Voting Agreements also provide that, at the next annual meeting of shareholders, which was held on November 6, 2009, the Company would nominate, and the Shareholder Parties and the Hughes Parties will vote all of the shares of Common Stock

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beneficially owned by them in favor of, each of the following individuals, with such nominees serving in the Board class set forth opposite his or her name:

The voting arrangement set forth in the Voting Agreements terminated on November 6, 2009, immediately following the annual meeting of shareholders of the Company, and the election of the new Board of Directors as slated above.

Audit of U.S. Federal Tax Returns, 2003 – 2008

The IRS is currently conducting a civil examination with respect to the 2006 through 2008 taxable years.  The examination is in process.

In October 2009, the Internal Revenue Service (“IRS”) issued an examination report formally proposing adjustments with respect to the 2003 through 2005 taxable years, which primarily relate to the prices that were charged in intragroup transfers of property and the disallowance of related deductions. The Company has challenged the IRS proposals and the matter is currently before the Office of Appeals of the Internal Revenue Service.  Management believes that the Company has appropriately reserved for these matters at an amount which it believes will ultimately be due upon resolution of the administrative proceedings. The Company is currently unable to determine the outcome of these discussions and their related impact, if any, on the Company’s financial condition, results of operations, or cash flows.

Other Litigation

The Company is party to various other legal proceedings in several foreign jurisdictions related to VAT assessments and other civil litigation.  While there is a reasonable possibility that a material loss may be incurred, the Company cannot at this time estimate the loss, if any, therefore, no provision for losses has been provided.  The Company believes future payments related to these matters could range from $0 to approximately $1.4 million.

One of the Company’s foreign subsidiaries is a defendant in litigation regarding primarily employee-related matters. The Company has recorded accruals of approximately $0.2 million and $0.1 million related to this litigation at December 31, 2009 and 2008, respectively, which is included in accrued liabilities.

Item 4. Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market and Share Prices

Our common stock was traded on the Nasdaq National Market System (symbol “NATR”) until April 5, 2006, the date that the Nasdaq Listing Qualifications Panel determined to delist our common stock from The Nasdaq National Market. Following the delisting of our stock from Nasdaq National Market, our stock was traded on the Pink Sheets (symbol NATR.PK) until the revocation of  the Exchange Act registration of our common stock on January 21, 2009. On February 12, 2009, the Company filed with the SEC a registration statement on Form 10 to re-register its common stock under the Exchange Act. The Company’s registration statement became effective as a result of the passage of time on April 13, 2009. On May 26, 2009, the Company cleared all comments from the SEC related to its registration statement on Form 10. Our stock then began trading on the OTC Market (symbol NATR.OTC) on June 25, 2009. On October 12, 2009, trading of the Company’s common stock recommenced on the NASDAQ Capital Market under the symbol “NATR.”

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The following table summarizes the high and low market prices of our common stock from the time it resumed trading on the Nasdaq National Market on October 12, 2009 through the year ended December 31, 2009:

The following table summarizes the best ask and bid market prices of our common stock while it traded on the Pink Sheets and OTC Markets:

(1)          The “Best Ask” represents the highest ask during the quarter at which a trade of our common stock was transacted on either the Pink Sheets or OTC Market.

(2)          The “Best Bid” represents the lowest bid during the quarter at which a trade of our common stock was transacted on either the Pink Sheets or OTC Market.

(3)          Includes activity from January 1, 2009 through January 21, 2009, the date our registration under the Exchange Act was revoked.

(4)          Includes activity from June 25, 2009, the date our shares began trading on the OTC Market, through June 30, 2009.

(5)          Includes activity from October 1, 2009, through October 9, 2009, the last date our common stock traded on the OTC Market.

The market price of our common shares is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the markets for our products, economic and currency exchange issues in the foreign markets in which we operate and other factors, many of which are not within our control. In addition, broad market fluctuations, as well as general economic, business and political conditions may adversely affect the market for our common shares, regardless of our actual or projected performance.

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

The closing price of our common shares on March 5, 2010, was $8.38.  The approximate number of holders of record of our common shares as of March 5, 2010 was 1,040. This number of holders of record does not represent the actual number of beneficial owners of our common shares because shares are frequently held in “street name” by securities dealers and others for the benefit of individual owners who have the right to vote their shares.

Recent Sales of Unregistered Securities

Since January 1, 2007, we have issued and sold the following unregistered securities:

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

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

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

On July 27, 2007, we issued and sold 500 shares of common stock to the estate of Robert Schaffer for cash consideration in an aggregate amount of $4,157 upon the exercise of stock options granted under our 1995 Stock Plan. This sale is exempt from the registration requirement of Section 5 of the Securities Act pursuant to Section 4(2) of the Securities Act.

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Dividends

There were 1,042 shareholders of record as of December 31, 2009. During the fiscal years 2009 and 2008, the Company paid cash dividends of $0.05 and $0.20 per common share, respectively. The Company suspended payment of its quarterly cash dividends, effective the second quarter of 2009, in an effort to conserve cash in the United States.  The suspension of cash dividends is expected to preserve approximately $3.1 million of cash flow on an annual basis.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table contains information regarding the Company’s equity compensation plans as of December 31, 2009:

(1)          Consists of two plans:  The Nature’s Sunshine Products, Inc. 2009 Stock Incentive Plan (the “2009 Incentive Plan”) and the Nature’s Sunshine Products, Inc. 1995 Stock Option Plan (the “1995 Option Plan”). The 2009 Incentive Plan was approved by shareholders on November 6, 2009. The terms of these plans are summarized in Note 9, “Capital Transactions”, to the Notes of our Consolidated Financial Statements, of Item 8, Part 2 of this report.

(2)          During the year ended December 31, 2007, the Company issued nonqualified options to purchase shares of common stock outside of any shareholder approved stock incentive plan. The terms of these nonqualified options to purchase shares of common stock are summarized in Note 9, “Capital Transactions”, to the Notes of our Consolidated Financial Statements, of Item 8, Part 2 of this report.

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Performance Graph

The graph below depicts our common stock as an index, assuming $100.00 was invested on December 31, 2004 along with the composite prices of companies listed in the Nasdaq and our peer group. Standard & Poor’s Investment Services has provided us with this information. The comparisons in the graph are required by regulations of the SEC and are not intended to forecast or be indicative of the possible future performance of our common stock. The publicly-traded companies in our peer group are USANA Health Sciences, Inc., Nu Skin Enterprises, Inc., Herbalife International, Inc., and Mannatech Incorporated.

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Item 6. Selected Financial Data

The selected financial data presented below is summarized from our results of consolidated operations for each of the five years in the period ended December 31, 2009, as well as selected consolidated balance sheet data as of December 31, 2009, 2008, 2007, 2006, and 2005.

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

Income Statement Data

Balance Sheet Data

Common Share Summary

Other Information

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion highlights the principal factors that have affected our financial condition, results of operations, liquidity and capital resources for the periods described. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes in Item 8 of this report. This discussion contains forward-looking statements. Please see “Cautionary Note Regarding Forward-Looking Statements” for the risks, uncertainties and assumptions associated with these forward-looking statements.

OVERVIEW

Our Business, Industry and Target Market

Nature’s Sunshine Products, Inc. and its subsidiaries are primarily engaged in the manufacturing and marketing of herbal products, vitamin and mineral supplements, personal care, and miscellaneous products. Nature’s Sunshine Products, Inc. is a Utah corporation with its principal place of business in Provo, Utah. We sell our products to a sales force of independent Distributors and Managers who use the products themselves or resell them to other Distributors or consumers. The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of each of our major product groups are subject to regulation by one or more governmental agencies.

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

We also sell our products through a separate division and operating business segment, Synergy Worldwide, which was acquired by us in 2000. Synergy Worldwide offers products with formulations different from those of the Nature’s Sunshine Products offerings. In addition, Synergy Worldwide’s marketing and Distributor compensation plans are sufficiently different from those of Nature’s Sunshine Products to warrant accounting for these operations as a separate business segment. Synergy Worldwide sells products in Japan, the United States, South Korea, Singapore, Thailand, Taiwan, Malaysia, Hong Kong, the Philippines, Indonesia, the United Kingdom, Germany, Austria, the Netherlands, Norway, Sweden, Australia, and the Czech Republic.

In 2009, we experienced a decline in net sales revenue of approximately 8.1 percent. This decline was primarily related to decreased sales overseas in our NSP International business segment of approximately 18.4 percent and a decrease of approximately 2.1 percent in our Synergy Worldwide segment, which were offset in part by an increase in net sales revenue of 1.1 percent for our NSP United States segment.  The decreases in net sales revenue for NSP International and Synergy Worldwide were primarily due to the strengthening of the U.S. dollar against most foreign currencies in which our subsidiaries operate and its impact on consumer demand in these markets, as well as weakening demand in certain foreign markets as a result of current economic conditions. The most significant impact of these events was in our Russian, Ukrainian, and Mexican markets,  principally during the first half of the year. The Japanese market was also impacted by weak economic conditions during the first half of 2009. Over the same period, our cost of goods sold increased as a percentage of net sales revenue as a result of additional promotions offered in our foreign markets during the earlier part of the year, as well as increases in raw material costs for some of our products, and reduced production volumes due to the decline in global sales.

We distribute our products to consumers through an independent sales force comprised of Managers and Distributors. Active Managers totaled approximately 28,700 and 26,000 at December 31, 2009 and 2008, respectively. Active Distributors totaled approximately 697,200 and 729,600 at December 31, 2009 and 2008, respectively. We anticipate the number of active Distributors to increase as we expand our existing operations, enter new international markets, and as current Distributors grow their businesses.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting U.S. GAAP and form the basis for the following discussion and analysis on critical accounting policies and estimates. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and those differences could have a material effect on our financial position and results of operations. Management has discussed the development, selection and disclosure of these estimates with the Board of Directors and its Audit Committee.

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A summary of our significant accounting policies is provided in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of this report. We believe the critical accounting policies and estimates described below, reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements. The impact and any associated risks on our business that are related to these policies are also discussed throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results.

Revenue Recognition

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

A reserve for product returns is recorded based upon historical experience.  The Company allows Distributors or Managers to return the unused portion of products within ninety days of purchase if they are not satisfied with the product.  In some of our markets, the requirements to return product are more restrictive.   Sales returns for each of the years 2009, 2008, and 2007, were approximately $0.1 million.

Accounts Receivable Allowances

Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. This estimated allowance is based primarily on the aging category, historical trends and management’s evaluation of the financial condition of the customer. This reserve is adjusted periodically as information about specific accounts becomes available.

Investments

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

For available-for-sale debt securities with unrealized losses, the Company performs an analysis to assess whether it intends to sell or whether it would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where the Company intends to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is recorded within earnings as an impairment loss.

For all other debt securities that experience a decline in fair value that is determined to be other-than-temporary and not related to credit loss, the Company records a loss, net of tax, in accumulated other comprehensive income (loss).  The credit loss is recorded within earnings as an impairment loss. Management judgment is involved in evaluating whether a decline in an investment’s fair value is other-than-temporary.

Regardless of the Company’s intent to sell a security, the Company performs additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security.  Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.

For equity securities, when assessing whether a decline in fair value below our cost basis is other-than-temporary, the Company considers the fair market value of the security, the length of time and extent to which market value has been less than cost, the financial condition and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer, and our intent and ability to hold the investment for a sufficient time in order to enable recovery of our cost. New

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information and the passage of time can change these judgments.  Where the Company has determined that the Company lacks the intent and ability to hold an equity security to its expected recovery, the security’s decline in fair value is deemed to be other-than-temporary and is recorded within earnings as an impairment loss.

Inventories

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

Self-insurance Liabilities

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

We self-insure for certain employee medical benefits. The recorded liabilities for self-insured risks are calculated using actuarial methods and are not discounted. The liabilities include amounts for actual claims and claims incurred but not reported. Actual experience, including claim frequency and severity as well as health care inflation, could result in actual liabilities being more or less than the amounts currently recorded.

Incentive Trip Accrual

We accrue for expenses for incentive trips associated with our direct sales marketing program, which rewards independent Distributors and Managers with paid attendance at our conventions and meetings. Expenses associated with incentive trips are accrued over qualification periods as they are earned. We specifically analyze incentive trip accruals based on historical and current sales trends as well as contractual obligations when evaluating the adequacy of the incentive trip accrual. Actual results could result in liabilities being more or less than the amounts recorded. We have accrued convention and meeting costs of approximately $2.9 million and $4.5 million at December 31, 2009 and 2008, respectively.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets, such as property, plant and equipment and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company uses an estimate of future undiscounted net cash flows of the related assets or groups of assets over their remaining lives in measuring whether the assets are recoverable. An impairment loss is calculated by determining the difference between the carrying values and the fair values of these assets. As of December 31, 2009 and 2008, the Company did not consider any of its long-lived assets to be impaired.

Contingencies

We are involved in certain legal proceedings. When a loss is considered probable in connection with litigation or non-income tax contingencies and when a loss can be reasonably estimated with a range, we record our best estimate within the range related to the contingency. If there is no best estimate, we record the minimum of the range. As additional information becomes available, we assess the potential liability related to the contingency and revise the estimates. Revision in estimates of the potential liabilities could materially impact our results of operations in the period of adjustment. Our contingencies are discussed in further detail in Note 11, “Commitments and Contingencies”, to the Notes of our Consolidated Financial Statements, of Item 8, Part 2 of this report.

Income Taxes

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

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Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. Valuation allowances are recorded as reserves against net deferred tax assets by the Company when it is determined that net deferred tax assets are not likely to be realized in the foreseeable future. As of December 31, 2009 and 2008, we had recorded valuation allowances of $18.7 million and $14.0 million, respectively, as offsets to our recorded net deferred tax assets.

As of December 31, 2009, we had foreign income tax net operating loss carryforwards of $9.8 million, which will expire at various dates from 2010 through 2012. The Company had approximately $4.4 million of foreign tax credits, which begin to expire at various times starting in 2012.

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

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.

Share-Based Compensation

The Company recognizes all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their granted-dated fair values in accordance with authoritative U.S. GAAP. The Company records compensation expense, net of an estimated forfeiture rate, over the vesting period of the stock options based on the fair value of the stock options on the date of grant. The Company estimated forfeiture rate is based upon historical experience.

RESULTS OF OPERATIONS

The following table summarizes our consolidated operating results as a percentage of net sales revenue for the periods indicated:

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Year Ended December 31, 2009 as Compared to the Year Ended December 31, 2008

Net Sales Revenue

Consolidated net sales revenue for the year ended December 31, 2009 was $343.0 million compared to $373.2 million in 2008, a decrease of approximately 8.1 percent. The decrease in net sales revenue for year ended December 31, 2009 compared to the same period in 2008 is primarily due to the strengthening of the U.S. dollar against most foreign currencies in which our subsidiaries operate and its impact on consumer demand in these markets, as well as weakening demand in certain foreign markets as a result of current economic conditions. The most significant impact was in our Russian, Ukrainian, and Mexican markets, during the first half of 2009. The Japanese markets was also impacted by weak economic conditions during the first half of 2009.

NSP United States

Net sales revenue related to NSP United States for the year ended December 31, 2009 was $151.8 million compared to $150.1 million for the same period in 2008, or an increase of 1.1 percent in 2009 compared to 2008. During the first half of 2009, sales were down 2.7 percent compared to the same period in 2008, as a result of decreases in consumer demand and as a result of difficult economic conditions in the United States at that time.  However, during the last six months of 2009, we saw an increase in net sales revenue compared to the same time in the prior year due to the launch of several new products during the Company’s August 2009 convention, as well as the launch of a new Manager development program which has encouraged Managers to sign up new Distributors.

Active Distributors within NSP United States totaled approximately 248,100 and 225,000 at December 31, 2009 and December 31, 2008, respectively.  Active Managers within NSP United States totaled approximately 6,900 and 6,200 at December 31, 2009 and December 31, 2008, respectively.

NSP International

NSP International reported net sales revenue for the year ended December 31, 2009 of $135.4 million compared to $166.0 million for the same period in 2008, a decrease of approximately 18.4 percent.  The decrease in sales is primarily due to weakness in the economies of many of the markets in which we operate due to global economic conditions during 2009 (primarily Russia, Ukraine, Mexico, and Japan) as well as negative foreign currency fluctuations of approximately $5.5 million, or 3.3 percent of the decrease in sales, as a result of the strengthening of the U.S. dollar against the currencies in substantially all markets in which NSP International operates, and the effect of the strengthening U.S. dollar on customer purchasing power for our products in these markets.

We had the following significant changes within the markets in which NSP International operates:

In Russia, our net sales revenues decreased approximately $10.3 million or 25.5 percent to $30.1 million for the year ended December 31, 2009 from $40.4 million for the same period in 2008. In Russia, our products are priced using the U.S. dollar. The strengthening of the U.S. dollar in relation to the Russian ruble has increased the price of our products significantly during 2009 compared to the same period in 2008.  During 2008, the average exchange rate was approximately 24.9 rubles to one dollar compared to 31.8 rubles to one dollar in 2009, a decline of 27.7 percent. As a result of these conditions, there has been a corresponding decrease in Distributors in Russia.

In Ukraine, our net sales revenues decreased approximately $12.5 million or 38.0 percent to $20.4 million for the year ended December 31, 2009 from $32.9 million for the same period in 2008.  In Ukraine, our products are priced using the U.S. dollar. The strengthening of the U.S. dollar in relation to the Ukrainian hryvnia has increased the price of our products significantly during 2009 compared to the same period in 2008.  During 2008, the average exchange rate was approximately 5.4 hryvnia to one dollar compared to 8.1 hryvnia to one dollar in 2009, a decline of 55.6 percent. As a result of these conditions, there has been a corresponding decrease in Distributors in Ukraine.

In Canada, our net sales revenues increased approximately $0.5 million or 3.6 percent to $14.5 million for the year ended December 31, 2009 from $14.0 million for the same period in 2008.  Our net sales in Canada were negatively impacted approximately $1.1 million or 7.9 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the Canadian dollar from 2008 to 2009. Excluding the effect of foreign currency fluctuations, net sales in Canada increased approximately $1.6 million or 11.4 percent for the year ended December 31, 2009 compared to the same period in 2008.  The increase in net sales is primarily due to the launch of several new products during the second half of the year, as well as an increase in the number of active Distributors.

In Mexico, our net sales revenues decreased approximately $4.0 million or 22.3 percent to $13.9 million for the year ended

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December 31, 2009 from $17.9 million for the same period in 2008.  Our net sales in Mexico were negatively impacted by approximately $3.1 million or 17.3 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the Mexican peso from 2008 to 2009. Excluding the effect of foreign currency fluctuations, net sales in Mexico decreased approximately $0.9 million or 5.0 percent for the year ended December 31, 2009 compared to the same period in 2008.  The decrease in net sales is primarily due to weak economic conditions within Mexico during 2009, as well as a decrease in the number of active Distributors.

In the remaining markets in which NSP International operates, our net sales revenues decreased approximately $4.3 million or 7.1 percent to $56.5 million for the year ended December 31, 2009 from $60.8 million for the same period in 2008.  Our net sales were negatively impacted approximately $1.3 million or 2.1 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the various currencies our markets operate in from 2008 to 2009. Excluding the effect of foreign currency fluctuations, net sales revenues in NSP International’s remaining markets decreased approximately $3.0 million or 4.9 percent for the year ended December 31, 2009 compared to the same period in 2008, primarily due to weak economic conditions during the earlier part of the current year.

Active Distributors within NSP International totaled approximately 353,300 and 428,600 at December 31, 2009 and December 31, 2008, respectively.  Active Managers within NSP International totaled approximately 20,300 and 19,000 at December 31, 2009, and December 31, 2008, respectively. The decrease in Distributors is primarily related to the changes in the markets of Russia, Ukraine, and Mexico as noted above.

Synergy Worldwide

Synergy Worldwide net sales revenue decreased to $55.9 million in 2009 compared to $57.1 million in 2008, a decrease of approximately 2.1 percent. The decrease in net sales is primarily due to current economic conditions in Japan and the effect of foreign currency fluctuations in the markets in which Synergy Worldwide operates, which have been offset by growth in several of our markets as noted below.

In Japan, our net sales revenues decreased approximately $8.9 million or 30.4 percent to $20.4 million for the year ended December 31, 2009 from $29.3 million for the same period in 2008.  Our net sales in Japan were positively impacted by approximately $1.9 million or 6.5 percent by foreign currency fluctuations due to the U.S. dollar weakening in relation to the Japanese yen from 2008 to 2009. Excluding the effect of foreign currency fluctuations, net sales in Japan decreased approximately $10.8 million or 36.9 percent for the year ended December 31, 2009 compared to the same period in 2008.  The decrease in net sales is primarily due to continuing economic weakness in Japan, which has resulted in a decrease in the number of active Distributors as well.

In Indonesia, our net sales revenues increased approximately $2.1 million or 30.4 percent to $9.0 million for the year ended December 31, 2009 from $6.9 million for the same period in 2008.  Our net sales in Indonesia were negatively impacted by approximately $0.7 million or 10.1 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the Indonesian rupiah from 2008 to 2009. Excluding the effect of foreign currency fluctuations, net sales in Indonesia increased approximately $2.8 million or 40.6 percent for the year ended December 31, 2009 compared to the same period in 2008.  The increase in net sales is primarily due to the implementation of a new Distributor recruiting program, which has significantly increased the level of Active Distributors within Indonesia, as well as the launch of several new products earlier this year in Indonesia.

In Europe, our net sales revenues increased approximately $3.0 million or 76.9 percent to $6.9 million for the year ended December 31, 2009 from $3.9 million for the same period in 2008.  Our net sales in Europe were negatively impacted by approximately $0.4 million or 10.3 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the euro from 2008 to 2009. Excluding the effect of foreign currency fluctuations, net sales in Europe increased approximately $3.4 million or 87.2 percent for the year ended December 31, 2009 compared to the same period in 2008 due to the continued growth of our operations in the countries in which we have operated since the opening of Synergy Worldwide in Europe in late 2007, as well as expansion into several additional countries during 2009.

In the United States, our net sales revenues increased approximately $1.6 million or 27.1 percent to $7.5 million for the year ended December 31, 2009 from $5.9 million for the same period in 2008.  Our growth within the Unites States is primarily due to growth of our U.S. Distributor base, as well as expansion of our personal import market program.

In the remaining markets in which Synergy Worldwide operates, our net sales revenues increased approximately $1.0 million or 9.0 percent to $12.1 million for the year ended December 31, 2009 from $11.1 million for the same period in 2008.  Our net sales were negatively impacted approximately $1.6 million or 14.4 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the various currencies our markets operate in from 2008 to 2009. Excluding the effect of foreign currency fluctuations, net sales revenue in Synergy Worldwide’s remaining markets increased approximately $2.6 million or 23.4 percent for the year ended December 31, 2009 compared to the same period in 2008, primarily due to growth of our Distributor base, which has been driven by

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changes in management within some of these markets.

Active Distributors within Synergy Worldwide totaled approximately 95,800 and 76,000 at December 31, 2009 and December 31, 2008, respectively.  Active Managers within Synergy Worldwide totaled approximately 1,500 and 800 at December 31, 2009, and December 31, 2008, respectively.

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

Cost of Goods Sold

Cost of goods sold as a percent of net sales revenue increased to 20.1 percent in 2009 compared to 19.3 percent in 2008.   This increase is primarily a result of additional promotions offered in our foreign markets during the earlier part of the year, as well as increases in raw material costs for some of our products, reduced production volumes, and product mix.

Volume Incentives

Volume Incentives are a significant part of our direct sales marketing program and represent commission payments made to our independent Distributors and Managers. These payments are designed to provide incentives for reaching higher sales levels and for recruiting additional Distributors.  Volume Incentives vary slightly, on a percentage basis, by product due to our pricing policies and commission plans in place in our international operations.  Volume Incentives as a percent of net sales revenue decreased to 36.8 percent in 2009 compared to 37.5 percent in 2008.  The decrease is partially due to fewer Distributors qualifying for payouts at higher rates due to lower sales volumes in Russia, Ukraine, Mexico, and Japan, as well as to reductions in the Volume Incentive programs for some products sold within the United States.

Selling, General and Administrative

Selling, general and administrative expenses decreased to 40.0 percent of net sales revenue in 2009 compared to 41.7 percent in 2008, or by approximately $18.4 million in 2009 compared to 2008, from $155.7 million to $137.3 million. The decrease in selling, general and administrative expenses is the result of decreased spending of approximately $6.8 million in our Russian, Ukrainian, and other Eastern European markets due to the significant declines in our net sales revenues in these markets, decreases in non-income tax related contingencies of $3.8 million related to favorable settlements for NSP United States, $3.4 million of favorable settlements related to VAT contingencies within some of the markets in which Synergy operates, as well as decreased professional fees within the United States of $2.9 million related to our efforts to become current in our financial reporting.  In addition, foreign currency fluctuations positively impacted general and administrative expenses by approximately $3.0 million, of which $1.7 million was related to exchange changes in Mexico.  These decreases were offset by increases of approximately $2.6 million of VAT related contingencies within some of the foreign markets in NSP International operates, as well an increase of $0.6 million related to the settlement of the SEC investigation of the Company as described in Note 10 of the consolidated financial statements in Part II, of Item 8 of this report. Excluding the items noted above, we have seen selling, general, and administrative costs in our NSP International and Synergy Worldwide segments increase as a percentage of sales as a result of reduced sales in some the key markets in which we operate as noted in the net sales revenue discussion above.  We continue to evaluate and explore ways to reduce costs within all of our operating segments.

Operating Income

Operating income increased $5.2 million in 2009 compared to 2008, from $5.6 million to $10.8 million.  The operating income for NSP United States increased to $6.6 million in 2009 compared to an operating loss of $5.9 million in 2008, an increase of $12.5 million. This increase is the result of declines in volume incentives as a percentage of net sales revenues, the reduction of selling, general and administrative expenses primarily due to decreases in the reduction in non-income tax related accruals and professional fees, as noted above. Operating income for NSP International decreased $14.3 million from $16.9 million in 2008 to $2.6 million during 2009 as a result of decreased net sales in many of the markets in which NSP International operates due to general economic conditions within these markets, as well as the impact of foreign currency fluctuations, as noted above in the discussion of net sales revenue. The conditions had a more significant impact earlier in the year. The operating loss in Synergy Worldwide decreased $7.0 million to operating income of $1.6 million in 2009 compared to an operating loss of $5.4 million in 2008.  This is primarily due to a favorable settlement of VAT related contingencies in some of its foreign markets as noted above. Excluding this, its operating loss decreased to $1.8 million, an improvement of $3.6 million primarily due to the increases in net sales revenue for Synergy Worldwide’s European, Indonesian, and United States markets, as well as continued cost cutting efforts in each of its markets.  The net impact of foreign currency fluctuations on operating income included in the operating results of NSP International and Synergy Worldwide is $0.4 million.

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Other Income, net

Other income, net for the year ended December 31, 2009 increased $2.7 million compared to the same period in 2008 primarily due to foreign exchange gains in certain markets based upon changes in exchange rates on intercompany related balances and U.S. dollar denominated cash accounts.

Income Taxes

Our effective income tax rate was 57.3 percent for 2009, compared to 128.4 percent for 2008. The effective rate for 2009 differed from the federal statutory rate of 35.0 percent primarily due to:

(i)                                     The amortization of a prepaid tax resulting from a taxable gain on the sale of intercompany assets eliminated for reporting purposes, but recognized for the calculation of the consolidated income tax provision, increased the effective tax rate by approximately 9.8 percent in 2009. The prepaid tax is being amortized over the respective life of the asset, and it is anticipated to impact the effective rate through 2010.

(ii)                                  Adjustments relating to the U.S. tax impact of foreign operations decreased the effective tax rate by 13.7 percentage points in 2009.  Included were adjustments for dividends received from foreign subsidiaries, adjustments for foreign tax credits, and adjustments relating to outside basis calculations under applicable U.S. GAAP. Changes to the effective rate due to dividends received from foreign subsidiaries, adjustments for foreign tax credits, and outside basis are expected to be recurring.

(iii)                               Foreign tax rate differentials that incrementally impact the federal statutory rate increased the effective tax rate by approximately 14.0 percent. This is primarily due to the Company not recording a benefit for losses in most jurisdictions where tax losses exist, particularly with respect to the Company’s markets in the Asia-Pacific region of the world. Some of these losses may be recurring or may result in benefits in future periods if these markets return to profitability.

(iv)                              Nondeductible foreign expenses incrementally that impact the federal statutory rate increased the effective tax rate by approximately 6.4 percent. In the current year, the increase relates primarily to income tax adjustments in foreign markets that are non-deductible for tax purposes. Some of these items may be recurring.

(v)                                 Changes in the deferred tax asset valuations allowance increased the effective tax rate by approximately 8.8 percent in 2009.  The change in the deferred tax asset valuation allowance was primarily the result of reserves being established for certain foreign affiliate deferred tax assets that were not likely to be realized due to recurring losses within the respective tax jurisdictions

As a net result of these and other differences, the effective tax rate for 2009 was greater than the statutory rate of 35.0 percent for the year ended December 31, 2009.

Year Ended December 31, 2008 as Compared to the Year Ended December 31, 2007

Net Sales Revenue

Consolidated net sales revenue for the year ended December 31, 2008 was $373.2 million compared to $360.9 million in 2007, an increase of approximately 3.4 percent. During 2008, the increase in net sales revenue was primarily due to continued growth in NSP International.

NSP United States

Net sales revenue related to the NSP United States business segment operations were $150.1 million and $148.3 million for the years ended December 31, 2008 and 2007, respectively, or an increase of 1.2 percent in 2008 compared to 2007.  This growth is partially due to a reduction of some of the rebates provided to Distributors associated with some of our products, as well as increase in shipping charges to customers due to fuel surcharges related to increasing fuel costs.

Active Distributors within NSP United States totaled approximately 225,000 and 214,100 at December 31, 2008 and December 31, 2007, respectively.  Active Managers within NSP United States totaled approximately 6,200 and 6,500 at December 31, 2008 and December 31, 2007, respectively.

NSP International

NSP International reported net sales revenue for the year ended December 31, 2008 of $166.0 million compared to $144.0

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million for the same period in 2007, an increase of approximately 15.3 percent. The increase in international net sales revenue in 2008 compared to 2007 was primarily the result of continued growth in our operations in Russia and Ukraine.  The increase in net sales revenue reflected the continued increase in Distributors and Managers in the Company’s international operations as well as foreign currency exchange rate fluctuations which positively impacted revenues by $1.8 million or 1.2 percent in 2008 compared to 2007.   Approximately $1.3 million of the benefit was the result of positive currency fluctuations in Japan, as the yen strengthened significantly in relation to the U.S. dollar in 2008. The effects of currency fluctuations on sales were immaterial in the aggregate for the remaining markets of NSP International.

We had the following significant changes within the markets in which NSP International operates:

In Russia, our net sales revenues increased approximately $9.4 million or 30.3 percent to $40.4 million for the year ended December 31, 2008 from $31.0 million for the same period in 2007. In Russia, the increase in sales was primarily due to a significant increase in the number of Distributors in this market due to active efforts to grow the market by local management.

In Ukraine, our net sales revenues increased approximately $11.0 million or 50.2 percent to $32.9 million for the year ended December 31, 2008 from $21.9 million for the same period in 2007. In Ukraine, the increase in sales was primarily due to a significant increase in the number of Distributors in this market due to active efforts to grow the market by local management.

In Mexico, our net sales revenues decreased approximately $1.4 million or 7.3 percent to $17.9 million for the year ended December 31, 2008 from $19.3 million for the same period in 2007.  Our net sales in Mexico were negatively impacted by approximately $0.2 million or 1.0 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the Mexican peso from 2007 to 2008. Excluding the effect of foreign currency fluctuations, net sales in Mexico decreased approximately $1.2 million or 6.2 percent for the year ended December 31, 2008 compared to 2007.  The decrease in net sales was primarily due to increased competition within Mexico during 2008, which resulted in a decrease in the number of active Distributors.

In Japan, our net sales revenues decreased approximately $0.4 million or 4.0 percent to $9.7 million for the year ended December 31, 2008 from $10.1 million for the same period in 2007.  Our net sales in Japan were positively impacted by approximately $1.3 million or 12.9 percent by foreign currency fluctuations due to the U.S. dollar weakening in relation to the Japanese yen from 2007 to 2008. Excluding the effect of foreign currency fluctuations, net sales in Japan decreased approximately $1.7 million or 16.8 percent for the year ended December 31, 2008 compared to 2007.  The decrease in net sales was primarily due to increased competition and economic conditions within Japan during 2008, which resulted in a decrease in the number of active Distributors.

In the remaining markets in which NSP International operates, our net sales revenues increased approximately $3.4 million or 5.5 percent to $65.1 million for the year ended December 31, 2008 from $61.7 million for the same period in 2008.  Our net sales were positively impacted by approximately $0.6 million or 1.0 percent by foreign currency fluctuations due to the U.S. dollar weakening in relation to the various currencies our markets operate in from 2007 to 2008. Excluding the effect of foreign currency fluctuations, net sales revenues in NSP International’s remaining markets increased approximately $2.8 million or 4.5 percent for the year ended December 31, 2008 compared to the same period in 2007, primarily due to growth in our Distributor base.

Active Distributors within NSP International totaled approximately 428,600 and 403,500 at December 31, 2008 and December 31, 2007, respectively.  Active Managers within NSP International totaled approximately 19,000 and 16,800 at December 31, 2008, and December 31, 2007, respectively. The increase in Distributors is primarily related to the changes in Russia and Ukraine as noted above.

Synergy Worldwide

Synergy Worldwide net sales revenue decreased to $57.1 million in 2008 compared to $68.6 million in 2007, a decrease of approximately 16.8 percent. The decrease in Synergy Worldwide net sales was primarily due to the loss of key Distributor networks as a result of increased competition in the United States and Japanese markets.  This decrease was partially offset by foreign currency exchange rate fluctuations that positively impacted net sales revenue by $2.6 million for the year ended 2008 compared to 2007. The strengthening of the Japanese yen contributed to $3.7 million of this increase, which was offset by a $1.1 million decrease in sales as a result of the South Korean won weakening in relation to the U.S. dollar.    The effects of currency fluctuations on sales were immaterial in the aggregate for the remaining markets of Synergy Worldwide.

In Japan, our net sales revenues decreased approximately $6.2 million or 17.5 percent to $29.3 million for the year ended December 31, 2008 from $35.5 million for the same period in 2007.  Our net sales in Japan were positively impacted approximately $3.7 million or 10.4 percent by foreign currency fluctuations due to the U.S. dollar weakening in relation to the Japanese yen from 2007 to 2008. Excluding the effect of foreign currency fluctuations, net sales in Japan decreased approximately $9.9 million or 27.9

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percent for the year ended December 31, 2008 compared to the same period in 2007.  The decrease in net sales is primarily due to the loss of a key Distributor network in Japan, which has resulted in a decrease in the number of active Distributors.

In South Korea, our net sales revenues decreased approximately $2.8 million or 30.1 percent to $6.5 million for the year ended December 31, 2008 from $9.3 million for the same period in 2007.  Our net sales in South Korea were negatively impacted approximately $1.1 million or 11.8 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the South Korean won from 2007 to 2008. Excluding the effect of foreign currency fluctuations, net sales in South Korea decreased approximately $1.7 million or 18.3 percent for the year ended December 31, 2008 compared to the same period in 2007.  The decrease in net sales is primarily due to economic conditions within South Korea, which has resulted in a decrease in the number of active Distributors.

In Europe, our net sales revenues increased approximately $2.1 million or 116.7 percent to $3.9 million for the year ended December 31, 2008 from $1.8 million for the same period in 2007.  Our net sales in Europe were positively impacted approximately $0.3 million or 16.7 percent by foreign currency fluctuations due to the U.S. dollar weakening in relation to the euro from 2007 to 2008. Excluding the effect of foreign currency fluctuations, net sales in Europe increased approximately $1.8 million or 100.0 percent for the year ended December 31, 2008 compared to the same period in 2007 due to the continued growth of our operations in the countries in which we have operated since the opening of Synergy Worldwide in Europe in 2007.

In the United States, our net sales revenues decreased approximately $2.6 million or 30.6 percent to $5.9 million for the year ended December 31, 2008 from $8.5 million for the same period in 2007.  The decline in our net sales revenue within the United States is primarily due to the loss of a key Distributor network during the year.

In the remaining markets in which Synergy Worldwide operates, our net sales revenues decreased approximately $2.0 million or 14.8 percent to $11.5 million for the year ended December 31, 2008 from $13.5 million for the same period in 2007.  Our net sales were negatively impacted approximately $0.3 million or 2.2 percent by foreign currency fluctuations due to the U.S. dollar strengthening in relation to the various currencies our markets operate in from 2007 to 2008. Excluding the effect of foreign currency fluctuations, net sales revenue in Synergy Worldwide’s remaining markets decreased approximately $1.7 million or 12.6 percent for the year ended December 31, 2008 compared to the same period in 2007, primarily due to economic conditions within the various markets.

Active Distributors within Synergy Worldwide totaled approximately 76,000 and 81,100 at December 31, 2008 and December 31, 2007, respectively.  Active Managers within Synergy Worldwide totaled approximately 800 and 800 at December 31, 2008, and December 31, 2007, respectively. The change in Distributors is primarily related to Japan and the United States as noted above.

Cost of Goods Sold

Cost of goods sold as a percent of net sales revenue decreased to 19.3 percent in 2008 compared to 19.7 percent in 2007.   This improvement was primarily a result of decreased importation and purchasing costs in some of our foreign markets, as a result of their currencies strengthening in relation to the U.S. dollar.  In particular, these markets include Japan and Mexico, which account for a significant portion of consolidated net sales.  In addition, we were able to raise prices, while maintaining level inventory costs in our Russian, Ukraine, and other eastern European markets.

Volume Incentives

Volume Incentives as a percent of net sales revenue decreased to 37.5 percent in 2008 compared to 38.3 percent in 2007.  The decrease was partially due to changes in Volume Incentive programs for some products sold within the United States as well as the result of fuel surcharges included in net sales revenue within the United States for which there is no Volume Incentive.

Selling, General and Administrative

Selling, general and administrative expenses increased to 41.7 percent of net sales revenue in 2008 compared to 41.2 percent in 2007.  In absolute terms, our selling, general and administrative expenses increased by $7.0 million in 2008 compared to 2007, from $148.7 million to $155.7 million.  The increase in selling, general and administrative expenses is primarily as a result of increased spending of approximately $7.6 million in our Russian and Eastern European markets for infrastructure to support our continued growth and costs of approximately $2.1 million for entering new markets in China and Europe (of which $1.1 million is related to Synergy Worldwide).  Foreign currency fluctuations negatively impacted general and administrative expenses by approximately $1.5 million, of which $0.7 million was related to Synergy Worldwide. These costs were offset by decreases of approximately $3.4 million in our Synergy Worldwide operations (excluding costs for entering new markets and the effect of foreign currency fluctuations) as a result of cost cutting initiatives to help bring operating costs more in line with the division’s reduced net sales revenue. These

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initiatives include reducing the division’s consulting fees, professional fees, travel, personnel, office and warehouse rent expense through the termination and renegotiation of leases, as well as other selling expenses.

Operating Income

Operating income increased $2.5 million in 2008 compared to 2007, from $3.1 million to $5.6 million.  The operating loss for NSP United States increased $0.6 million to $5.9 million in 2008 compared to $5.3 million in 2007.  This increase was primarily related to the Company’s interest in the losses of a variable interest entity of $0.9 million for which the Company was the primary beneficiary (see Note 1 of the Notes to the Consolidated Financial Statements set forth in Item 8 of this report).  This entity was involved in the development of nutritional supplements.  Operating income for NSP International increased $4.2 million from $12.7 million in 2007 to $16.9 million in 2008 as a result of continued growth in our Russian, Ukrainian, and Eastern European markets.  The operating loss in Synergy Worldwide increased $1.0 million to $5.4 million in 2008 compared to $4.4 million in 2007.  This was primarily due to the loss of key Distributor networks as a result of increasing competition within the United States and Japanese markets.  This loss resulted in a significant decrease in sales in relation to the operating costs in these markets.  The net impact of foreign currency fluctuations on operating income included in the operating results of NSP International and Synergy Worldwide was $0.2 million.

Other Income, net

Other income, net for the year ended December 31, 2008 decreased $0.5 million compared to the same period in 2007 primarily due to a decrease in foreign exchange gains in certain markets based upon changes in exchange rates on intercompany related balances.

Income Taxes

The effective income tax rate was 128.4 percent for 2008, compared to 284.5 percent for 2007. The effective rate for 2008 differed from the federal statutory rate of 35.0 percent primarily due to:

(i)                                     Additional liabilities associated with uncertain tax positions increased the effective rate by 59.7 percent for 2008. These reserves related primarily to our exposure to transfer pricing on intercompany sales to foreign subsidiaries, to the withholding on sales commissions within certain foreign jurisdictions, and to the deductibility of volume incentive payments within certain foreign jurisdictions.  The increase recognized in 2008 was related to items that arose or increased during 2008.

(ii)                                  Changes in the deferred tax asset valuation allowance increased the effective rate by approximately 68.2 percent for 2008.  The decrease in the deferred tax asset valuation allowance was primarily the result of significant reserves being established for certain foreign subsidiary deferred tax assets that were not likely to be realized due to the recurring losses within the respective tax jurisdictions.

(iii)                               The amortization of a prepaid tax resulting from a taxable gain on the sale of intercompany assets eliminated for reporting purposes, but recognized for the calculation of the consolidated income tax provision, increased the effective rate by approximately 17.4 percent in 2008. The prepaid tax is being amortized over the respective life of the asset, and it is anticipated to impact the effective tax rate through 2010.

(iv)                              Adjustments relating to the U.S. tax impact of foreign operations decreased the effective tax rate by 33.6 percent in 2008.  Included were adjustments for dividends received from foreign subsidiaries, adjustments for foreign tax credits, and adjustments relating to outside basis calculations under applicable U.S. GAAP.

(v)                                 A foreign exchange tax loss on a U.S. dollar denominated intercompany payable decreased the effective tax rate by approximately 16.8 percent in 2008.  The related foreign book loss are eliminated in consolidation; however, it was still taxable in the respective foreign jurisdictions.

(vi)                              Foreign and state tax rate differentials that incrementally impact the federal statutory rate, as well as permanent nondeductible or deductible items account for the remaining change.

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

The effective income tax rate was 284.5 percent for 2007. The effective rate for 2007 differed from the federal statutory rate of

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35 percent primarily due to:

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

LIQUIDITY AND CAPITAL RESOURCES

Our principal use of cash is to pay for operating expenses, including Volume Incentives, capital assets, inventory purchases, and funding of international expansion. As of December 31, 2009, working capital was $33.5 million, compared to $30.2 million as of December 31, 2008.  At December 31, 2009, we had $35.5 million in cash and cash equivalents, of which $33.7 is held in our foreign markets and may be subject to various withholding taxes and other restrictions related to repatriation, and $3.2 million in unrestricted short-term investments, which were available to be used along with our normal cash flows from operations to fund any unanticipated shortfalls in future cash flows.

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

For the year ended December 31, 2009, we generated cash from operating activities of $0.9 million compared to $0.8 million in 2008. The increase in operating cash is primarily related to improvements in operating income from a net loss of $1.8 million in the prior year, to net income of $6.1 million, as well as the decrease in our accrued liabilities related to the reduction of certain non-income tax related contingencies, payments of professional fees, as well as the timing of receipts from accounts receivable, and other fluctuations in other operating assets and liabilities.

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For the year ended December 31, 2008, we generated cash from operating activities of $0.8 million compared to $12.8 million in 2007. The decrease in cash generated from operating activities was primarily due to the timing of payments on accounts receivable and increased use of funds to purchase inventory compared to decreases in our overall inventory balances in 2007.  Our supply of inventory on hand had increased to 201 days as of December 31, 2008 compared to 181 days as of December 31, 2007.  The increase in our inventory on hand is the result of building inventory for our new markets in Europe and China, as well as new product launches in South Eastern Asia. In addition, operating cash flow decreased significantly as a result of the timing of payments of accrued liabilities.

Capital expenditures related to the purchase of equipment, computer systems, and software for the years ended December 31, 2009, 2008, and 2007 were $3.2 million, $3.5 million, and $4.5 million, respectively. Approximately $4.0 million of cash was used during 2008 to purchase a warehouse in Venezuela. During 2007, an additional $1.0 million was used for the acquisition of intangibles related to the purchase of product formulations.

We also had cash proceeds of $2.1 million and $0.1 million from the sale of restricted investments during the years ended December 31, 2009 and 2008, respectively. These investments were initially purchased during 2007. In addition, we had cash proceeds of $0.8 million, $0.6 million, and $1.4 million from the sale of available-for-sale investments for each of the years ended December 31, 2009, 2008, and 2007, respectively.

During 2009, 2008, and 2007, we used cash to pay dividends of $0.8 million, $3.1 million, and $3.1 million, respectively.  The Company suspended the payment of its quarterly cash dividends, effective the second quarter of 2009, in an effort to conserve cash in the United States. The suspension of cash dividends is expected to preserve approximately $3.1 million of cash flow on an annual basis.

The uses of cash for financing activities above were partially offset by proceeds received from option holders exercising their options of $1.3 million for the year ended December 31, 2007.  There were no proceeds related to the exercise of stock options for the years ended December 31, 2008 and 2009.

We believe that our working capital requirements can be met for the foreseeable future through our available cash and cash equivalents, and cash generated from operating activities; however, a prolonged economic downturn, a decrease in the demand for our products, the unfavorable settlement of our unrecognized tax positions and non-income tax contingencies could adversely affect our long-term liquidity. In the event of a significant decrease in cash provided by our operating activities, it might be necessary for us to obtain additional external sources of funding.

We do not currently maintain a long-term credit facility or any other external sources of long-term funding; however, we are exploring the possibility of establishing a long-term credit facility and believe that such funding can be established with competitive terms in the event additional sources of funds become necessary.

During 2009, we had short-term borrowings and repayments of $7.9 million from our investment brokerage secured by our available for sale investments in order to generate additional liquidity from month-to-month based upon our working capital needs. We have the ability to borrow up to approximately 80 percent of the fair value of our municipal obligations within our available for sale investments. These borrowings began in 2009 and were typically repaid in the month following the initial borrowing.

CONTRACTUAL OBLIGATIONS

The following table summarizes information about contractual obligations as of December 31, 2009 (in thousands):

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The Company has entered into long-term agreements with third-parties in the ordinary course of business, in which it has agreed to pay a percentage of net sales in certain regions in which it operates, or royalties on certain products. In 2009, 2008 and 2007, the aggregate amounts of these payments were $4.0 million, $7.7 million and $5.6 million, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

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

RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Guidance

In December 2007, the Financial Accounting Standards Board (“FASB”) issued new guidance on business combinations that changes how business combinations are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. In addition, the guidance expands required disclosures surrounding the nature and financial affects of business combinations. The Company adopted this guidance on January 1, 2009, and will apply it to future business combinations.

In December 2007, the FASB issued new guidance on noncontrolling interests in a subsidiary that changes the accounting and reporting standards for the noncontrolling interests in a subsidiary in consolidated financial statements. The guidance recharacterizes minority interest as noncontrolling interests and requires noncontrolling interests to be classified as a component of shareholders’ equity. The guidance requires retroactive adoption of the presentation and disclosure requirements for existing minority interest. The Company’s adoption of this guidance, effective January 1, 2009, did not have a material impact on the Company’s financial condition, results of operations, or cash flows.

In April 2008, the FASB issued authoritative guidance related to the determination of the useful life of intangible assets. The guidance states that in developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. This guidance is to be applied to intangible assets acquired after January 1, 2009. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations, or cash flows.

In April 2009, the FASB issued new guidance that amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for interim and

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annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations, or cash flows.

In April 2009, the FASB issued new guidance providing additional information on factors to consider in estimating fair values when there has been a significant decrease in the market activity for a financial asset or liability. It also includes guidance on identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations, or cash flows.

In May 2009, the FASB issued new authoritative guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. The guidance distinguishes events requiring recognition in the financial statements and those that may require disclosure in the financial statements. Furthermore, it requires disclosure of the date through which subsequent events were evaluated. This guidance is effective for interim and annual periods after June 15, 2009. In February 2010, FASB amended this guidance to clarify the date through which subsequent events are to be evaluated. The Company adopted this guidance during the quarter ended June 30, 2009 and the subsequent amendment as of the year ended December 31, 2009, and has evaluated subsequent events through the date the Company’s consolidated financial statements were issued.

In June 2009, the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,” (“Codification”) was issued. The Codification supersedes all existing accounting standard documents and is the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included in the Codification will be considered non-authoritative. The Codification was implemented on July 1, 2009 and is effective for interim and annual periods ending after September 15, 2009. The Company’s Notes to the Consolidated Financial Statements in Item 8 of this report reflect the adoption of the Codification.

Recent Accounting Guidance Not Yet Adopted

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of variable interest entities (“VIEs”). The amendment requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a VIE. The primary beneficiary of a VIE is the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The amendment requires ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE as well as expanded disclosure requirements for enterprises with an interest in a VIE. The guidance is effective for fiscal years beginning after November 15, 2009, with early adoption prohibited. The Company does not expect the adoption of this amendment to have a material impact on its financial condition, results of operations, or cash flows.

In October 2009, the FASB issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010 (early adoption is permitted), modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. Although applicable to the Company, the Company does not expect the adoption of these amendments to have a material impact on its financial condition, results of operations, or cash flows.

In January 2010, the FASB issued authoritative guidance that requires new disclosures related to fair value measurements and clarifies existing disclosure requirements about the level of disaggregation, inputs and valuation techniques. Specifically, reporting entities now must disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In addition, in the reconciliation for Level 3 fair value measurements, a reporting entity should present separately information about purchases, sales, issuances and settlements. The guidance clarifies that a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities for disclosure of fair value measurement, considering the level of disaggregated information required by other applicable U.S. GAAP guidance and should also provide disclosures about the valuation techniques and inputs used to measure fair value for each class of assets and liabilities. This guidance will be effective for the Company on January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements, which will be effective for the Company on January 1, 2011. The Company does not expect this guidance to have a material impact on its financial condition, results of operations, or cash flows.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We conduct business in several countries and intend to continue to expand our international operations. Net sales revenue, operating income, and net income are affected by fluctuations in currency exchange rates, interest rates and other uncertainties inherent in doing business and selling product in more than one currency. In addition, our operations are exposed to risks associated

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with changes in social, political, and economic conditions inherent in international operations, including changes in the laws and policies that govern international investment in countries where we have operations, as well as, to a lesser extent, changes in United States laws and regulations relating to international trade and investment.

Foreign Currency Risk

During the year ended December 31, 2009, approximately 55.0 percent of our net sales revenue and approximately 54.7 percent of our operating expenses were realized outside of the United States. Inventory purchases are transacted primarily in U.S. dollars from vendors located in the United States. The local currency of each international subsidiary is generally the functional currency, while certain regions, including Russia and the Ukraine, are served by a U.S. subsidiary through third party entities, for which all business is conducted in U.S. dollars. We conduct business in twenty-three different currencies with exchange rates that are not on a one-to-one relationship with the U.S. dollar.  All revenues and expenses are translated at average exchange rates for the periods reported. Therefore, our operating results will be positively or negatively impacted by a weakening or strengthening of the U.S. dollar in relation to another fluctuating currency. Given the uncertainty and diversity of exchange rate fluctuations, we cannot estimate the effect of these fluctuations on our future business, product pricing, results of operations, or financial condition, but we have provided consolidated sensitivity analyses below of functional currency/reporting currency exchange rate risks. Changes in various currency exchange rates affect the relative prices at which we sell our products. We regularly monitor our foreign currency risks and periodically take measures to reduce the risk of foreign exchange rate fluctuations on our operating results. We do not use derivative instruments for hedging, trading, or speculating on foreign exchange rate fluctuations.  Additional discussion of the impact on the effect of currency fluctuations has been included in our management’s discussion and analysis included in Part II, Item 7 of this report.

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

Exchange Rate Sensitivity of Operating Income for the year ended December 31, 2009 (dollar amounts in thousands)

As noted above, certain of our operations including Russia and the Ukraine are served by a U.S. subsidiary through third party entities, for which all business is conducted in U.S. dollars. Although changes in exchange rates between the U.S. dollar and the Russian rubble or the Ukrainian hryvnia do not result in currency fluctuations within our financial statements, a weakening or strengthening of the U.S. dollar in relation to these other currencies can significantly impact the prices of our products and the purchasing power of our independent Managers and Distributors within these markets.

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

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Exchange Rate Sensitivity of Balance Sheet as of December 31, 2009 (dollar amounts in thousands)