The following Management's Discussion and Analysis should be read in conjunction with Management's Discussion and Analysis included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission ("SEC") on February 27, 2009, and our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report.

Overview

Our revenue for the three-month period ended March 31, 2009 decreased 1% to $296.2 million compared to the same period in 2008 as a result of foreign currency exchange rate fluctuations, which negatively impacted revenue by 5%. Solid year-over-year local-currency growth in our South Korea, United States, Europe and South Asia/Pacific markets were offset by the impact of foreign currency fluctuations as well as local currency declines in China and Japan. During the quarter we continued to see strong results in our personal care brand, including continued demand for the Galvanic Spa System II and ageLoc Galvanic Gels, our first products to incorporate ageLoc technology, which are currently being sold in our Americas and Europe regions.

Earnings per share for the first quarter of 2009 were $0.19 compared to $0.21 for the same period in 2008. Earnings per share were negatively impacted by $9.4 million in planned restructuring charges (or $0.09 per share), primarily related to transformation efforts to streamline our operations in Japan. First quarter 2008 earnings were negatively impacted by a foreign currency translation loss of $4.5 million primarily related to the translation of our Japanese yen denominated debt into U.S. dollars.

    Revenue

    North Asia. The following table sets forth revenue for the three-month
periods ended March 31, 2009 and 2008 for the North Asia region and its
principal markets (U.S. dollars in millions):

                                   2009                 2008          Change

         Japan              $            109.9   $            109.0     1%
         South Korea                      29.9                 40.4   (26%)
         North Asia total   $            139.8   $            149.4    (6%)

Revenue in the region for the three-month period ended March 31, 2009 was negatively impacted approximately 2 percent by foreign currency exchange rate fluctuations.

Local-currency revenue in Japan declined 10% for the three-month period ended March 31, 2009, compared to the same period in 2008, which was offset by the impact of a stronger yen during the quarter compared to the prior-year period. Although the decline in local currency revenue was less than previous quarters, we continued to experience a year-over-year decline in our distributor numbers, with active and executive distributor counts decreasing 7% and 11%, respectively. Regulatory and media scrutiny of the industry and our focus on distributor compliance in response to this scrutiny continued to negatively affect our business. During the quarter, however, we continued to focus on initiatives that have successfully contributed to growth in our other markets. We have experienced a positive response to these initiatives by our distributors. We believe these initiatives will contribute to improving revenue trends in the future.

South Korea continued to experience local-currency revenue growth with local-currency revenue increasing 10% compared to the same period in 2008. However, a 48% weighted average weakening of the Korean won resulted in a large decline in reported revenue in this market compared to the prior-year period. As the Korean won continues to fluctuate, it may positively or negatively impact our results. Local-currency growth in South Korea tempered compared to prior quarters, due to the success of the Estera product launch during the prior-year period, making for a difficult year-over-year comparison. We believe revenue growth was also negatively impacted by the prolonged and difficult economic conditions in this market. The number of active and executive distributors in Korea increased 16% and 6%, respectively, compared to the prior-year period.

Americas. The following table sets forth revenue for the three-month periods ended March 31, 2009 and 2008 for the Americas region and its principal markets (U.S. dollars in millions):

                                  2009                 2008          Change

          United States    $             49.2   $             44.4    11%
          Canada                          4.6                  3.3    39%
          Latin America                   4.6                  2.7    70%
          Americas total   $             58.4   $             50.4    16%

Revenue in the United States for the three-month period ended March 31, 2009 increased by 11% compared to the prior-year period, reflecting slightly slower growth than in recent quarters. The increase in revenue continued to be driven by strong interest in our highly demonstrable Galvanic Spa System II. Our launch of ageLoc Galvanic Gelsduring the last quarter of 2008 also contributed to growth during the first quarter of 2009. Active distributors in the United States increased 1% and executive distributors increased 5% in the first quarter of 2009 compared to the same prior-year period.

On a local-currency basis, revenue in Canada increased 74% and in Latin America by 93% over the prior-year period, driven primarily by the success of our Galvanic Spa System II and ageLoc gels in these markets. We plan to begin initial marketing efforts in Colombia during the second quarter of 2009.

Greater China. The following table sets forth revenue for the three-month periods ended March 31, 2009 and 2008 for the Greater China region and its principal markets (U.S. dollars in millions):

                                    2009                 2008          Change

       Taiwan                $             19.3   $             21.6   (11%)
       Mainland China                      16.5                 16.7    (1%)
       Hong Kong                           11.7                 11.6     1%
       Greater China total   $             47.5   $             49.9    (5%)

Foreign currency exchange rate fluctuations negatively impacted revenue by approximately 2% in this region during the first quarter of 2009.

On a local-currency basis, revenue in Mainland China decreased 6% in the three-month period ended March 31, 2009, compared to the same period in 2008. This decrease is primarily due to our continued transition to a new sales model and continued efforts to manage our sales force to ensure compliance with our policies and local regulations. The number of preferred customers in Mainland China decreased 49% and sales representatives decreased 12%, compared to the prior-year period.

Local-currency revenue in Taiwan was down 3%, and local-currency revenue in Hong Kong was even on a year-over-year basis in the three-month period ended March 31, 2009, compared to the same prior-year period. We continue to be unable to market the Galvanic Spa System II in Taiwan due to regulatory restrictions, which has been a primary growth initiative in our other markets. The first quarter executive distributor count in Taiwan was up 6% and the number of active distributors was down 11% when compared to the prior year period, while executive distributors in Hong Kong were up 2% and the active distributors in Hong Kong were down 3%.

Europe. The following table sets forth revenue for the three-month periods ended March 31, 2009 and 2008 for the Europe region (U.S. dollars in millions):

Regional results were negatively impacted 19% by foreign currency fluctuations.

We continue to experience strong growth throughout our European markets. Growth in this region was driven by strong sales force leadership and sustained interest in our Galvanic Spa System II and Pharmanex BioPhotonic Scanner products, as well as momentum generated from the expansion of our business in Eastern Europe, which includes the markets of Hungary, Romania, Russia, Slovakia, Poland and the recently opened Czech Republic. We currently plan on beginning initial marketing activities in Turkey during the second quarter of 2009.

South Asia/Pacific. The following table sets forth revenue for the three-month periods ended March 31, 2009 and 2008 for the South Asia/Pacific region and its principal markets (U.S. dollars in millions):

                                       2009                 2008          Change

    Singapore/Malaysia/Brunei   $              9.4   $              9.9    (5%)
    Thailand                                   8.0                  8.7    (8%)
    Australia/New Zealand                      2.7                  3.3   (18%)
    Indonesia                                  2.0                  2.0     -
    Philippines                                1.7                  1.6     6%
    South Asia/Pacific total    $             23.8   $             25.5    (7%)

Foreign currency exchange rate fluctuations negatively impacted revenue in South Asia/Pacific by 15% in the first quarter of 2009 compared to the same prior-year period. Constant currency growth of 8% in this region was driven primarily by steady sales of our Galvanic Spa System II and The Right Approach weight loss products. The growth in this region was driven by double-digit constant-currency growth in Malaysia, Australia/New Zealand, Philippines, and Indonesia. In addition, revenue in Thailand was negatively impacted by ongoing political unrest in this market.

Gross profit

Gross profit as a percentage of revenue remained at 81.8% for the first quarter of 2009 level with the same period in 2008.

Selling expenses

Selling expenses as a percentage of revenue decreased to 41.6% for the first quarter of 2009 from 42.9% for the same period in 2008. This improvement is largely related to the phase-in of a distributor compensation plan modification, which we refer to as the Wealth Maximizer, implemented in North America and Europe during 2008. Other compensation plan modifications in several markets including China and Japan also contributed to this improvement.

General and administrative expenses

General and administrative expenses increased to $89.7 million for the first quarter of 2009 from $88.6 million for the same period in 2008. As a percentage of revenue, general and administrative expenses increased to 30.3% for the first quarter of 2009 from 29.7% for the same period in 2008. The slight increase in general and administrative expenses was associated primarily with additional promotion and event spending during the first quarter, particularly in Japan where we are beginning to hold additional distributor events similar to what we do in other markets, as part of our efforts to improve results in Japan.

Restructuring charges

During the first quarter of 2009, we recorded restructuring charges of $9.4 million primarily related to restructuring in our Japan operations, including an approximately 35% headcount reduction as well as facility relocations and closures. Approximately $6.8 million of these charges related to severance payments to terminated employees and approximately $2.6 million related to facility relocation or closing costs. We currently anticipate that we will incur approximately $5 million in additional restructuring charges during the remainder of 2009 primarily related to facility relocations and closures in Japan.

Other income (expense), net

Other income (expense), net for the first quarter of 2009 was approximately $1.2 million of expense compared to $5.8 million of expense for the same period in 2008. This expense consisted primarily of approximately $1.8 million in interest expense, offset by approximately $0.6 million in foreign currency gains. Other income (expense), net for the first quarter of 2008 was negatively impacted by a foreign currency translation loss of $4.5 million primarily related to the translation of our Japanese yen denominated debt into U.S. dollars.

Provision for income taxes

Provision for income taxes for the first quarter of 2009 was $7.1 million compared to $8.1 million for the same period in 2008. The effective tax rate was 37.4% of pre-tax income during the first quarter of 2009, compared to a rate of 37.5% in the same prior-year period.

Net income

As a result of the foregoing factors, net income for the first quarter of 2009 decreased to $11.8 million from $13.5 million for the same period in 2008.

Liquidity and Capital Resources

Historically, our principal uses of cash have included operating expenses, particularly selling expenses, and working capital (principally inventory purchases), as well as capital expenditures, stock repurchases, dividends, debt repayment and the development of operations in new markets. We have generally relied on cash flow from operations to fund operating activities, and we have at times incurred long-term debt in order to fund strategic transactions and stock repurchases.

We typically generate positive cash flow from operations due to favorable gross margins and the variable nature of selling expenses, which constitute a significant percentage of operating expenses. We generated $18.7 million in cash from operations during the three-month period ended March 31, 2009, compared to $14.1 million during the same period in 2008.

As of March 31, 2009, working capital was $132.0 million, compared to $124.0 million as of December 31, 2008. Cash and cash equivalents at March 31, 2009 and December 31, 2008 were $117.0 million and $114.6 million, respectively. The increase in cash balances was primarily due to the increase in cash generated from operating activities. This increase in cash positively impacted our working capital.

Capital expenditures in the first three months of 2009 totaled $3.2 million, and we anticipate capital expenditures of approximately $25 million for 2009. These capital expenditures are primarily related to:

• purchases of computer systems and software, including equipment and development costs; and

• the build-out and upgrade of leasehold improvements in our various markets, including retail stores in China and walk-in centeres in Japan.

We currently have long-term debt pursuant to various credit facilities and other borrowings. The following table summarizes these long-term debt arrangements as of March 31, 2009:

                      Original      Balance as of
  Facility or         Principal        March 31,
  Arrangement(1)       Amount          2009(2)        Interest Rate       Repayment terms


2000 Japanese         yen 9.7       yen 2.8               3.0%           Notes due October
yen denominated       billion       billion                              2010, with annual
notes                               ($28.0                               principal
                                    million as of                        payments that
                                    March 31,                            began in October
                                    2009)                                2004.


2003 $205.0
million
multi-currency
uncommitted
shelf facility:

    U.S. dollar       $50.0         $20.0 million         4.5%           Notes due April
    denominated:      million                                            2010, with annual
                                                                         principal
                                                                         payments that
                                                                         began in April
                                                                         2006.


                      $40.0         $40.0 million         6.2%           Notes due July
                      million                                            2016, with annual
                                                                         principal
                                                                         payments that
                                                                         begin in July
                                                                         2010.


                      $20.0         $20.0 million         6.2%           Notes due January
                      million                                            2017, with annual
                                                                         principal
                                                                         payments
                                                                         beginning January
                                                                         2011.


    Japanese yen      yen 3.1       yen 2.7               1.7%           Notes due April
    denominated:      billion       billion                              2014, with annual
                                    ($27.0                               principal
                                    million as of                        payments that
                                    March 31,                            began in April
                                    2009)                                2008.

                      yen 2.3       yen 2.3               2.6%           Notes due
                      billion       billion                              September 2017,
                                    ($22.9                               with annual
                                    million as of                        principal
                                    March 31,                            payments
                                    2009)                                beginning
                                                                         September 2011.

                      yen 2.2       yen 2.2               3.3%           Notes due January
                      billion       billion                              2017, with annual
                                    ($22.0                               principal
                                    million as of                        payments
                                    March 31,                            beginning January
                                    2009)                                2011.

                      Original      Balance as of
  Facility or         Principal        March 31,
  Arrangement(1)       Amount          2009(2)        Interest Rate       Repayment terms


2004 $25.0            N/A           None                   N/A           Credit facility
million                                                                  expires May 2010.
revolving credit
facility

(2) The current portion of the Company's long-term debt (i.e. becoming due in the next 12 months) is $28.5 million and includes $14.0 million of the balance on the Company's 2000 Japanese yen denominated notes, $4.5 million of the balance of the Company's Japanese yen-denominated debt under the 2003 multi-currency uncommitted shelf facility and $10.0 million of the balance on the Company's U.S. dollar denominated debt under the 2003 multi-currency uncommitted shelf facility.

Our board of directors has approved a stock repurchase program authorizing us to repurchase our outstanding shares of Class A common stock on the open market or in private transactions. The repurchases are used primarily to offset dilution from our equity incentive plans and for strategic initiatives. During the first quarter of 2009, we repurchased approximately 0.2 million shares of Class A common stock under this program for approximately $2.0 million. At March 31, 2009, approximately $81.6 million was available for repurchases under the stock repurchase program.

In February 2009, our board of directors declared a quarterly cash dividend of $0.115 per share for Class A common stock. This quarterly cash dividend of $7.3 million was paid on March 18, 2009 to stockholders of record on February 27, 2009. Currently, we anticipate that our board of directors will continue to declare quarterly cash dividends and that the cash flows from operations will be sufficient to fund our future dividend payments. However, the continued declaration of dividends is subject to the discretion of our board of directors and will depend upon various factors, including our net earnings, financial condition, cash requirements, future prospects and other factors deemed relevant by our board of directors.

We believe we have sufficient liquidity to be able to meet our obligations on both a short- and long-term basis. We currently believe that existing cash balances, future cash flows from operations and existing lines of credit will be adequate to fund our cash needs on both a short- and long-term basis. The majority of our historical expenses have been variable in nature and as such, a potential reduction in the level of revenue would reduce our cash flow needs. In the event that our current cash balances, future cash flow from operations and current lines of credit are not sufficient to meet our obligations or strategic needs, we would consider raising additional funds in the debt or equity markets or restructuring our current debt obligations. Additionally, we would consider realigning our strategic plans, including a reduction in capital spending, stock repurchases or dividend payments.

Due to the international nature of our business, we are subject from time to time to reviews and audits by the foreign taxing authorities of the various jurisdictions in which we conduct business throughout the world. In 1999, we implemented a duty valuation methodology with respect to the importation of certain products into Japan. For purposes of the import transactions at issue, we had taken the position that, under applicable customs law, there was a sale between the manufacturer and our Japan subsidiary, and that customs duties should be assessed on the manufacturer's invoice. The Valuation Department of the Yokohama customs authorities reviewed and approved this methodology at that time, and it had been reviewed on several occasions by the audit division of the Japan customs authorities since then. In connection with subsequent audits in 2004, the Yokohama customs authorities assessed us additional duties and penalties on these products imported into Japan from October 2002 to October 2004, based on a different valuation methodology than what was previously approved. With respect to the periods under audit, the customs authorities took the position that the relevant import transaction involved a sale between our U.S. affiliate and our Japan subsidiary and that duties should be assessed on the value of that transaction. We disputed this assessment. We also disputed the amount of duties we were required to pay on products imported from November of 2004 to June of 2005 for similar reasons. The total amount assessed or in dispute was approximately yen 2.7 billion (or approximately $27.3 million as of March 31, 2009), net of any recovery of consumption taxes. Effective July 1, 2005, we implemented some modifications to our business structure in Japan and in the United States that we believe will eliminate any further customs valuation disputes with respect to product imports in Japan after that time.

Because we believe the documentation and legal analysis supports our position and the valuation methodology we used with respect to the products in dispute had been reviewed and approved by the customs authorities in Japan, we believe the assessments are improper and we filed letters of protest with Yokohama customs with respect to this entire amount. Yokohama customs rejected our letters of protest, and to follow proper administrative procedures we filed appeals with the Japan Ministry of Finance. In order to appeal, we were required to pay the approximately yen 2.7 billion in custom duties and assessments related to all of the amounts at issue, which we recorded in "Other Assets" in our Consolidated Balance Sheet. On June 26, 2006, we were advised that the Ministry of Finance had rejected the appeals filed with their office relating to the imports from October 2002 to October 2004. We decided to appeal this issue through the judicial court system in Japan, and on December 22, 2006, we filed a complaint with the Tokyo District Court Civil Action Section with respect to this period. In January 2007, we were advised that the Ministry of Finance also rejected our appeal with them for the imports from November 2004 to June 2005. We appealed this decision with the court system in July 2007. Currently, all appeals are pending with the Tokyo District Court Civil Action Section. One of the findings cited by the Ministry of Finance in its decisions was that we had treated the transactions as sales between our U.S. affiliate and our Japan subsidiary on our corporate income tax return under applicable income tax and transfer pricing laws. To the extent that we are unsuccessful in recovering the amounts assessed and paid, we will be required to take a corresponding charge to our earnings.

Critical Accounting Policies

The following critical accounting policies and estimates should be read in conjunction with our audited consolidated financial statements and related notes thereto, and our interim unaudited consolidated financial statements and related notes thereto. Management considers the most critical accounting policies to be the recognition of revenue, accounting for income taxes, accounting for intangible assets and accounting for stock-based compensation. In each of these areas, management makes estimates based on historical results, current trends and future projections.

Revenue. We recognize revenue when products are shipped, which is when title and risk of loss pass to our independent distributors. With some exceptions in various countries, we offer a return policy whereby distributors can return unopened and unused product for up to 12 months subject to a 10% restocking fee. Reported revenue is net of returns, which have historically been less than 5% of gross sales. A reserve for product returns is accrued based on historical experience. We classify selling discounts as a reduction of revenue. Our selling expenses are computed pursuant to our global compensation plan for our distributors, which is focused on remunerating distributors based primarily upon the selling efforts of the distributors and the volume of products purchased by their downlines, and not their personal purchases.

Income Taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This statement establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise's activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting of income taxes. We pay income taxes in many foreign jurisdictions based on the profits realized in those jurisdictions, which can be significantly impacted by terms of intercompany transactions among our affiliates around the world. Deferred tax assets and liabilities are created in this process. As of March 31, 2009, we had net deferred tax assets of $74.3 million. These net deferred tax assets assume sufficient future earnings will exist for their realization, as well as the continued application of current tax rates. In certain foreign jurisdictions valuation allowances have been recorded against the deferred tax assets . . .