The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis discusses the financial condition and results of our operations on a consolidated basis, unless otherwise indicated.

Overview

We are a developer, manufacturer and marketer of a proprietary line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports nutrition. We also offer a line of skin care products. We sell our products through an international network marketing system using independent distributors. Sales in the United States represented approximately 89.0% of worldwide net sales for the six months ended June 30, 2009 and 86.4% of worldwide net sales for the six months ended June 30, 2008. Our international operations currently generate sales through distributor networks in Australia, Canada, Germany, Ireland, Malaysia, Mexico, New Zealand, the Philippines, Singapore and the United Kingdom. We also operate on a limited basis in Austria and the Netherlands from our German distribution center and in Brunei from our Malaysia office.

We derive our revenues principally through product sales made by our global independent distributor base, which, as of June 30, 2009, consisted of approximately 68,040 distributors. Our sales can be affected by several factors, including our ability to attract new distributors and retain our existing distributor base, our ability to properly train and motivate our distributor base and our ability to develop new products and successfully maintain our current product line.

All of our sales to distributors outside the United States are made in the respective local currency; therefore, our earnings and cash flows are subject to fluctuations due to changes in foreign currency rates as compared to the U.S. dollar. As a result, exchange rate fluctuations may have an effect on sales and gross margins. Accounting practices require that our results from operations be converted to U.S. dollars for reporting purposes. Consequently, our reported earnings may be significantly affected by fluctuations in currency exchange rates, generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Products manufactured by us for sale to our foreign subsidiaries are transacted in U.S. dollars. From time to time, we enter into foreign exchange forward contracts to mitigate our foreign currency exchange risk.

Components of Net Sales and Expense

Product sales represent the actual product purchase price typically paid by our distributors, after giving effect to distributor allowances, which can range between 20% to 40% of suggested retail price, depending on the rank of a particular distributor. Handling and freight income represents the amounts billed to distributors for shipping costs. We record net sales and the related commission expense when the merchandise is shipped.

Our primary expenses include cost of products sold, distributor royalties and commissions and selling, general and administrative expenses.

Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead directly associated with production of our products and sales materials, as well as shipping costs relating to the shipment of products to distributors, and duties and taxes associated with product exports. Cost of products sold is impacted by the cost of the ingredients used in our products, the cost of shipping distributors' orders, along with our efficiency in managing the production of our products.

Distributor royalties and commissions are monthly payments made to Master Affiliates and above, based on products sold in their downline organization. Based on our distributor agreements, these expenses typically approximate 23% of sales at suggested retail. Also, we include other sales leadership bonuses, such as Ambassador bonuses, in this line item. Distributor royalties and commissions are directly related to the level of our sales and, absent any changes in our distributor compensation plan, should continue at comparable levels as a percentage of net sales as in recent periods. However, in 2008, we adjusted the commission structure on our newest product, GlucAffect, and other higher priced products in our line. We reduced the value of the product used to determine distributor allowances and commission payouts on these products. This, in turn, allows us to sell these products at a lower suggested retail price with no net impact to our earnings. This adjustment appears as a slight reduction in the percentage of distributor royalties and commissions as a percentage of net sales.

Selling, general and administrative expenses include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation and amortization, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits; the amount we decide to invest in distributor training and motivational initiatives; the cost of regulatory compliance, such as the costs incurred to comply with the various provisions of the Sarbanes-Oxley Act of 2002; and other administrative costs.

Results of Operations

        The following table sets forth selected results of our operations
expressed as a percentage of net sales for the three- and six-month periods
ended June 30, 2009 and 2008. Our results of operations for the periods
described below are not necessarily indicative of results of operations for
future periods.

                                            Three months ended          Six months ended
                                                 June 30,                   June 30,
                                             2009          2008         2009         2008

  Net sales                                    100.0 %      100.0 %       100.0 %     100.0 %
  Costs and expenses:
  Cost of products sold                         18.8         17.2          19.1        17.1
  Distributor royalties and commissions         38.1         39.3          37.8        39.3
  Selling, general and administrative           40.1         40.0          38.0        37.4

  Income from operations                         3.0          3.5           5.1         6.2
  Interest expense                              (0.2 )       (0.0 )        (0.1 )      (0.0 )
  Interest and other income                      0.6          0.5           0.4         0.4

  Income before income taxes                     3.4          4.0           5.4         6.6
  Provision for income taxes                     1.4          1.6           2.2         2.6

  Net income                                     2.0 %        2.4 %         3.2 %       4.0 %

Net Sales. Overall net sales decreased by 16.3% in the three months ended June 30, 2009 compared to the same period in 2008. During the second quarter of 2009, sales in the United States decreased by 13.7%, and our international sales decreased by 31.5% over the prior-year period.

The following table summarizes net sales by geographic market for the three months ended June 30, 2009 and 2008. Beginning in 2009, we have condensed the sales and distributor count data for the various countries where we operate within Europe and Asia into single line items for each region.

                                Three months ended June 30,
                              2009                      2008                Change from prior year
                                  % of Net                   % of Net
                       Amount      Sales        Amount         Sales         Amount            %
                                    (dollars in thousands)
United States         $ 17,638       87.9 %    $ 20,435         85.3 %     $  (2,797 )       (13.7 )%
Australia/New Zealand      535        2.7           682          2.8            (147 )       (21.6 )
Canada                     313        1.6           436          1.8            (123 )       (28.2 )
Mexico                     345        1.7           481          2.0            (136 )       (28.3 )
Europe                     305        1.5           381          1.6             (76 )       (19.9 )
Asia                       917        4.6         1,545          6.5            (628 )       (40.6 )
Consolidated total    $ 20,053      100.0 %    $ 23,960        100.0 %     $  (3,907 )       (16.3 )%

The following table summarizes net sales by geographic market for the six months ended June 30, 2009 and 2008.

                                 Six months ended June 30,
                              2009                      2008                Change from prior year
                                  % of Net                   % of Net
                       Amount      Sales        Amount         Sales         Amount            %
                                   (dollars in thousands)
United States         $ 39,019       89.0 %    $ 45,120         86.4 %     $  (6,101 )       (13.5 )%
Australia/New Zealand    1,051        2.4         1,428          2.7            (377 )       (26.4 )
Canada                     648        1.5           897          1.7            (249 )       (27.8 )
Mexico                     627        1.4           880          1.7            (253 )       (28.8 )
Europe                     613        1.4           905          1.8            (292 )       (32.3 )
Asia                     1,886        4.3         3,001          5.7          (1,115 )       (37.2 )
Consolidated total    $ 43,844      100.0 %    $ 52,231        100.0 %     $  (8,387 )       (16.1 )%

The following table sets forth, as of June 30, 2009 and 2008, the number of our active distributors and Master Affiliates and above. The total number of active distributors includes Master Affiliates and above. We define an active distributor as one that enrolls as a distributor or renews his or her distributorship during the prior twelve months. Master Affiliates and above are distributors that have attained the highest level of discount and are eligible for royalties generated by Master Affiliates and above in their downline organization. Growth in the number of active distributors and Master Affiliates and above is a key factor in the growth of our business.

                                             June 30, 2009                      June 30, 2008                          % Change
                                                        Master                              Master                              Master
                                       Active       Affiliates and        Active        Affiliates and        Active        Affiliates and
                                    Distributors        Above          Distributors         Above          Distributors          Above

United States                             54,160           7,880            55,070             10,080            (1.7 )%          (21.8 )%
Australia/New Zealand                      2,440             180             2,420                220             0.8             (18.2 )
Canada                                     1,230             120             1,230                150             0.0             (20.0 )
Mexico                                     1,820             210             1,540                220            18.2              (4.5 )
Europe                                     1,090             160             1,250                170           (12.8 )            (5.9 )
Asia                                       7,300             840             7,940                920            (8.1 )            (8.7 )
Consolidated total                        68,040           9,390            69,450             11,760            (2.0 )%          (20.2 )%

In the United States, net sales were down 13.7% in the second quarter of 2009 compared to the same period in 2008. For the six-month period ended June 30, 2009, net sales in the United States were down 13.5% versus the prior-year period. Sales in the United States continue to be adversely impacted by the downturn in the economy. First, the broad reduction in consumer spending in the United States has negatively impacted our sales. Second, we believe the credit problems in the U.S. financial markets, and the reduced availability of consumer credit, continue to play a role in our sales decline, resulting in the lower number of distributors qualifying for the level of Master Affiliate. In the second quarter of 2009, approximately 617 distributors qualified as new Master Affiliates, compared to approximately 1,090 in the prior-year quarter, a decline of 43.4%. For the first six months of 2009, the number of distributors qualifying for the level of Master Affiliate is down 40.6%, compared to the prior-year period. In addition, the net number of Master Affiliates and above as of June 30, 2009 decreased by 21.8%, as compared to the net number of Master Affiliates and above as of June 30, 2008. This is consistent with a reduced number of distributors qualifying for the level of Master Affiliate discussed above. The net number of active Distributors in the United States as of June 30, 2009 decreased by 1.7% to 54,160, compared to the number of active Distributors as of June 30, 2008. To help offset this decline, we launched an initiative in January 2009 to increase new distributor enrollments by offering an enrollment fee of $20, half of the normal $39.95 fee. As a result, new distributor enrollments increased in the second quarter of 2009 to 4,970 compared to 4,680 in the prior year quarter, an increase of 6.2%. For the first six months of 2009, new distributor enrollments are up 15.7%, compared to the prior-year period. Distributor retention was 59.3% for the first six months of 2009 compared to a rate of 64.7% for all of 2008. We continue to structure our distributor training to help distributors reach the Master Affiliate level as quickly as possible, as we believe that is a key in their potential for long-term success.

Another impact of the downturn in the economy to our business is the number of orders placed and the average order size. In the second quarter of 2009, we processed approximately 67,880 orders in the U.S. for products at an average order of $333 at suggested retail, a decline of 3.4% in the number of orders placed compared to the prior-year quarter. In the same period of 2008, we processed approximately 70,280 product orders at an average order of $372 at suggested retail. The average order size for all of 2008 was $388 at suggested retail. This decline in the average order size is another indicator of the impact of the current economic conditions and a contributing factor in the lower numbers of distributors reaching the Master Affiliate level.

During the three months ended June 30, 2009, net sales in our international operations decreased in aggregate by 31.5% to $2.41 million compared to $3.52 million for the three months ended June 30, 2008. For the six-month period ended June 30, 2009, international net sales decreased by 32.1% to $4.82 million compared to $7.11 million in the same period in 2008. For the first six months of 2009, approximately 45% of the decline was the result of foreign currency fluctuation in the form of a stronger U.S. dollar. Excluding currency impact, international net sales decreased by 18.9% and 17.5% for the second quarter and first six months of 2009, respectively, compared to the same periods of the prior year. Sales in all of our foreign markets are being impacted by the global recession as in the United States. Our half-price distributor enrollment initiative has been implemented in nearly all of our foreign markets. Sales in the Australia/New Zealand market were impacted less by the global recession, as net sales on a constant currency basis were down only 3.8%. We rolled out our current meal replacement/appetite suppressant product line in February 2009, marketed under the name, Slimsimply, in this region. Other regional sales results on a constant currency basis for the first half of 2009 compared to the same period of 2008 were as follows: Canada's net sales are down 13.4%, Mexico's net sales are down 7.3%, European net sales are down 12.6%, and Asian net sales are down 29.8%.

Cost of Products Sold. Cost of products sold as a percentage of net sales was 18.8% and 19.1% for the three- and six-month periods ended June 30, 2009, respectively, compared to 17.2% and 17.1% for the same periods in 2008. Gross margins were impacted in the second quarter and first half of 2009 compared to the same periods of 2008 by raw material price increases and higher freight costs. Lower plant utilization also continues to have a negative impact on cost of products sold.

Distributor Royalties and Commissions. Distributor royalties and commissions as a percentage of net sales were 38.1% and 37.8% for the three- and six-month periods ended June 30, 2009, respectively, compared to 39.3% and 39.3% for the same periods in 2008. The decrease as a percentage of net sales is the result of changes made to our commission payout structure on our newest product, GlucAffect, and certain other higher priced products in our line.

Selling, General and Administrative Expenses. For the three and six months ended June 30, 2009, selling, general and administrative, or SGA, expenses decreased by $1.54 million and $2.85 million, respectively, compared to the same periods in 2008. SGA expenses as a percentage of net sales were 40.1% and 38.0% for the three- and six-month periods ended June 30, 2009, respectively, compared to 40.0% and 37.4% for the same periods of 2008.

Sales and marketing expenses decreased by approximately $1.75 million in the first six months of 2009, compared to the prior-year period. The decrease is comprised of lower distributor bonuses and expenses directly related to the level of sales and a reduction in the amount spent on company-sponsored business opportunity meetings and other special events, as we restructured our schedule of major distributor events to include a nationwide distributor conference held in the United States in February 2009 in Ft. Worth, Texas. During the second quarter of 2009, we held a series of distributor events referred to as the "Financial Freedom Tour". However, these events are of a smaller scale and replaced the distributor conferences historically held on a regional basis; and therefore, we consider them to be more cost effective.

Distribution and warehouse expenses decreased by $168,000 and general and administrative expenses decreased by approximately $937,000 in the first six months of 2009, compared to the prior-year period. The decrease in general and administrative expenses consists primarily of reductions in professional fees, corporate travel expenses, salaries, and incentive compensation. The general and administrative expenses in 2008 included a pre-tax charge of $215,000 for the restructuring of the German office, which included costs for severance payments and accrued lease termination costs.

Interest Income/Expense. Interest income decreased to $35,000 for the six months ended June 30, 2009, compared to $236,000 for the same period in 2008. The decrease is the result of a lower level of invested funds. We incurred $51,000 in interest expense during the first half of 2009, on promissory notes and bank debt related to the purchases of our common stock from a significant shareholder during the fourth quarter of 2008 and second quarter of 2009.

Income Taxes. We recorded income tax expense of $942,000 for the first six months of 2009, an effective rate of 39.8%. In the same period in 2008, we recorded income tax expense of $1.33 million, which represented an effective rate of 38.9%. Our effective rate is higher in 2009 due to non-deductible losses for U.S. income tax purposes in some of our foreign markets, compared to the prior-year period.

Net Income. Our net income for the three and six months ended June 30, 2009 was $410,000 ($0.03 per share basic and diluted) and $1.42 million ($0.10 per share basic and diluted), respectively, compared to $569,000 ($0.04 per share basic and diluted) and $2.10 million ($0.13 per share basic and diluted) for the same periods in 2008. Profitability decreased in the second quarter and first half of 2009 as net sales decreased in the United States and across our international markets as discussed above.

Financial Condition, Liquidity and Capital Resources

During the first six months of 2009, we generated $2.56 million of net cash from operating activities, $200,000 was provided by investing activities, and we used $1.20 million in financing activities. This compares to $2.24 million of net cash provided by operating activities, $1.57 million used in investing activities, and $2.02 million used in financing activities in the same period of 2008. Cash and cash equivalents increased by $1.66 million to $6.12 million as of June 30, 2009 compared to December 31, 2008.

Significant changes in working capital items consisted of a decrease in accounts and notes receivable of $257,000, an increase in prepaid expenses/other current assets of $118,000, an increase in accounts payable and accrued expenses of $653,000, and an increase in other assets of $276,000 in the first six months of 2009. Accounts and notes receivable decreased due to collections on VAT refunds due to us in Mexico and credits applied to distributor accounts on sales taxes. The increase in prepaid expenses/other current assets represents the annual premium payments made in the first quarter on most of the corporate insurance policies. The increase in accounts payable and accrued expenses is related to a financing arrangement for our annual corporate insurance policy renewals, coupled with various annual accruals. The change in other assets is due to payments made on various officer life insurance policies.

Investing activities during the first six months of 2009 consisted of $288,000 for capital expenditures, along with proceeds of $489,000 from the final withdrawal in a limited partnership investment.

Stockholders' equity decreased to $10.90 million at June 30, 2009 compared with $16.11 million at December 31, 2008. The decrease is due to the purchase of treasury stock from a significant shareholder for $6.12 million and our cash dividend of $612,000 in the second quarter, offset by our net income of $1.42 million during the first six months of 2009. Our working capital balance was $4.73 million at June 30, 2009 compared to $6.25 million at December 31, 2008. The current ratio at June 30, 2009 was 1.48 compared to 1.85 at December 31, 2008.

In late June 2009, we entered into a term loan with our primary lender in the principal amount of $4.12 million. The term of the loan is for a period of two years with interest accruing on the outstanding principal balance at a floating interest rate based on the 30-day LIBOR plus 3.0%, subject to a 3.75% floor. As of June 30, 2009, we are subject to the 3.75% floor. Monthly principal and interest payments are based on a ten-year amortization. The aggregate outstanding balance of principal and interest is due and payable on June 29, 2011. The loan includes revised financial covenants under which we are required to (1) maintain at all times a tangible net worth of not less than $10 million and (2) maintain at all times a ratio of total funded debt to EBITDA of not greater than 2.5 to 1. The proceeds of the term loan were used to reduce the outstanding balance on the revolving credit facility we have with the lender.

We also have a $5 million secured revolving credit facility with the same lender with whom we renewed in September 2008. This facility expires in September 2009, and any advances accrue interest at a variable interest rate based on LIBOR. The term loan and revolving credit facility are secured by all our tangible and intangible assets and also by a mortgage on our building and real estate located in Chesterfield, Missouri. This facility bears the same financial covenants as listed with the term loan. At June 30, 2009, we had outstanding borrowings of $880,000 on the revolving line of credit facility and were in compliance with all financial covenants. In July 2009, we drew an additional $1 million on this facility to settle the promissory note that was a part of the stock purchase described in Note 5 to the unaudited Consolidated Financial Statements.

We believe that our internally generated funds coupled with the restructured bank loan facilities will be sufficient to meet working capital requirements for the remainder of 2009.

Critical Accounting Policies

A summary of our critical accounting policies and estimates is presented on pages 39-42 of our 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2009.