UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from ______ to ________.

Commission File Number: 0-25238

NATURAL HEALTH TRENDS CORP.

12901 Hutton Drive
Dallas, Texas 75234
(972) 241-4080

Indicate by check mark whether the registrant (1) has 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ].

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

As of November 1, 2004, the number of shares outstanding of the registrant’s class of common stock, par value $0.001 per share, was 6,819,573.

NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
September 30, 2004

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. OVERVIEW AND BASIS OF PRESENTATION

Overview

     Natural Health Trends Corp. (“NHTC” or the “Company”) is a Florida corporation incorporated in 1988. NHTC is an international direct-selling company which operates through subsidiaries that distribute products to promote health, wellness and vitality. Lexxus International, Inc., a wholly-owned subsidiary, and other Lexxus subsidiaries, sell certain cosmetic products as well as “quality of life” products. eKaire.com, Inc., a wholly-owned subsidiary, distributes nutritional supplements aimed at general health and wellness. Other active wholly or majority owned subsidiaries of NHTC and their countries of incorporation include:

•		Lexxus International (SW Pacific) Pty. Ltd. (Australia)
•		Kaire Nutraceuticals Australia Pty. Ltd. (Australia)
•		Lexxus International (NZ) Ltd. (New Zealand)
•		Kaire Nutraceuticals New Zealand Ltd. (New Zealand)
•		Lexxus International Co., Ltd. (Taiwan)
•		MyLexxus Europe AG (Switzerland)
•		KGC Networks Pte. Ltd. (Singapore)
•		Lexxus International Co., Ltd. (Hong Kong)
•		Lexxus International Marketing, Pte. Ltd. (Singapore)
•		Lexxus International Network Marketing, Inc. (the Philippines)
•		LXK Ltd. (South Korea)
•		I Luv My Pet, Inc. (U.S.)
•		Marketvision Communications Corp. (Delaware)
•		Lexxus Korea, Inc. (Delaware)
•		MyLexxus Personal Care International (India) Pvt. Ltd.

     NHTC’s common stock, par value, $0.001 per share, is listed on the NASD OTC Bulletin Board. In March 2003, NHTC effected a 1-for-100 reverse stock split with respect to its outstanding shares of common stock. In addition, the trading symbol for the shares of its common stock changed from “NHTC” to “NHLC”. All share references will give effect to the reverse stock split. On May 27, 2004, the Company filed a listing application with The NASDAQ Stock Market (“NASDAQ”) for quotation of its shares of common stock. No assurance can be given that the Company will be approved by NASDAQ, or if approved, when the Company’s shares will be quoted thereon.

Basis of Presentation

     The unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial information as of September 30, 2004, and for the nine months and

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three months ended September 30, 2004 and 2003. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2003 Annual Report on Form 10-KSB.

     Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income or stockholders’ equity.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The accompanying interim consolidated financial statements include the accounts of NHTC and all of its wholly and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses, including the recoverability of inventory. The Company’s estimates and assumptions are continually evaluated based on available information and experience. Because the use of estimates is inherent in the financial reporting process, actual results could differ from estimates. If there is a significant unfavorable change to current conditions, it would likely result in a material adverse impact to the Company’s business, operating results and financial condition.

Revenue Recognition

     The Company’s revenues are primarily derived from sales of products, sales of starter and renewal administrative enrollment packs and shipping fees. Product sales and direct expenses are recognized when the products are shipped. The Company defers revenue from the sale of its starter and renewal administrative enrollment packs and recognizes the revenue and its associated direct costs over the term of the membership, generally twelve months. As of September 30, 2004, the Company had deferred revenue of approximately $6,592,000, of which approximately $2,441,000 pertained to goods ordered that will be shipped in the fourth quarter of 2004 and approximately $4,151,000 pertained to unamortized administrative enrollment packs.

     The Company also estimates and records a sale return allowance for possible sales refunds based on its historical experience on a country-by-country basis.

Shipping and Handling Cost

     The Company records freight and shipping revenue collected from distributors as revenue. The Company records shipping and handling costs associated with customer shipments as cost of sales.

Distributor Commissions

     Distributors are paid commissions based on their direct and indirect commissionable net sales and downline growth. Commissions are earned over 52 business periods and are paid three weeks in arrears. Commissions are accrued when earned.

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Accounting for Stock-Based Compensation

     Currently, NHTC follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and its related interpretations for stock options granted to employees and members of its board of directors. Under the recognition and measurement principles of APB 25, NHTC is not required to recognize any compensation expense unless the market price of the stock exceeds the exercise price on the date of grant, the terms of the grant are subsequently modified or in the case of variable options. The Financial Accounting Standards Board (“FASB”) has recently issued a proposal to change the recognition and measurement principles for equity-based compensation granted to employees and board members. Under the proposed rules, NHTC would be required to recognize compensation expense related to stock options granted to employees and board members effective for periods beginning after June 15, 2005. The compensation expense would be calculated based on the expected number of options expected to vest and would be recognized over the stock options’ vesting period. If this proposal is passed, NHTC would be required to recognize compensation expense related to stock options granted to its employees or board members, which could have a material effect on its consolidated financial condition and results of operations.

     For disclosure purposes in according with Statement of Financial Accounting Standards 123 (“SFAS 123”), the fair value of options is estimated on the date of grant using the Black-Scholes option pricing model. If NHTC had recognized compensation cost in accordance with SFAS 123, NHTC’s income available to common stockholders and income per common share would have been as follows (in thousands, except per share data):

Earnings Per Share

     Basic income per common share is computed based on the weighted-average number of common shares outstanding during the periods presented. Diluted income per common share data gives effect to all potentially dilutive common shares that were outstanding during the periods presented. Income per

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     common share for the three and nine months ended September 30, 2004 and 2003 are as follows (in thousands, except per share data):

Accounting for Software

     As part of the Marketvision Communications Corp. acquisition (see Note 4), the Company acquired approximately $5,600,000 of computer software and programs. The valuation of the software was determined by a third party appraisal firm. The software is classified as a non-current asset in the balance sheet and is being amortized over a seven-year period beginning April 1, 2004.

Recently Issued Accounting Standards

     During the first quarter of 2004, the Company adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51.” The adoption of this accounting standard did not have a material effect on the Company’.

3. COMPREHENSIVE INCOME (In Thousands)

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4. BUSINESS COMBINATIONS

     The Company entered into the following business combinations during the nine months ended September 30, 2004:

Purchase of the Minority Interest of Lexxus International, Inc.

     On March 29, 2004, the Company purchased 4,900 shares of common stock owned by the minority stockholders of Lexxus International, Inc., a Delaware corporation (“Lexxus”), (representing the 49% interest in Lexxus not owned by the Company) in exchange for 100,000 shares of restricted NHTC common stock. The total purchase price, including acquisition related costs of approximately $7,000, was approximately $1,969,000 based upon the average closing price of NHTC common stock of $23.08 discounted by 15% due to the restrictions contained in the purchase agreement. The average closing price of $23.08 was calculated based on the closing price of NHTC common stock a few days before and after the acquisition was announced. The purchase price was allocated between the additional net assets acquired of approximately $164,000 and goodwill.

Purchase of Marketvision Communications Corp.

     On March 31, 2004, the Company entered into a merger agreement with Marketvision Communications Corp. (“Marketvision”), pursuant to which the Company acquired all of the outstanding capital stock of Marketvision in exchange for the issuance of 690,000 shares of NHTC restricted common stock (the “Issued Shares”), promissory notes in the aggregate principle amount of approximately $3,203,000, a cash payment of approximately $1,337,000 in April 2004, less pre-acquisition net payables due to Marketvision of approximately $646,000, for a total purchase price of approximately $17,583,000, including acquisition costs of approximately $153,000. The Issued Shares were valued at the average closing price of NHTC common stock of $23.08 discounted by 15% due to certain restrictions contained in the purchase agreement. The average closing price of $23.08 was calculated based on the closing price of NHTC common stock a few days before and after the acquisition was announced. Marketvision is the exclusive developer and service provider of direct selling internet technology used by the Company since 2001. Marketvision hosts and maintains the internet technology for the Company and charges an annual fee for this service based upon the number of enrolled distributors of the Company’s products. Marketvision earned revenues for this service of approximately $1,839,000 and $579,000 for the year ended December 31, 2003 and three months ended March 31, 2004, respectively.

     Management believes that this transaction was in the best interests of the Company because (i) the success of the Company’s business is dependent upon Marketvision’s direct selling software and (ii) the Company projects enrolling a significant number of new distributors in the future, which would be very expensive under the former compensation agreement between the Company and Marketvision. Since the former owners of Marketvision include Terry LaCore, a member of the Company’s Board of Directors and the Chief Executive Officer of Lexxus International, Inc., a wholly owned subsidiary of NHTC, the Board of Directors hired the independent appraisal firm of Bernstein, Conklin & Balcombe to assess the fairness of the transaction with Marketvision from a financial point of view. In March 2004, Bernstein, Conklin & Balcombe delivered its opinion to the Company’s Board of Directors that the Marketvision transaction is fair to the Company from a financial point of view.

     In addition, the Company entered into a Shareholder’s Agreement with the former stockholders of Marketvision. Such agreement contained customary terms and conditions, including restrictions on transfers of the Issued Shares, rights of first refusal and indemnification. Further, the Shareholder’s Agreement contains a one time put right related to 240,000 Issued Shares for the benefit of the former stockholders of Marketvision (other than Mr. LaCore) that requires NHTC, during the six month period commencing eighteen months following the earlier of (i) the first anniversary of the closing date, or (ii)

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the date on which the Issued Shares are registered with the Securities and Exchange Commission (the “SEC”) for resale to the public, to repurchase all or part of such shares still owned by the such stockholders for $4.00 per share less any amount previously received by such stockholders from the sale of their shares of the Issued Shares. The Company has recorded this obligation of $960,000 as mezzanine common stock in the consolidated balance sheet. The agreement also provided the former stockholders of Marketvision with piggyback registration rights in the event NHTC files a registration statement with the SEC, other than on Forms S-4 or S-8, stock option grants for the former stockholders (other than Mr. LaCore) as well as three-year employment agreements for the former stockholders, other than Mr. LaCore. In the event that the Company defaults on its payment obligations under the notes or the employment agreements, an entity owned by the former stockholders of Marketvision (other than Mr. LaCore) has certain rights to use, develop, modify, market, distribute and sublicense the Marketvision software to third parties.

     Operations of Marketvision subsequent to March 31, 2004 have been included in the Company’s consolidated financial statements. The transaction was accounted for using the purchase method of accounting and the purchase price was allocated among the assets acquired based on their estimated fair market values. The assets of Marketvision included certain computer equipment and developed software.

     The purchase price was calculated as follows (in thousands):

     The purchase price was allocated among assets acquired based on their estimated fair market values as follows (in thousands):

     Amortizable intangibles acquired will be amortized over their estimated life of seven years. The purchase price allocation is based on preliminary estimates, including estimates of federal tax contingencies, which are subject to change once additional information becomes available. Changes to these estimates could result in changes to the purchase price allocation.

Purchase of the Minority Interest of Lexxus International Co., Ltd. (Taiwan)

     On April 19, 2004, the Company purchased 510,000 shares of common stock owned by the minority stockholders of Lexxus International Co., Ltd. (Taiwan), a Taiwan limited liability corporation (“Lexxus Taiwan”), (representing the 30% interest in Lexxus Taiwan not owned by the Company or Lexxus) in exchange for approximately $136,000 in cash. The cash consideration given approximated the

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book value of the shares acquired and no goodwill resulted from the transaction. All Lexxus Taiwan minority shareholders were unrelated to the Company.

5. CONTINGENCIES

     During the fall of 2003, the customs agency of the government of South Korea brought a charge against LXK, Ltd., the Company’s wholly owned subsidiary operating in South Korea (“LXK”), with respect to the importation of the Company’s Alura product. The customs agency alleges that Alura is not a cosmetic product, but rather should be categorized and imported as a pharmaceutical product. The matter is currently being considered in the courts. During the ongoing hearings, LXK intends to present expert testimony that Alura is not a pharmaceutical product, and therefore, LXK should be permitted to sell and distribute Alura in South Korea. The failure to sell Alura in South Korea is not anticipated to have a material adverse effect on the financial condition, results of operations, cash flow or business prospects of LXK.

     On or around March 31, 2004, Lexxus International, Inc. (“Lexxus”) received a letter from John Loghry, a former Lexxus distributor, alleging that Lexxus had wrongfully terminated an alleged oral distributorship agreement with Mr. Loghry and that the Company had breached an alleged oral agreement to issue shares of the Company’s common stock to Mr. Loghry. The letter demanded a settlement payment of $35 million without any explanation as to the amount of the claim. After Mr. Loghry threatened to commence suit against Lexxus and the Company in Nebraska, on May 13, 2004, Lexxus and the Company filed an action for declaratory relief against Mr. Loghry in the United States District Court for the Northern District of Texas seeking, inter alia, a declaration that Mr. Loghry was not wrongfully terminated and is not entitled to recover anything from Lexxus or the Company. Mr. Loghry has filed counterclaims against the Company and Lexxus asserting his previously articulated claims. Discovery has commenced and the Company intends to vigorously defend itself in this case.

     In September 2004, Mr. Loghry filed third party claims against certain officers of the Company and Lexxus, including against Terry LaCore and Mark Woodburn for fraud, LaCore, Woodburn, and Lisa Grossman for conspiracy to commit the same, and Grossman for tortuous interference. A motion to dismiss this action has been filed.

     On November 1, 2004, Toyota Jidosha Kabushiki Kaisha (d/b/a Toyota Motor Corporation) and Toyota Motor Sales, U.S.A. (collectively, “Toyota”) filed a complaint against the Company and Lexxus International, Inc. (“Lexxus”) in United States District Court for the Central District of California (CV04-9028). The complaint alleges trademark and service mark dilution, unfair competition, trademark and service mark infringement, and trade name infringement, each with respect to Toyota’s Lexus trademark. Toyota seeks to enjoin the