TABLE OF CONTENTS

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FORWARD LOOKING STATEMENTS

        THIS ANNUAL REPORT ON FORM 10-K, IN PARTICULAR “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” AND “ITEM 1. BUSINESS,” INCLUDE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS REPRESENT OUR EXPECTATIONS OR BELIEFS CONCERNING, AMONG OTHER THINGS, FUTURE REVENUE, EARNINGS, GROWTH STRATEGIES AND OTHER FINANCIAL RESULTS, NEW PRODUCTS, FUTURE OPERATIONS AND OPERATING RESULTS, AND FUTURE BUSINESS AND MARKET OPPORTUNITIES. WE WISH TO CAUTION AND ADVISE READERS THAT THESE STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS AND BELIEFS CONTAINED HEREIN. FOR A SUMMARY OF CERTAIN RISKS RELATED TO OUR BUSINESS, SEE “ITEM 1. BUSINESS – RISK FACTORS” BEGINNING ON PAGE 23.

In this Annual Report on Form 10-K, references to “dollars” and “$” are to United States dollars. Nu Skin, Pharmanex, “6S Quality Process” and Big Planet are our trademarks. The italicized product names used in this Annual Report on Form 10-K are product names and also, in certain cases, our trademarks.

PART I

ITEM 1.       BUSINESS

        Nu Skin Enterprises is a leading, global direct selling company. We develop and distribute premium-quality, innovative personal care products and nutritional supplements that are sold worldwide under the Nu Skin and Pharmanex brands. We also market technology products and services and a line of home care products under the Big Planet brand. We are one of the largest direct selling companies in the world with 2003 revenue of $986 million and a global network of approximately 678,000 active independent distributors. Approximately 29,000 of our active distributors have achieved executive distributor status. Our executive distributors play an important leadership role in our distribution network and are critical to the growth and profitability of our business. We currently operate in more than 30 countries throughout Asia, the Americas and Europe, and we recognize approximately 89% of our revenue in markets outside the United States, with our Japanese operations accounting for approximately 57% of our revenue. Because of the size of our foreign operations, our operating results can be negatively impacted by such factors as weakening of foreign currencies, regulatory issues and poor economic or political conditions in those markets.

        We develop and market branded consumer products that we believe are well-suited for direct selling. Our distributors market and sell our products by educating consumers about the benefits and distinguishing characteristics of our products and by providing personalized customer service. Through dedicated research and development, we continually develop and introduce new products and enhance our existing line of products to provide our distributors with a differentiated product portfolio. We are able to attract and motivate high-caliber independent distributors because of our focus on developing innovative products, our attractive global compensation system and our advanced technological distributor support. The direct selling and nutritional supplement industries, however, are subject to extensive governmental

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regulations throughout the world, which impose some restrictions on our business and create the risk that we could be fined or have our operations suspended if we fail to comply with these regulations.

Our Product Divisions 

        We have three product divisions: Nu Skin, which offers personal care products; Pharmanex, which offers nutritional products; and Big Planet, which offers high-technology products and services.

        Presented below are the U.S. dollar amounts and percentages of revenue from the sale of Nu Skin, Pharmanex and Big Planet products and services for each of the years ended December 31, 2001, 2002, and 2003. This table should be read together with the information presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which discusses the costs associated with generating the aggregate revenue presented:

        Nu Skin.    Nu Skin is our original product line and offers over 100 premium-quality personal care products in the areas of daily skin care, advanced skin treatments, ethnobotanical personal care and other advanced products.

        Our strategy is to leverage our network marketing distribution model to establish Nu Skin as an innovative leader in the personal care market. We are committed to continuously improving and evolving our product formulations to incorporate innovative and proven ingredients while excluding those that we believe are detrimental to consumers. For example, we recently introduced Tru Face Essence, a facial firming serum that restores youthful contours to the face and neck area. Other examples include our Tru Face Revealing Gel, a daily treatment that refines skin appearance for a radiant complexion and Epoch Ava Puhi Moni Anti-Dandruff Shampoo, an “ethnobotanical” shampoo that combines ancient use of plants with modern day science. Our educated distributor force provides consumers with detailed

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information and instruction about our Nu Skin products and guidelines for using the products most effectively, thereby enabling us to bring more sophisticated ideas and technologies to market.

        Nu Skin offers products individually and in comprehensive product sets that include a variety of products in each product line. The following table summarizes the current Nu Skin product line by category. Revenue percentages in the table are for the year ended December 31, 2003:

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        Pharmanex.       We currently offer approximately 65 Pharmanex nutritional products. We are committed to providing our customers with high-quality, standardized and scientifically substantiated nutritional supplements. Pharmanex nutritional supplements include our flagship LifePak line of micronutrient and phytonutrient supplements, which we currently sell in all of our major markets. LifePak sales accounted for 20% of our total revenue and 43% of Pharmanex revenue in 2003. We also offer a line of targeted Pharmanex nutritional supplements, weight management products and other specialty products. We design Pharmanex nutritional products to promote healthy, active lifestyles and general well being when used in conjunction with proper diet and exercise.

        We believe that direct selling is a more effective method of marketing high-quality nutritional supplements than traditional retailing channels because our distributors are able to educate consumers about the benefits of our nutritional supplements and to differentiate the quality and benefits of our products from those offered by competitors. Our strategy is to further expand our nutritional supplement business by continuing to introduce new, innovative products based on extensive research and development. To further extend our research capability, we have completed the build-out of a research center in Shanghai, China. This approximately 12,000 square foot facility will house Pharmanex research scientists and is one of three research and development centers (Shanghai, Beijing, and Provo, Utah) in the Pharmanex division. Our product development efforts are focused in the area of anti-aging, weight management and other nutrition issues. We recently introduced ReishiMax GLP, which promotes a healthy immune system, TRA, a weight management system, and IgG Boost, a colostrum supplement utilizing patented technology we recently acquired. We have never included stimulants, such as ephedra or anabolic steroids (and precursors) in our products. Any ingredients that are proven to have any long-term addictive or harmful effects are not considered for product development, even if the short-term effects may be desirable.

        We are continuously looking for ways to help our distributors market our products more effectively. In 2003, we introduced a patented laser-based scanning tool that measures the level of carotenoids (a powerful antioxidant) in skin tissue. We believe we are the first nutrition company to make available a non-invasive tool that will measure the level of tissue antioxidant carotenoids after regular nutritional supplementation. We currently lease over 600 scanners to distributors in the United States, and anticipate making more of them available to other distributors during 2004 as we complete our development of a final production model. We lease the scanners to our distributors at a monthly lease rate ranging from $199 to $299 per month. We have placed scanners in our walk-in centers in Taiwan, Hong Kong and certain of our markets in Southeast Asia and Europe. We are currently evaluating the scanner for potential introduction in these and other international markets subject to favorable results of regulatory reviews and compliance with applicable regulations in foreign markets.

        Another marketing tool for our distributors that we are promoting is an automatic reordering program whereby customers can subscribe for automatic monthly delivery of products. This program is well-suited for Pharmanex products, particularly the LifePak daily supplement line, which come in one-month supply packages. We have found that our distributors are able to generate a higher rate of repeat customers through the use of this program.

        We have developed a “6S Quality Process” to standardize our nutritional supplements. We believe that this 6S Quality Process enhances our ability to provide consumers with safe, effective and consistent products. The 6S Quality Process generally involves the following steps:

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Selection. Conducting a scientific review of research and databases in connection with the selection of potential products and ingredients, and determining the authenticity, usefulness and safety standards for potential products and ingredients.

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Sourcing. Investigating potential sources, evaluating the quality of sources and performing botanical and chemical evaluations where appropriate.

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Structure. Determining the structural profile of natural compounds and active ingredients.

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Standardization. Standardizing the product dosage of its biologically relevant active ingredients.

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Safety. Assessing safety from available research and, where necessary, performing additional tests such as microbial tests and chemical analyses for toxins and heavy metals.

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Substantiation. Reviewing documented pre-clinical and clinical trials and, where necessary and appropriate, initiating studies and clinical trials sponsored by Pharmanex.

        Pharmanex also sells a Vitameal dehydrated food product made with a blend of enriched rice and lentils. Vitameals are highly nutritious and designed to serve as an emergency food supply. Pharmanex also supplies Vitameal as part of a humanitarian relief effort designed to satisfy the nutritional needs of children at risk of starvation. We have implemented a program that provides a convenient way for distributors to donate Vitameal products they purchase from us to relief organizations for use in humanitarian relief. This initiative is maintained under the Nourish the Children trademark. In the past 18 months, we have provided over 7 million meals to starving children through this program.

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        The following table summarizes the current Pharmanex product lines by category. Revenue percentages in the table are for the year ended December 31, 2003:

          Big Planet. Big Planet offers innovative high technology products and services that appeal to mass markets often underserved by other companies because of the common complexities of high-tech products. We believe our Big Planet technology products help to attract a new, more technologically sophisticated demographic of distributors to our business. We believe that a significant number of these individuals are people who would not ordinarily be attracted to a more conventional direct sales business. However, our experience indicates that, upon joining our business, many distributors attracted by our Big Planet products and services also begin to purchase and distribute our Nu Skin and Pharmanex products. Our strategy for Big Planet moving forward is to expand the Big Planet product mix to include high-margin, high-technology products that focus on ease of use and that have application in broader markets across multiple geographies. This approach will allow Big Planet to achieve greater distribution through Nu Skin Enterprises’ global distributor network and to profit from the higher margins associated with product categories such as software. For example, Big Planet recently announced the upcoming release of a cutting-edge Internet security software tool designed to protect Internet users from unauthorized access to their private information through “spyware” and other invasive devices.

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        We also offer telecommunications and Internet services as a way of providing more opportunities to create commissionable spending, including Internet access and website hosting, domestic and international long distance telecommunications services and personal 800 numbers. Big Planet recently modified its strategy relating to these technology services. Effective July 1, 2003 we moved from a wholesaler of telecommunication services to a commissioned agent, allowing us to increase our operating profit margin on these services service. We also offer an affiliate online shopping website called the Big Planet Mall (www.bpmall.com). Moving forward, we will continue to actively review other existing product lines for opportunities to improve operating margins. In addition, in August 2003, Big Planet sold its professional employer organization (“PEO”), allowing Big Planet to focus on product initiatives that produce higher margins and that are more closely aligned with our long-term technology vision.

        Big Planet also offers business tools designed to allow our distributors to increase their productivity by leveraging technology in the management of their direct selling activities. These products include individual, personalized distributor websites that grant customers easy and convenient access to information about our products and services. We host these websites for our distributors and provide content with relevant product and business information. Distributors also have the ability to configure their individual websites to customize their marketing efforts and to conduct e-commerce activities across our product line, by seamlessly integrating their sites and online ordering capabilities with our websites and back-end fulfillment systems. Online orders placed by a customer are credited to the appropriate distributor and are automatically routed through our electronic ordering system, and products are shipped by us directly to the customer. We believe this web-based approach greatly simplifies and enhances the ordering experience for our distributors and their customers while at the same time helping to reduce our overall operating costs. Other Big Planet products designed to enhance distributor activity include online business tools, which help our distributors to monitor their sales activity, as well as set up meetings, communicate with their sales organizations and conduct electronic-based marketing efforts.

        As part of an overall business development initiative, Big Planet also manages product development in the growing home-care market product segment. Past initiatives have included developing environmentally friendly cleaning products under the Ecosphere brand name. Products in this segment also include water filtration products and other potential home-care categories. These products are not marketed under the Big Planet brand name.

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        The following table summarizes the current Big Planet product lines by category. Revenue percentages in the table are for the year ended December 31, 2003⁽¹⁾:

Sourcing and Production 

        Nu Skin. In order to maintain high product quality, we acquire our ingredients and products from suppliers that we believe are reliable, reputable and provide us with ingredients and products we believe to be of high quality. For approximately ten years, we have acquired ingredients and products from one unaffiliated supplier that currently manufactures approximately 39% of our Nu Skin personal care products. Our contract with our major supplier is for a one-year term that automatically renews for an additional one-year term unless either terminates the contract. We maintain a good relationship with our supplier and do not anticipate that either party will terminate the contract in the near term. We also have ongoing relationships with secondary and tertiary suppliers who supply almost all of our remaining products and ingredients. We believe that, in the event we are unable to source any products or ingredients from our major supplier, we could produce or replace those products or substitute ingredients from our secondary and tertiary suppliers without great difficulty or significant increases in our cost of goods sold.

        Due to Chinese government restrictions on the importation and sale of finished goods for our method of operation, we established our own manufacturing facility in Shanghai, China in 2001. At this facility, we currently manufacture our personal care products sold through our retail stores in Mainland China. A small portion of the output from this facility is exported to our other markets. If necessary, this facility could be expanded or other facilities could be built in Mainland China to provide manufacturing capabilities for our other markets as a back-up to our major supplier in addition to our secondary and tertiary suppliers.

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        The recent identification of bovine spongiform encephalopathy (BSE), or Mad Cow Disease, in one cow in the United States has not resulted in the suspension of importation licenses for our personal care products in any of our markets. However, Mainland China has suspended the importation of any finished goods or bulk cosmetic products from the United States, irrespective of whether or not they contain bovine-derived ingredients. Since substantially all of our personal care products sold through our retail stores in Mainland China are produced in our Shanghai facility, we were able to easily address this issue by accelerating the local manufacturing of the small number of products we were still exporting in bulk to Mainland China.

        Pharmanex.        Substantially all of our Pharmanex nutritional supplements and ingredients, including LifePak, are produced or provided by third party suppliers that we consider to be among the best suppliers of these products and ingredients. We currently rely on two unaffiliated suppliers, one of which supplies approximately 39% and the other of which supplies approximately 28% of our Pharmanex nutritional supplements. We believe that, in the event we were unable to source any products or ingredients from these suppliers or our other current suppliers, we could produce or replace these products or substitute ingredients without great difficulty or significant increases in our cost of goods sold. We also maintain an extraction and processing facility located in Zhejiang Province, China, where we currently produce the extracts for our TeGreen 97 and ReishiMax products.

        Substantially all of our Pharmanex revenue is generated from products that are encapsulated in gel capsules that are produced with bovine materials. In late 2003, bovine spongiform encephalopathy (BSE), or Mad Cow Disease, was identified in one cow in the United States, prompting a few countries, including Japan and South Korea, to suspend importation of nutritional supplements encapsulated with bovine-based gelatin produced in the United States. In addition, Japan enacted a prohibition on the sale of such products in the country after February 16, 2004. In response, we converted some gelatin encapsulated products into an all porcine-based gelatin form, and switched to tablet form for other products, including LifePak for the Japanese market. There are certain sourcing, regulatory and other risks associated with the implementation of these measures. For a more detailed discussion of the risks to our business associated with BSE, please refer to the section below entitled “Risk Factors”.

        To help ensure the quality of Pharmanex products, we have implemented an extensive quality control process designed to maintain tight quality controls through all stages of development, including the sourcing of raw materials and the manufacturing and packaging of our products. During investigations of potential sources of botanical raw materials, we conduct analyses of samples from each potential source. Suppliers are chosen based on the quality and concentration level of the active ingredients present in the source. We also maintain close working relationships with the manufacturers of our products and their quality control departments to implement quality assurance programs that meet our requirements. We regularly check and monitor their compliance with these programs. Our selection and retention of manufacturers is driven by their ability to meet our strict quality control criteria.

        Big Planet. Other than web hosting, email, online distributor tools and Big Planet Mall, nearly all of the Big Planet services and products we offer are currently contracted or sourced from unaffiliated third parties pursuant to contractual arrangements. For example, we have contracted with Qwest Communications to provide long distance telephone and Internet access services. By contracting to provide these services or by acting as a commisioned agent for these services, we are able to avoid the large capital deployment and investment that would be required to build the infrastructure necessary to provide these services. However, our profit margins and ability to deliver quality services at competitive prices depend upon our ability to negotiate and maintain favorable terms with our third party providers.

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Distributors receive commissions based on our gross margin on each sale of Big Planet products or services, including monthly recurring service charges, or based on the commission received by us with respect to products sold directly by third party vendors to our distributors and customers. In addition to the online business tools we have developed internally, we source complementary tools from third party vendors to enhance our suite of distributor tools. We also source and manufacture our home-care products through various third party vendors.

Research and Development 

        We continually invest in our research and development capabilities. Our research and development expenditures were approximately $7 million in each of 2001 and 2002 and were approximately $6 million in 2003. The majority of our recent research and development activity has been directed towards our Pharmanex products. Much of our Pharmanex research to date has been conducted in Mainland China, where we benefit from a very low cost labor pool that enables us to conduct research and clinical trials at a much lower cost than we would incur in the United States. We also have a laboratory adjacent to our office complex in Provo, Utah, which houses both Pharmanex and Nu Skin research facilities and technical personnel. Because of our commitment to product innovation, we will continue to commit significant resources to research and development in the future.

        We believe that we are one of the few nutritional supplement companies in the United States that has a research and development program modeled after the pharmaceutical industry. We believe that this research and development capability provides us with an important competitive advantage in the industry. We employ approximately 75 scientists at our dedicated research and development centers in Shanghai, China and Beijing, China and at our Provo, Utah offices. We also have working relationships with other independent scientists including an advisory board comprised of recognized authorities in various related disciplines. In addition, we evaluate a significant number of product ideas presented to us by outside sources.

        We have established collaborative arrangements with two prominent universities and research institutions in Mainland China: Shanghai Medical University and Beijing Medical University. The staffs of these institutions include scientists with expertise in natural product chemistry, biochemistry, pharmacology and clinical studies. Our research and development center in Shanghai coordinates and validates our collaborative efforts with these institutions. We also occasionally collaborate with other major universities in the United States and other countries. Some of the university research centers that we have worked with include UCLA, the Rippe Center for Clinical Lifestyle Research, Columbia University, the University of Kansas, the University of Hong Kong School of Medicine and Taiwan Academia Sinica.

          For product development support in our Nu Skin personal care line, we have established an aggressive licensing strategy and rely on an advisory board comprised of recognized authorities in various disciplines as well as an in-house staff of research and marketing professionals. We also have entered into an agreement with the Stanford University Medical Center for directed research and clinical trials of Nu Skin products and materials. These activities are conducted at the Nu Skin Center for Dermatological Research at Stanford University’s School of Medicine. This center focuses on scientific investigation, dermatology research, product development and clinical trials. We believe our strategic alliances provide important access to innovative product concepts.

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Geographic Sales Regions 

        For information on revenue for each of the geographic regions in which we operated for the years ended December 31, 2001, 2002, and 2003, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 17 to our consolidated financial statements.

        North Asia. The North Asia region currently consists of our markets in Japan and South Korea. Japan is our largest market globally with revenue of approximately $559 million in 2003. According to the World Federation of Direct Selling Associations, the direct selling channel in Japan generated sales of approximately $24.5 billion of goods and services in 2002, making Japan the second largest direct selling market in the world. Despite our revenue growth in Japan, the overall size of the direct selling channel in Japan has been negatively impacted over the last several years by economic and competitive conditions. Substantially all of our Nu Skin personal care products and a majority of our Pharmanex nutritional supplements, including LifePak, our leading multi-vitamin and mineral supplement, are available in the Japanese market. In 2003, we introduced in Japan ReishiMax GLP, a Pharmanex product that promotes a healthy immune system and Tru Face Essence, a facial firming serum from our Nu Skin division that restores youthful contours to the face and neck area. Tru Face Essence is now one of the top revenue generating products for the Nu Skin division. We have also introduced a number of our Big Planet technology products and services into Japan including Internet service offered through a third party provider, personalized websites, computers and online business tools.

        According to the World Federation of Direct Selling Associations, the direct selling channel in South Korea generated sales of approximately $4.6 billion of goods and services in 2002. Our revenue in this market was approximately $59 million in 2003. We currently offer the majority of our Nu Skin personal care products and approximately one-half of our Pharmanex nutritional supplements in South Korea.

        Greater China. The Greater China region currently consists of our markets in Taiwan, Hong Kong, and our retail operations in Mainland China. Taiwan was our largest revenue generating market in this region during 2003 with revenue of approximately $73 million in 2003. Nu Skin Taiwan is one of the largest direct selling companies in Taiwan. According to the World Federation of Direct Selling Associations, the direct selling channel in Taiwan generated approximately $1.3 billion in sales of goods and services in 2002, and over three million people (over 10% of Taiwan’s population) are estimated to participate in direct selling. We offer most of our Nu Skin personal care products and approximately one-half of our Pharmanex nutritional products, including LifePak, in Taiwan. We currently offer Big Planet branded Internet service in Taiwan through a third party provider and a limited number of our other Big Planet products.

        A significant component of our growth strategy is to continue to enter into and expand new markets, particularly Mainland China. Mainland China has restrictions that prevent us from operating our direct sales business model there. Therefore, we have adopted a retail sales model there in which an employed sales force sells products through fixed retail locations. We rely on this employed sales force to market and sell products at the various fixed retail locations supported by only modest advertising and promotional efforts. In January 2003, we significantly increased the number of retail locations we operate in Mainland China to 100 stores, and in late 2003 we further expanded our retail operations into five new cities. In addition, we introduced our Nu Skin-branded products to the market. Our revenue in Mainland China was approximately $38 million in 2003, with $18 million of revenue in the fourth quarter. Our retail model in Mainland China is largely based upon our ability to attract customers to our retail stores, to educate them about our products and to obtain repeat purchases from these customers. We currently sell

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32 Nu Skin products and an additional 58 personal care products marketed under local brand names. All product sales are transacted within our retail stores. Our employed sales force earns base pay and related benefits, as well as a bonus based upon their personal sales efforts. While our distributor leaders from other markets are able to introduce customers and sales people to our stores, their promotional efforts are significantly limited due to the restrictions on direct selling in this market. The number of full-time sales representatives we employ in Mainland China was 3,100 as of December 31, 2003. We enter into labor contracts with all potential new sales representatives, only a small percentage of which complete the qualification process and become full-time sales representatives. We provide these potential new sales representatives with a minimum base pay and other labor benefits. As of December 31, 2003, we had approximately 9,100 of such sales employees not yet considered full-time sales representatives.

        As a result of its admission to the World Trade Organization, Mainland China has agreed to establish regulations regarding sales away from fixed retail locations by December 2004. If we view these new regulations to be an enhancement to our retail business model, we may revise our business model in Mainland China to alter our remuneration plan for our employed sales force, incorporate the use of a non-employee sales force and/or limit our reliance on retail stores. Subject to appropriate changes in direct selling laws, we believe that Mainland China could become one of the largest direct selling markets in the world over the next several years. Our operations in Mainland China are subject to a complex political and regulatory environment and we have been subject to significant regulatory scrutiny since expanding our operations in January 2003. See “Government Regulation” for more information on these regulatory issues.

        North America. The North America region consists of our markets in the United States and Canada. According to the World Federation of Direct Selling Associations, the direct selling channel in the United States generated sales of approximately $28.7 billion of goods and services in 2002, making the United States the largest direct selling market in the world. In 2003, we generated approximately $113 million in revenue in the United States. Substantially all of our Nu Skin personal care products, our Pharmanex nutritional supplements and our Big Planet products and services are available in the United States. As of December 31, 2003, we had 2,577 executive distributors in the United States, which accounted for 90% of the total executive distributors within North America.

        South Asia/Pacific. The South Asia/Pacific region currently consists of our markets in Thailand, the Philippines, Australia/New Zealand and Singapore/Malaysia. According to the World Federation of Direct Selling Associations, the direct selling channel in Thailand generated sales of approximately $512 million of goods and services in 2002. In 2003, we generated approximately $23 million in revenue in Thailand.

        In December 2000, we commenced operations in Singapore. We offer Nu Skin products and a limited number of Pharmanex products, including LifePak, in this market. In addition, we expanded operations into Malaysia in November 2001. Because Malaysian law requires our Malaysian affiliate to be 70% locally-owned, we have entered into a shareholders’ agreement with local partners that allows us to manage the day-to-day operations of the local affiliate, with veto control over all major decisions. In addition, we have entered licensing and distribution agreements with the local affiliate pursuant to which we sell products and receive license fees based on total sales to distributors in this market. Because of our ability to control the operations of our Malaysian affiliate, we consolidate all of the revenue from this market in our top-line revenue. The opening of Singapore and Malaysia has contributed significantly to our growth in Southeast Asia. In 2003, combined revenue from Singapore and Malaysia was approximately $37 million. According to the World Federation of Direct Selling Associations, the direct

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selling channel in Singapore and Malaysia generated combined sales of approximately $1.2 billion of goods and services in 2002.

        Other Markets. Our Other Markets currently consist of the markets in Europe, Central America and Brazil. We currently distribute products in 17 countries in Central and Southern Europe and Scandinavia, including the United Kingdom, Ireland, France, Germany, Belgium, the Netherlands, Luxembourg, Spain, Portugal, Italy, Austria, Poland, Sweden, Iceland, Norway, Finland and Denmark. In 2003, our revenue from our European markets was approximately $32 million. The majority of our Nu Skin personal care products and several of our Pharmanex products, including LifePak, are sold in Europe. We also distribute a limited number of Big Planet products in the European market. We have additional small operations in Brazil, Mexico and Guatemala.

        According to the World Federation of Direct Selling Associations, the direct selling channel in Brazil generated sales of approximately $2.0 billion of goods and services in 2002. We have recently implemented a modified direct selling model in Brazil that we believe provides an attractive opportunity for distributors in that market. We also believe that this model can be a useful prototype that will help us compete in less developed economies throughout the world, including our other current markets in Latin America and potential new markets in Eastern Europe, which we believe will be among the fastest growing direct selling regions in the World over the next several years. Approximately 45% of our Nu Skin personal care products have been introduced in Brazil, along with 41 locally produced products.

Distribution

        Overview.        The foundation of our sales philosophy and distribution system is network marketing. Except in Mainland China, we currently sell substantially all of our products through independent distributors who are not our employees. Our distributors generally purchase products from us for resale to consumers and for personal consumption. Because of the nature of our Big Planet products and services, distributors buy a limited number of our Big Planet products for resale but primarily act as independent sales representatives for our products and receive a commission on product sales from us.

        We believe that network marketing is an effective vehicle to distribute our products because:  

        In Mainland China, government regulations currently prevent us from implementing our direct sales business model there. As a result, we have implemented a modified business model utilizing retail stores and an employed sales force. Throughout this Annual Report on Form 10-K, we include full-time sales representatives in Mainland China in our “executive level” distributor numbers in order to provide some

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level of comparison between our China model with employed sales people and our global direct selling model. In addition, we have implemented a “preferred customer” program in Mainland China, and throughout this report we include these preferred customers in our “active distributor” numbers. While "preferred customers" are legally very different from distributors, both are considered customers of our products.

        Our revenue is highly dependent upon the number and productivity of our distributors and sales representatives. Growth in sales volume requires an increase in the productivity and/or growth in the total number of distributors and sales representatives. As of December 31, 2003, we had approximately 678,000 active distributors of our products and services, including 117,000 preferred customers in Mainland China. An active distributor is a distributor or preferred customer who has purchased products for resale or personal consumption during the previous three months. Approximately 29,000 of these active distributors had achieved “executive level” status, including 3,100 employed full-time sales representatives in Mainland China. Executive level distributors are the distributors who are most seriously pursuing the direct selling opportunity and must achieve and maintain specified personal and group sales volumes for a required period of time. Once a distributor becomes an executive level distributor, the distributor can begin to take full advantage of the benefits of commission payments on personal and group sales volume. In Mainland China, employed full-time sales representatives are those sales representatives that have completed a qualification process and receive a salary, labor benefits and bonuses based on their personal sales efforts. As of each of the dates indicated below, we had the following number of executive distributors in the referenced regions:

        On a monthly basis, we evaluate a limited number of distributor requests for exceptions to the terms and conditions of the Global Compensation Plan, including volume requirements. While our general policy is to discourage exceptions, we believe that the flexibility to grant exceptions is critical in retaining distributor loyalty and dedication.

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        Sponsoring.        We rely on our distributors to recruit and sponsor new distributors of our products. While we provide product samples, brochures, magazines and other sales materials at cost, distributors are primarily responsible for recruiting and educating new distributors with respect to products, the Global Compensation Plan and how to build a successful distributorship.

        The sponsoring of new distributors creates multiple levels in a network marketing structure. Persons that a distributor sponsors are referred to as “downline” or “sponsored” distributors. If downline distributors also sponsor new distributors, they create additional levels in the structure, but their downline distributors remain in the same downline network as their original sponsoring distributor.

        Sponsoring activities are not required of distributors and we do not pay any commissions for sponsoring new distributors. However, because of the financial incentives provided to those who succeed in building a distributor network that consumes and resells products, we believe that many of our distributors attempt, with varying degrees of effort and success, to sponsor additional distributors. People are often attracted to become distributors after using our products and becoming regular customers. Once a person becomes a distributor, he or she is able to purchase products directly from us at wholesale prices. The distributor is also entitled to sponsor other distributors in order to build a network of distributors and product users. A potential distributor must enter into a standard distributor agreement, which obligates the distributor to abide by our policies and procedures.

        Global Compensation Plan. We believe that one of our key competitive advantages is our Global Compensation Plan. Under our Global Compensation Plan, distributors are paid consolidated monthly commissions in the distributor’s home country, in local currency, for their own product sales and for product sales in that distributor’s downline distributor network across all geographic markets. Because of restrictions on direct selling in Mainland China, our sales employees within Mainland China do not participate in the Global Compensation Plan, but are compensated according to a retail sales model established for that market. Additionally, while distributor leaders are compensated based on sales activity of preferred customers and sales employees in Mainland China, sales in Mainland China do not accrue to satisfy applicable sales volume requirements within the Global Compensation Plan.

        Commissions on the sale of an individual Nu Skin or Pharmanex product can reach approximately 58% of the wholesale price. The actual payout percentage, however, varies depending on a distributor’s level within the Global Compensation Plan. On a global basis, the overall commissions payout on these products has typically averaged approximately 41% to 43%. We believe that our commission payout as a percentage of total sales is among the most generous paid by major direct selling companies. Commissions are paid on the sales of Big Planet products and services as a percentage of our gross margins on those products. For Big Planet products and services purchased directly from our third party vendors by our distributors or customers, the commission is based on the total commission Big Planet receives from third parties with respect to those sales. Accordingly, the commissions paid to distributors of Big Planet products and services are less as a percentage of revenue than for our Nu Skin and Pharmanex products.

        High Level of Distributor Incentives. Based upon management’s knowledge of our competitors’ distributor compensation plans, we believe that the Global Compensation Plan is among the most financially rewarding plans offered to distributors by leading direct selling companies. Currently, there are two fundamental ways in which our distributors can earn money:  

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through retail markups on sales of products purchased by distributors at wholesale; and

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through a series of commissions on product sales.

        Each of our products carries a specified number of sales volume points. Commissions are based on total personal and group sales volume points per month. Sales volume points are essentially based upon a product’s wholesale cost, net of any point-of-sales taxes. As a distributor’s business expands from successfully sponsoring other distributors into the business who in turn expand their own businesses, a distributor receives a higher percentage of commissions. An executive