10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 000-25867

NAUTILUS, INC.

(Exact name of registrant as specified in its charter)

Washington	94-3002667
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

16400 S.E. Nautilus Drive

Vancouver, Washington 98683

(Address of principal executive offices, including zip code)

(360) 859-2900

(Issuer’s telephone number, including area code)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x    No  ¨

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

Large Accelerated Filer  ¨     Accelerated Filer  x     Non-Accelerated Filer  ¨

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

Number of shares of issuer’s common stock outstanding as of November 1, 2007: 31,557,136

NAUTILUS, INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 6.	Exhibits	28
Signatures		29
Exhibit Index		30

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NAUTILUS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

	September 30, 2007		December 31, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	21,296	$	4,262
Trade receivables (net of allowance for doubtful accounts of $4,154 and $3,983 at September 30, 2007 and December 31, 2006, respectively)		86,350		137,714
Inventories, net		89,498		75,832
Prepaid expenses and other current assets		13,158		23,093
Income tax receivable		8,622		—
Short-term notes receivable		2,562		2,461
Assets held for sale		1,677		1,677
Deferred tax assets		9,393		5,722
Total current assets		232,556		250,761
PROPERTY, PLANT AND EQUIPMENT (at cost, net of accumulated depreciation of $61,347 and $51,262 at September 30, 2007 and December 31, 2006, respectively)		51,972		52,658
GOODWILL		65,606		65,037
INTANGIBLE AND OTHER ASSETS, net		103,417		56,486
TOTAL ASSETS	$	453,551	$	424,942
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables	$	47,241	$	61,375
Accrued liabilities		29,540		31,444
Short-term borrowings		109,000		47,500
Income taxes payable		1,483		4,551
Customer deposits		2,158		2,229
Current portion of long-term debt		386		259
Total current liabilities		189,808		147,358
LONG TERM DEBT		3,889		4,158
NONCURRENT DEFERRED TAX LIABILITIES		15,247		16,792
LONG-TERM TAXES PAYABLE		3,421		—
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS’ EQUITY:
Common stock – no par value, 75,000 shares authorized; 31,545 and 31,482 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		3,958		1,026
Retained earnings		230,759		251,418
Accumulated other comprehensive income		6,469		4,190
Total stockholders’ equity		241,186		256,634
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	453,551	$	424,942

See notes to consolidated financial statements.

3

NAUTILUS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
NET SALES	$	133,636		$	159,583		$	409,548		$	482,185
COST OF SALES		80,855			87,493			238,002			270,192
Gross profit		52,781			72,090			171,546			211,993
OPERATING EXPENSES:
Selling and marketing		52,717			42,621			147,609			137,887
General and administrative		16,175			14,507			42,858			40,399
Research and development		3,630			2,521			9,568			8,321
Royalties		1,903			1,296			4,610			3,991
Litigation settlement		—			—			(18,300	)		—
Total operating expenses		74,425			60,945			186,345			190,598
OPERATING INCOME (LOSS)		(21,644	)		11,145			(14,799	)		21,395
OTHER INCOME (EXPENSE):
Interest income		222			296			265			582
Interest expense		(1,852	)		(833	)		(3,603	)		(1,734	)
Other income (expense), net		910			(2	)		1,697			1,220
Total other income (expense)		(720	)		(539	)		(1,641	)		68
INCOME (LOSS) BEFORE INCOME TAXES		(22,364	)		10,606			(16,440	)		21,463
INCOME TAX EXPENSE (BENEFIT)		(8,915	)		1,230			(6,565	)		5,215
NET INCOME (LOSS)	$	(13,449	)	$	9,376		$	(9,875	)	$	16,248
EARNINGS (LOSS) PER SHARE:
BASIC	$	(0.43	)	$	0.29		$	(0.31	)	$	0.50
DILUTED	$	(0.43	)	$	0.29		$	(0.31	)	$	0.50
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC		31,545			32,138			31,533			32,577
DILUTED		31,545			32,240			31,533			32,732

See notes to consolidated financial statements.

4

NAUTILUS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Nine Months Ended September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(9,875	)	$	16,248
Adjustments to reconcile net income (loss) to net cash provided (used in) operating activities:
Depreciation and amortization		12,527			12,815
Stock-based compensation		2,192			2,044
Litigation settlement		(18,300	)		—
Provision for long-term receivables		4,770			—
(Gain) loss on sale of property, plant and equipment		(19	)		109
Income tax effect of stock-based compensation		(111	)		(36	)
Deferred income taxes		(4,590	)		1,182
Foreign currency transaction gain		(1,462	)		(1,115	)
Changes in assets and liabilities:
Trade receivable		53,944			(2,338	)
Inventories		(12,396	)		27,559
Prepaid expenses and other current assets		8,984			370
Income taxes receivable		(8,622	)		—
Trade payables		(14,172	)		(12,678	)
Accrued liabilities		(2,412	)		(4,072	)
Income taxes payable		(1,780	)		(1,907	)
Customer deposits		(99	)		(1,523	)
Net cash provided by operating activities		8,579			36,658
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(9,299	)		(8,372	)
Proceeds from sale of property, plant and equipment, and assets held for sale		32			6,064
Increase in other assets		(35,385	)		(7,501	)
Net increase in notes receivable		(101	)		(60	)
Net cash used in investing activities		(44,753	)		(9,869	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid on common stock		(9,465	)		(9,760	)
Proceeds from exercise of stock options		756			484
Income tax effect of stock-based compensation		111			36
Stock repurchases		—			(16,653	)
Net increase (decrease) in short-term borrowings		61,500			(5,147	)
Principal payments on long-term debt		(142	)		(1,900	)
Net cash (used in) provided by financing activities		52,760			(32,940	)
Net effect of foreign currency exchange rate changes		448			1,571
Net increase (decrease) in cash and cash equivalents		17,034			(4,580	)
Cash and cash equivalents, beginning of period		4,262			7,984
Cash and cash equivalents, end of period	$	21,296		$	3,404
Supplemental Disclosures:
Cash paid for interest	$	2,944		$	1,479
Cash paid for income taxes	$	8,454		$	6,685
Non-cash investing activities:
Intangible assets received from Litigation Settlement	$	18,300			—

See notes to consolidated financial statements

5

NAUTILUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements relate to Nautilus, Inc. and its subsidiaries (the “Company”) as of September 30, 2007 and for the three and nine month periods ended September 30, 2007 and 2006. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The financial information included herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results to be expected for the full year.

Use of Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosure of contingent assets and liabilities in the financial statements. Actual results could differ from those estimates. A description of our significant estimates and assumptions can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

Reclassifications

Prior year amounts of interest income and interest expense which were presented net have been reclassified to conform to the current year presentation within the consolidated statements of operations. This change had no impact on previously reported operating income, net income or stockholders’ equity.

New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which expands the scope of what companies may carry at fair value. SFAS 159 offers an irrevocable option to carry the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings. The Statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption will have on the Company’s results of operations, cash flows or financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption will have on the Company’s results of operations, cash flows or financial position.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”). The Company adopted the provisions of this interpretation on January 1, 2007. The disclosure requirements and cumulative effect of the adoption of FIN 48 are presented in Note 12.

6

2. SHARE BASED COMPENSATION

Stock Options

A summary of the Company’s stock option plan activity for the nine months ended September 30, 2007 is as follows:

(in thousands, except per share amounts)	Total Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2007	2,568		$	16.44
Granted	745			15.21
Forfeited or canceled	(450	)		17.40
Expired	(239	)		24.21
Exercised	(63	)		11.97		$	364
Outstanding at September 30, 2007	2,561		$	15.29	4.55	$	—
Vested and expected to vest at September 30, 2007	1,744		$	15.05	4.11	$	—
Exercisable at September 30, 2007	1,149		$	14.74	3.41	$	—

The fair value of the Company’s option awards was estimated assuming the following weighted average assumptions:

	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Expected life (years)	4.75		4.75		4.75		4.75
Risk-free interest rate	4.58	%	4.80	%	4.66	%	4.80	%
Expected dividend yield	3.92	%	3.10	%	3.10	%	2.60	%
Expected volatility	44	%	44	%	44	%	44	%

The weighted average grant-date fair value of stock options granted during the nine month periods ended September 30, 2007 and 2006 was $5.26 and $5.55, respectively for stock options granted. The total fair value of options vested during the nine month periods ended September 30, 2007 and 2006 was $0.8 million and $2.0 million, respectively. The total unrecognized compensation cost related to nonvested options was $4.6 million at September 30, 2007. This cost is expected to be recognized over a weighted-average period of 2.47 years.

Performance Units

A summary of the Company’s performance unit activity as of September 30, 2007, and changes during the nine month period ended September 30, 2007, are as follows:

(in thousands, except per share amounts)	Performance Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2007	174		$	12.52 – 17.70
Granted	45			16.10 – 16.80
Forfeited or canceled	(171	)		12.52 – 17.70
Expired	—			—
Exercised	—			—
Outstanding at September 30, 2007	48		$	15.15 –16.80

At September 30, 2007 there was approximately $0.8 million of total unrecognized share-based compensation costs related to performance units with intrinsic value of zero. None of the performance units were vested at September 30, 2007. The Company recorded no compensation expense during the three and nine month periods ended September 30, 2007.

7

Restricted Stock

A summary of the Company’s restricted stock activity as of September 30, 2007, and changes during the nine month period ended September 30, 2007, are as follows:

(in thousands, except per share amounts)	Shares Underlying Awards Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2007	—			—
Awarded	292		$	9.23
Released	—			—
Forfeited	(9	)		9.23
Outstanding at September 30, 2007	283		$	9.23

At September 30, 2007, there was approximately $1.3 million of total unrecognized share-based compensation costs related to restricted stock that will be amortized through the third quarter of 2009 with intrinsic value of $2.3 million at September 30, 2007. None of the restricted stock awards were vested at September 30, 2007. The Company recorded $0.1 million and $0.1 million of compensation expense during the three and nine month periods ended September 30, 2007, respectively.

3. INVENTORIES

Inventories consisted of the following:

(in thousands)	September 30, 2007		December 31, 2006
Finished goods	$	65,764	$	55,235
Work-in-process		1,567		1,154
Raw materials		10,401		9,440
Parts and components		11,766		10,003
Inventories	$	89,498	$	75,832

Inventories are stated at the lower of cost or market. The Company evaluates the need for inventory valuation adjustments associated with obsolete, slow-moving and not saleable inventory by reviewing current transactions and forecasted product demand on a monthly basis.

8

4. INTANGIBLE AND OTHER ASSETS

Intangible assets, exclusive of goodwill, consisted of the following:

(in thousands)	Estimated Useful Life (in years)	September 30, 2007			December 31, 2006
Intangible assets:
Indefinite life trademarks	N/A	$	37,523		$	37,523
Patents	1 to 16		25,997			7,697
Customer base	8		3,400			3,400
Developed technology	4		2,500			2,500
Non-compete agreements	3		1,936			1,647
Total intangible assets			71,356			52,767
Accumulated amortization:
Patents			(1,996	)		(730	)
Customer base			(949	)		(631	)
Developed technology			(1,396	)		(927	)
Non-compete agreements			(1,559	)		(916	)
Total accumulated amortization			(5,900	)		(3,204	)
Intangible assets, net			65,456			49,563
Other assets			1,961			6,923
Deposit for Land America			36,000			—
Intangible and other assets, net		$	103,417		$	56,486

Identifiable intangible assets such as license agreements, patents, and trademarks are recorded at cost or when acquired as part of a business combination, at estimated fair value and are amortized straight-line over the period they provide the Company with economic benefit. The amortization expense for the next five full succeeding years is estimated at $3.7 million, $3.2 million, $2.9 million, $2.9 million, and $2.9 million.

The $18.3 million increase in the patents intangible asset is due to the ICON Health & Fitness, Inc. litigation settlement described in Note 9 that has been valued at $18.3 million. This settlement allows for the Company to use a variety of fitness equipment patents and technologies. This intangible asset value will be amortized over the useful life of the technologies granted through this settlement.

5. ACCRUED LIABILITIES

Accrued liabilities in excess of five percent of total current liabilities consisted of accrued warranty expense of $8.5 million and $9.8 million at September 30, 2007 and December 31, 2006, respectively, and accrued payroll of $5.9 million and $7.1 million at September 30, 2007 and December 31, 2006, respectively.

6. LINE OF CREDIT AND OTHER DEBT

In February 2007, the Company paid off the outstanding balances under the $65 million facility that it entered in fiscal 2005 as well as the $25 million facility that it entered into October 2006. Thereafter, the Company entered into a new revolving credit agreement (the “Facility”) with several financing institutions. The Facility provides for an unsecured revolving credit facility to include revolving loans and a $10 million swing line, for a maximum commitment amount of $125 million with an option to increase the facility to $175 million. The Facility expires on February 14, 2012 and is intended for general corporate purposes, working capital requirements, financing permitted acquisitions and share repurchases. The Company has $109.0 million of borrowings outstanding on the Facility at September 30, 2007.

The Facility provides for either Base Rate in the principal amount of $1.0 million or in increments of $0.1 million thereof or Eurodollar Rate loans in the principal amount of $2.5 million or in increments of $0.5 million in excess thereof. It also allows for swing loans in minimum amounts of $0.1 million subject to its sub-limit of $10.0 million for the duration of up to ten business days, and letters of credit in the minimum amount of $0.1 million.

The Facility requires DashAmerica, Inc., d/b/a Pearl Izumi Inc., (“Pearl Izumi”), a wholly-owned subsidiary of the Company, to be a guarantor; other domestic subsidiaries may be required to become guarantors under certain circumstances. The Facility also contains certain financial and non-financial covenants which include a consolidated leverage ratio, a consolidated asset coverage ratio, and a requirement to maintain a minimum consolidated Earnings Before Income Tax, Depreciation and Amortization, (“EBITDA”).

9

On October 5, 2007, the Company and Pearl Izumi entered into a Security and Pledge Agreement with Bank of America, N.A. (“Security Agreement”) in its capacity as administrative agent under the Facility. The Security Agreement covers substantially all of the personal property assets of the Company and Pearl Izumi and secures the line of credit, swingline credit line and letter of credit subfacility, which had previously been unsecured.

On October 12, 2007, the Company and its subsidiary Pearl Izumi entered into a First Amendment and Waiver to Credit Agreement (the “Amendment”) in respect of the Facility dated as of February 14, 2007 among Bank of America, N.A. in its capacity as Administrative Agent and the lenders party thereto.

Pursuant to the Amendment, the lenders under the credit facility agreed to waive defaults of the financial covenants under the Facility with respect to the four fiscal quarter period ended September 30, 2007. The applicable margin on borrowings was increased: (i) with respect to Eurodollar Rate loans, to 2.00% per annum, (ii) with respect to Base Rate loans, to 0.50% per annum, and (iii) with respect to Swing Line loans, to 0.50% per annum. Additionally, effective as of January 1, 2008, the maximum amount of the credit line will be restricted to $75,000,000 unless the Company’s consolidated EBITDA is at least $32,500,000 for each of the two most recently ended quarterly periods.

7. COMPREHENSIVE INCOME (LOSS)

Accounts of the Company’s foreign operations are measured using the local currency as the functional currency. These accounts are then translated into U.S. dollars using the current rate method with translation gains and losses accumulated as the accumulated other comprehensive income component of stockholders’ equity, except for gains or losses with the Company’s international subsidiaries which are recorded as part of other income/expense in the Consolidated Statements of Operations.

Comprehensive income (loss) was as follows:

(in thousands)	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
Net income (loss)	$	(13,449	)	$	9,376	$	(9,875	)	$	16,248
Foreign currency translation adjustments		1,414			300		2,279			1,351
Comprehensive income (loss)	$	(12,035	)	$	9,676	$	(7,596	)	$	17,599

8. EARNINGS (LOSS) PER SHARE

The calculation of the number of outstanding shares is as follows:

	Three months ended September 30,					Nine months ended September 30,
(in thousands, except per share amounts)	2007			2006		2007			2006
Basic shares outstanding		31,545			32,138		31,533			32,577
Dilutive effect of stock options*		—			102		—			155
Dilutive effect of restricted stock*		—			—		—			—
Diluted shares outstanding		31,545			32,240		31,533			32,732
Antidilutive stock options **		2,518			1,864		1,794			1,818
Antidilutive restricted stock**		8			—		11			—
Net income (loss)	$	(13,449	)	$	9,376	$	(9,875	)	$	16,248
Earnings (loss) per share:
Basic	$	(0.43	)	$	0.29	$	(0.31	)	$	0.50
Diluted	$	(0.43	)	$	0.29	$	(0.31	)	$	0.50

* Including potential common shares in the calculation of diluted earnings per share for 2007 would result in an antidilutive per share amount because the Company has a net loss for the three and nine months ended September 30, 2007; therefore, no potential shares have been included in the calculation of diluted earnings per share for these periods.

** Potential shares not included in the calculation of diluted earnings per share for each respective period because they would be antidilutive.

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9. COMMITMENTS AND CONTINGENCIES

Legal Matters

We are involved in various claims, lawsuits and other proceedings from time to time. Such litigation involves uncertainty as to possible losses we may ultimately realize when one or more future events occur or fail to occur. We accrue and charge to income estimated losses from contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Differences between estimates recorded and actual amounts determined in subsequent periods are treated as changes in accounting estimates. The Company estimates the probability of losses on legal contingencies based on the advice of internal and external counsels, outcomes from similar litigation, the status of the lawsuits (including settlement initiatives), legislative developments, and other factors. Due to numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates significantly. A significant change in our estimates, or a result that materially differs from our estimates, could have a significant impact on our financial position, results of operations and cash flows.

On April 26, 2007, the Company and ICON Health & Fitness (“ICON”) settled a series of pending lawsuits between the parties. This settlement included a number of claims and lawsuits between ICON and the Company going back to 2002-2003, and which were pending in federal courts in Salt Lake City, Utah, and Seattle, Washington, and before the Federal Circuit Court of Appeals. Both the Company and ICON have filed dismissals of their respective lawsuits against each other. This settlement and dismissals cleared the previous contingent liability claim of $8.1 million against the Company following a trial in November 2005 in Salt Lake City, and ICON granted the Company use of certain intellectual property for the Company’s use in product development and enhancement valued at $18.3 million.

In October 2006, the Company filed a complaint in the Superior Court for Clark County, Washington against Gately’s LLC (“Gately’s”) seeking damages in the amount of $5.1 million plus interest, attorney’s fees and costs, for collection of outstanding accounts receivable for product purchased by Gately’s. This case has been dismissed and refiled by the Company in state court in Boulder County, Colorado. In its answer to the complaint, Gately’s has asserted defenses to payment and counterclaims against Nautilus in an unspecified amount. In September 2007, Gately’s filed a petition for bankruptcy which has stayed the litigation in Colorado. In September 2007, the Company reserved an additional $4.8 million to be fully reserved for this unpaid receivable as a result of the bankruptcy filing.

In addition to the matters described above, from time to time the Company is subject to litigation, claims and assessments that arise in the ordinary course of business, including disputes that may arise from intellectual property related matters. Many of our legal matters are covered in whole or in part by insurance. Management believes that any liability resulting from such matters will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Guarantees

From time to time the Company arranges for commercial leases or other financing sources with third parties to enable certain of its commercial customers to purchase the Company’s commercial products. As a result, at September 30, 2007 and December 31, 2006, the maximum contingent liability under all recourse and guarantee provisions was approximately $1.3 million and $1.6 million, respectively. At September 30, 2007, lease terms on outstanding commercial customer financing arrangements were between 3 and 5 years. A reserve for estimated losses under recourse provisions of approximately $0.1 million and $0.1 million was recorded based on historical loss experience and was included in accrued expenses at September 30, 2007 and December 31, 2006, respectively.

The Company has an agreement with a financing company to provide second tier financing for its consumers in which the Company shared financial responsibility if consumer default rates exceeded contractual expectations. During the third quarter of 2007, the Company renegotiated its second tier financing agreements and transferred risk of loss to the financing company for a settlement payment of $0.7 million. As a result, a reserve is no longer established for consumer default on second tier financing arrangements. Our financing partners review consumer credit information and determine which consumers will receive financing and approve the amount of financing provided. The Company had a reserve for second tier consumer financing of $0.3 million at December 31, 2006.

Commitments

At September 30, 2007, the Company had approximately $2.3 million in outstanding commercial letters of credit expiring between December 31, 2007 and 2008.

11

Given that the majority of its inventory is sourced from Asia, the Company has long lead times for inventory purchases and therefore needs to secure factory capacity from its vendors in advance. As a result, at September 30, 2007, the Company had approximately $51.3 million in purchase obligations for inventory purchases with the majority payable in the next 12 months.

10. REPORTABLE SEGMENTS

The Company’s operating segments are evidence of the structure of the Company’s internal organization and are organized to allow focus on specific business opportunities in the Company’s worldwide market place. The Company’s three business segments are Fitness Equipment Business, International Equipment Business, and Fitness Apparel Business.

The Fitness Equipment Business is responsible for the design, production, marketing and selling of branded fitness equipment sold under the Nautilus, Bowflex, Schwinn Fitness and Stairmaster brand names and is responsible for servicing customers within the Americas, which includes the United States, Mexico, Canada and South America.

The International Equipment Business is responsible for the marketing and selling of branded fitness equipment sold under the Nautilus, Bowflex, Schwinn Fitness and Stairmaster brand names. The International Equipment Business is responsible for servicing customers outside of the Americas.

The Fitness Apparel Business is responsible for the design, production, marketing and selling of branded fitness apparel, footwear and accessory products sold primarily under the Pearl Izumi brand in both domestic and international markets.

The three business segments are supported by teams that provide services to support the entire enterprise including finance and reporting, legal, human resources, and other centralized functions. Management does not allocate expenses from the centralized functions to the business segments. As a result, the business segments operating results are reviewed based on revenue and gross profit.

Net sales from external customers for the Company’s consolidated operations were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2007		2006		2007		2006
Fitness Equipment Business	$	96,577	$	128,257	$	301,544	$	389,176
International Equipment Business		18,680		14,584		53,220		43,002
Fitness Apparel Business		18,379		16,742		54,784		50,007
Net Sales	$	133,636	$	159,583	$	409,548	$	482,185

Gross profit from external customers for the Company’s consolidated operations was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2007		2006		2007		2006
Fitness Equipment Business	$	39,853	$	61,687	$	132,036	$	179,621
International Equipment Business		5,103		2,994		15,851		10,473
Fitness Apparel Business		7,825		7,409		23,659		21,899
Gross Profit	$	52,781	$	72,090	$	171,546	$	211,993

Assets from the Company’s three operating segments were as follows:

(in thousands)	September 30, 2007		December 31, 2006
Fitness Equipment Business	$	322,275	$	298,459
International Equipment Business		40,489		37,052
Fitness Apparel Business		90,787		89,431
	$	453,551	$	424,942

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11. PURCHASE OPTION AGREEMENTS

On October 17, 2007 the Company entered into the following agreements: (i) Asset Purchase Agreement by and among the Company and Land America Health &Fitness Co., Ltd., a company formed under the laws of the People’s Republic of China (“Land America”), Michael C. Bruno (“Bruno”) and Yang Lin Qing (“Yang”) (the “Land America Agreement”); (ii) Asset Purchase Agreement by and among the Company and Treuriver Investments Limited a British Virgin Islands company (“Treuriver”), Bruno and Yang (the “Treuriver Agreement”); (iii) Post-Closing Audit Agreement by and among the Company, Land America, Bruno and Yang (the “Audit Agreement”); and (iv) First Amendment to Escrow Agreement by and among the Company, Treuriver, Bruno (in his capacity as Representative under the Treuriver Agreement), and U.S. Bank National Association (in its capacity as Escrow Agent) (the “First Amendment”). (The Land America Agreement, Treuriver Agreement, Audit Agreement and First Amendment are collectively referred to as the “Agreements”, and Land America, Treuriver, Bruno and Yang are collectively referred to as “Sellers”).

The Agreements provide for the terms and conditions under which the Company or its wholly-owned subsidiaries will acquire or lease substantially all of the assets of Land America and Treuriver. Land America is primarily engaged in the manufacture of products for the Company in a manufacturing facility located in Xiamen, People’s Republic of China (“PRC”), and Treuriver is Land America’s related trading company. The Agreements were entered into following the exercise, on June 29, 2007, of purchase options set forth in Purchase Option Agreements with Land America, Treuriver, Bruno and Yang which the Company entered into on February 1, 2007.

In connection with execution of the Purchase Option Agreements, the Company delivered a non-refundable deposit of $6 million to Sellers. Upon exercise of the options, the Company deposited an additional $30 million into escrow. Under the terms of the First Amendment to Escrow Agreement entered into as part of the Agreements, $12.5 million was released from escrow to Sellers as an additional nonrefundable deposit and $12.5 million was released to the Company. The remaining $5.0 million is to remain in escrow until closing.

Under the terms of the Agreements, on January 1, 2008 a wholly-owned direct or indirect subsidiary of the Company to be formed in Xiamen, Fujian, PRC (“Buyer”) will acquire substantially all of the assets currently used by Land America to manufacture products on behalf of the Company. In addition, Buyer will enter into a Lease Agreement providing for the lease of the land and buildings in which Land America currently conducts its manufacturing operations. The Lease Agreement includes a purchase option and it is anticipated that Buyer will complete the purchase of the buildings and land use rights on or before October 31, 2008. In addition, on January 1, 2008 the Company or a direct or indirect wholly-owned subsidiary of the Company will acquire substantially all of the assets of Treuriver.

In addition to applying the previously delivered deposits as described above, within five business days of closing on January 1, 2008 the Company or its subsidiaries will pay $21.5 million to Sellers. The portion of the total purchase price attributable to inventory is subject to adjustment based on the actual value of inventory on the closing date. On the earlier of October 31, 2008 and the date on which Buyer completes the purchase of the land rights and buildings pursuant to the Lease Agreement, an additional $11 million will be paid to Sellers. The purchase price for the land rights and buildings is $11.5 million. The total acquisition cost, including the purchase of the land rights and buildings, but excluding inventory, is expected to be $63.0 million. The additional purchase of inventory at closing is expected to range from $4.0 million to $6.0 million.

12. INCOME TAXES

The Company adopted the provisions of FIN 48 – Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, on January 1, 2007. As a result of the implementation of FIN 48, the Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. As a result of this review, the Company adjusted the estimated value of its uncertain tax positions by recognizing additional liabilities totaling $1.3 million through a charge to retained earnings. Upon the adoption of FIN 48, the estimated value of the Company’s uncertain tax positions was a liability of $3.2 million resulting from unrecognized tax benefits. If the Company’s positions are sustained by the taxing authority in favor of the Company, approximately $2.6 million would reduce the Company’s effective tax rate.

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The Company recognizes accrued interest and penalties related to uncertain tax positions in federal, state, and foreign income tax expense. As of January 1, 2007, the Company had accrued approximately $0.8 million for the payment of tax-related interest and penalties.

The Company’s federal income tax returns for 2004 through 2006 are open tax years. The Company’s unrecognized state tax benefits are related to state returns open from 2000 through 2006 depending on each state’s statute of limitation. In addition, the Company files in numerous foreign jurisdictions with varying statutes of limitation.

The Company believes it is reasonably possible that, within the next 12 months, $1.1 million of previously unrecognized tax benefits related to domestic filing positions, of which $0.8 million would reduce the Company’s effective tax rate, will be recorded primarily as a result of the expiration of federal and state statutes of limitation.

As of September 30, 2007, there have been no material changes to the liability for uncertain tax positions.

13. SUBSEQUENT EVENTS

On October 12, 2007 the Company committed to reduce its workforce by approximately 140 positions. The Company took this action to improve operating margins in a period of lower-than-expected sales. In conjunction with these actions, the Company currently expects to incur restructuring-related charges of approximately $0.8 million pre-tax related to employee termination benefits consisting primarily of severance and related fringe benefits. The Company expects the $0.8 million to result in short-term cash outlays. The Company may incur other costs associated with the announced restructuring activities.

On October 29, 2007, the Company declared a dividend distribution of one common share purchase right for each outstanding share of its common stock (the “Rights”). If a person becomes an Acquiring Person, each Right will entitle its holder to purchase, at the Right’s exercise price, a number of shares of the Company’s common stock having a market value at the time of twice the exercise price of $27. Rights held by the Acquiring Person become void and are not exercisable to purchase shares at the bargain purchase price. An Acquiring Person is defined as a person who acquires 20% or more of the Company’s outstanding common stock (other than a shareholder who beneficially owns more than 20% of the outstanding shares of Common Stock on October 29, 2007, who will be precluded from acquiring any additional shares). In effect, this would enable a holder of Rights (other than an Acquiring Person) to purchase $54 worth of common stock at half price. Additionally, at any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of Common Stock the Board of Directors may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of our common stock, (or of a share of a similar class or series of our common stock having similar rights, preferences and privileges) of equivalent value, per Right (subject to adjustment). The Board of Directors is entitled to redeem the rights at $.01 per right at any time before a person has acquired 20% or more of the outstanding common stock. The rights plan expires on October 28, 2010. The Board of Directors has also resolved to submit the continuation of the Plan to a shareholder vote within 12 months of the adoption of the rights plan.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements include any statements related to our expectations regarding future performance or conditions, including any statements regarding anticipated sales growth across markets, distribution channels, and product categories, expenses and gross margins, expense as a percentage of revenue, anticipated earnings, new product introductions, acquisition of manufacturing operations in Asia, future capital expenditures, anticipated tax benefits, financing and working capital requirements and resources. These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors could cause actual results to differ materially from those projected in forward-looking statements, including the risks described in our most recent Annual Report on Form 10-K. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operation (the “MD&A”) should be read in conjunction with our consolidated financial statements and related notes located at Item 1 of this Form 10-Q. We believe that period-to-period comparisons of our operating results are not necessarily indicative of future performance. You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies that operate in evolving markets. We may not be able to successfully address these risks and difficulties and, consequently, we cannot assure you of any future growth or profitability.

SUMMARY OF THE THIRD QUARTER 2007 RESULTS

Net sales for the third quarter of 2007 were $133.6 million, compared to $159.6 million in the same quarter of 2006, a decrease of 16.3%. Gross profit margins decreased to 39.5% in the third quarter of 2007, compared to 45.2% in the same quarter of 2006, as a result of changes in product and channel mix and lower sales volume in our Fitness Equipment business. This decrease is primarily due to a soft North American market for home exercise strength products. Operating expenses for the third quarter of 2007 were $74.4 million, compared to $60.9 million in the same quarter of 2006, an increase of 22.2%. This increase is primarily related to an increase of $4.8 million in our bad debt reserve resulting from a former customer that has filed Chapter 11 bankruptcy, costs of $2.3 million associated with the termination of the employment of our former CEO, additional direct marketing spend of $0.9 million and incremental marketing spend of $1.1 million and $0.4 million in our International and Apparel business segments as we realized top line growth in these businesses. These factors led to a quarterly operating loss of $21.6 million compared to operating income of $11.1 million in the third quarter of 2006. Diluted loss per share for the quarter was 43 cents, compared to earnings of 29 cents per share a year ago. During the third quarter of 2006, we recorded a $3.0 million reduction of tax contingency reserve as a result of closing certain statutory periods. In October 2007, we announced a reduction in force of approximately 140 employees, or 9% of our workforce. The staff reduction includes the elimination of positions in most areas of the Company.

15

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

The following tables present certain consolidated financial data as a percentage of net sales and statement of operations data comparing results for the three months ended September 30, 2007 and 2006:

	Three Months Ended September 30,
(In Thousands)	2007			% of net sales		2006			% of net sales		$ change			% change
Net sales	$	133,636		100.0	%	$	159,583		100.0	%	$	(25,947	)	-16.3	%
Cost of sales		80,855		60.5	%		87,493		54.8	%		(6,638	)	-7.6	%
Gross profit		52,781		39.5	%		72,090		45.2	%		(19,309	)	-26.8	%
Operating expenses:
Selling and marketing		52,717		39.4	%		42,621		26.7	%		10,096		23.7	%
General and administrative		16,175		12.1	%		14,507		9.1	%		1,668		11.5	%
Research and development		3,630		2.7	%		2,521		1.6	%		1,109		44.0	%
Royalties		1,903		1.4	%		1,296		0.8	%		607		46.8	%
Total operating expenses		74,425		55.7	%		60,945		38.2	%		13,480		22.1	%
Operating income (loss)		(21,644	)	-16.2	%		11,145		7.0	%		(32,789	)	-294.2	%
Interest income		222		0.2	%		296		0.2	%		(74	)	-25.0	%
Interest expense		(1,852	)	-1.4	%		(833	)	-0.5	%		(1,019	)	-122.3	%
Other income, net		910		0.7	%		(2	)	0.0	%		912		NA
Total other income (expense)		(720	)	-0.5	%		(539	)	-0.3	%		(181	)	-33.6	%
Income (loss) before income taxes		(22,364	)	-16.7	%		10,606		6.7	%		(32,970	)	-310.9	%
Income tax expense (benefit)		(8,915	)	-6.7	%		1,230		0.8	%		(10,145	)	-824.8	%
Net income (loss)	$	(13,449	)	-10.1	%	$	9,376		5.9	%	$	(22,825	)	-243.4	%

Net Sales

Fitness Equipment Business The fitness equipment business designs, produces, markets and sells fitness products under the Nautilus, Bowflex, Schwinn Fitness, and StairMaster brand names. Depending on the brand, our fitness equipment is marketed and sold through the direct, commercial and retail channels of distribution located in the Americas, which includes the U.S., Canada, Mexico and South America. Total net sales for the Fitness Equipment Business were $96.6 million in the third quarter of 2007 compared to $128.3 million in the same period of 2006, a decrease of $31.7 million or 24.7%. The decrease is primarily attributable to reduced sales in the North American market for home strength fitness equipment, primarily home gyms, along with our strategy to improve profitability by eliminating or reducing certain of our customer relationships. Specific channel net sales information is detailed below:

In the commercial channel, net sales were $15.2 million in the third quarter of 2007 compared to $17.9 million in the same period of 2006, a decrease of $2.7 million or 15.1%. Sales in this channel primarily constitute those to commercial dealers, health clubs, hotels and living complexes. The decrease in commercial channel sales was a result of our transition to our new Nautilus One product, a selectorized plate load circuit, and our new “F-3” line of free weights. These two product lines started shipping in limited quantities later in the third quarter than had been anticipated.

In the retail channel, net sales were $22.6 million in the third quarter of 2007 compared to $43.0 million in the same period of 2006, a decrease of $20.4 million or 47.5%. Sales in this channel are primarily to various sporting good stores, warehouse clubs, department stores, fitness retail stores and independent bicycle dealers that typically sell health club-quality equipment to the end consumer for home and small business use. The decline in this channel is mainly due to softness in the North American retail market for strength fitness equipment where we have historically sold our rod-based home gyms. Softness in the home fitness market in the third quarter led to lower sales as our retail partners carried existing inventory into the quarter and did not make significant additional purchases. In addition, sales were affected by our continued strategy to limit the number of power-rod home gyms sold into the retail channel due to potential conflict with our direct channel.

In the direct channel, net sales were $58.4 million in the third quarter of 2007 compared to $67.1 million in the same period of 2006, a decrease of $8.7 million or 13.0%. Sales in the direct channel consist of our Bowflex branded

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products and primarily include our rod-based home gyms, TreadClimbers, SelectTech dumbbells, and the Revolution. The decrease in net sales is primarily due to decreased sales volume of our home gyms, primarily the power-rod home gyms. This decline is a result of reduced advertising to support the power-rod product line along with increased competition for media space and lower conversion rates within the North American market for home fitness equipment. This decrease was offset by an increase in sales volume for our TreadClimbers in part driven by additional media support for that product in the third quarter of 2007.

International Equipment Business Net sales from the International Equipment Business were $18.7 million in the third quarter of 2007 compared to $14.6 million in the same period of 2006, an increase of $4.1 million or 28.1%. The International Equipment Business represents equipment sales outside of the Americas and includes primarily commercial and retail sales. The increase in net sales is due to expansion of our commercial sales channel through our four western European subsidiaries and various distributors. In addition, the International Equipment business continues to have commercial channel success through our new subsidiary in China since initial launch during the third quarter of 2006.

Fitness Apparel Business Net sales from the Fitness Apparel Business were $18.4 million in the third quarter of 2007 compared to $16.7 million in the same period of 2006, an increase of $1.7 million or 10.2%. The Fitness Apparel Business sells high quality fitness apparel and footwear for cyclists, runners and fitness enthusiasts. The revenue stream of the Fitness Apparel Business is generally seasonal with the first and third quarters having the highest sales and the second and fourth quarters having lower sales. Much of this is related to the timing of customer’s seasonal inventory purchases. The increase in net sales is primarily due to an increase in sales of our core Pearl Izumi cycling apparel with smaller increases in sales of our running apparel and cycling footwear products. In addition, we now operate twelve retail stores and an internet site, which have contributed to the sales increase in the Fitness Apparel Business.

Gross Profit

As a result of lower net sales, total gross profit was $52.8 million in the third quarter of 2007 compared to $72.1 million in the same period of 2006, a decrease of $19.3 million or 26.8%. As a percentage of net sales, gross profit margins decreased to 39.5% in the third quarter of 2007 compared to 45.2% in the comparable period of 2006. The decrease is primarily the result of changes in both our product and channel sales mix as well as overall reduction in the volume of our sales, offset by cost reductions implemented as part of our cost control and containment efforts within our owned manufacturing facilities and with our foreign manufacturing partners. During the third quarter of 2007 we experienced increased sales in our International Equipment Business, which generally has lower gross margins, and reduced sales in our Fitness Equipment Business, which traditionally has higher gross margins. As part of our ongoing efforts to improve margins, we have reduced the cost of products sourced from our Asian manufacturing partners and we continue to focus on improving overall operating efficiencies by consolidating our finished goods supply base, implementing a product pricing model to fully estimate prices from components to finished goods, and implementing stringent guidelines over our second and third party parts supplier base.

Fitness Equipment Business Gross profit for the Fitness Equipment Business decreased, primarily as a result of lower sales, to $39.9 million in the third quarter of 2007 compared to $61.7 million in the same period of 2006. As a percentage of net sales, gross profit margins decreased to 41.3% in the third quarter of 2007 compared to 48.1% in the comparable period of 2006. Factors affecting gross profit margin are primarily related to the overall shift in sales mix for customers, channel and product marketing support for certain retail customers, a higher percentage of sales from our TreadClimber products in the direct channel, which experience a higher number of returns than other products and incremental reserves related to certain finished goods and parts. These items were offset by a reduction of our warranty costs due to an overall improvement in quality and the recovery of a portion of warranty costs from our Asian manufacturers, and through reductions of the actual cost of our sourced products through various sustained engineering efforts and continued vendor contract negotiations as we seek strong partnerships with fewer vendors.

International Equipment Business Gross profit for the International Equipment Business was $5.1 million in the third quarter of 2007 compared to $3.0 million in the same period of 2006, an increase of $2.1 million or 70.0%. As a percentage of net sales, gross profit margin was 27.3% in the third quarter of 2007 compared to 20.5% in the comparable period of 2006. The increase in gross profit is the result of a change in our sales mix in the retail channel and improved margins by selling direct in China and in the Australia direct channel rather than through a distributor.

Fitness Apparel Business Gross profit for the Fitness Apparel Business was $7.8 million in the third quarter of 2007 compared to $7.4 million in the same period of 2006. As a percentage of net sales, gross profit margin decreased to 42.6% in the third quarter of 2007 compared to 44.3% in the comparable period of 2006. The decrease in profit margin percentage is due to the mix of products sold and establishing an inventory reserve related to surplus raw materials and excess and obsolete product.

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Operating Expenses

Selling and Marketing

Selling and marketing expenses were $52.7 million in the third quarter of 2007 compared to $42.6 million in the same period of 2006, an increase of $10.1 million or 23.7%. The increase is the result of incremental expenses of $4.8 million within the Fitness Equipment business related to bad debt reserves primarily related to the filing for Chapter 11 bankruptcy by our former customer Gately’s, LLC. In addition, we recorded additional charges related to new strategic marketing agreements as well as costs associated with the termination of certain marketing programs. We have also realized lower conversion rates within the direct channel for our rod-based home gyms which increases our cost per sale. The International Equipment business incurred incremental marketing cost increases in the current period as a result of expansion into new markets including both China and Australia. As a percentage of overall net sales, selling and marketing expenses were 39.4% in the third quarter of 2007 compared to 26.7% in the same period of 2006.

General and Administrative

General and administrative expenses were $16.2 million in the third quarter of 2007 compared to $14.5 million in the same period of 2006, an increase of $1.7 million or 11.7%. As a percentage of net sales, general and administrative expenses were 12.1% in the third quarter of 2007 compared to 9.1% in the same period of 2006. The increase in expense is primarily due to costs associated with the departure of the Company’s former Chief Executive Officer and increased amortization related to the intangible assets acquired during a legal settlement in the second quarter of 2007.

Research and Development

Research and development expenses were $3.6 million in the third quarter of 2007 compared to $2.5 million in the same period of 2006, an increase of $1.1 million or 44.0%. As a percentage of net sales, research and development expenses were 2.7% in the third quarter of 2007 compared to 1.6% in the same period of 2006. The increase in expense is due to increases in wages, recruiting, relocation, prototyping expenses and contracted services related to the development of the Nautilus One and other new equipment and apparel products.

Royalties

Royalty expenses were $1.9 million in the third quarter of 2007 compared to $1.3 million in the same period of 2006. We have several agreements under which we are obligated to pay royalty fees on certain product sales. The increase in our royalty expense is primarily a result of increased sales volumes related to our Bowflex TreadClimber and Nautilus Commercial TreadClimber and Bowflex Revolution products as well as preproduction royalties for products that are not yet being sold. The Bowflex Revolution has a higher royalty rate than many of our other products. As a percentage of net sales, royalty expenses were 1.4% in the third quarter of 2007 compared to 0.8% in the same period of 2006. We anticipate this trend to continue through the fourth quarter as we expect our Revolution and TreadClimber sales to be a higher percentage of sales in the Direct Channel as compared to the fourth quarter of last year.

Other Income (Expense)

Interest Expense

Interest expense increased to $1.9 million in the third quarter of 2007 compared to $0.8 million in the same period of 2006. The increase in interest expense is due to the increased average short-term borrowings outstanding during the third quarter of 2007 as compared to 2006.

Other Income, net

Net other income increased to $0.9 million in the third quarter of 2007. The increase is due to the higher foreign currency gains in 2007 realized by the Company.

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Income Tax Expense (Benefit)

The provision for income tax was a benefit of $8.9 million in the third quarter of 2007 compared to an expense of $1.2 million in the same period of 2006, a decrease of $10.1 million. The decrease was due primarily to a pre-tax loss in the third quarter of 2007 compared to pre-tax income in the same period of 2006. Our effective tax rate for the third quarter of 2007 was 39.9% compared to 11.6% in the same period of 2006. The increase in our annual effective tax rate was primarily due to the change to pre-tax loss from pre-tax income, and a $3.0 million reduction of tax contingency reserves during the third quarter of 2006.

SUMMARY OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007

Net sales for the first nine months of 2007 were $409.5 million, compared to $482.2 million for the same period of 2006, a decrease of 15.1%. Gross profit margins decreased to 41.9% in the first nine months of 2007, compared to 44.0% in the same period of 2006, primarily as a result of changes in sales mix for customers, channels, and products. The Company settled a lawsuit and obtained access to certain intellectual properties that were valued at $18.3 million and are recorded as a reduction to operating expenses in the 2^nd quarter of 2007. As a result of lower sales volume, offset by the litigation settlement, we realized an operating loss for the first nine months of 2007 of $14.8 million compared to operating income of $21.4 million for the prior year comparable period. Diluted loss per share for the first nine months of 2007 was 31 cents, compared to diluted earnings per share of 50 cents a year ago.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006

The following tables present certain consolidated financial data as a percentage of net sales and statement of operations data comparing results for the nine months ended September 30, 2007 and 2006:

	Nine Months Ended September 30,
(In Thousands)	2007			% of net sales		2006			% of net sales		$ change			% change
Net sales	$	409,548		100.0	%	$	482,185		100.0	%	$	(72,637	)	-15.1	%
Cost of sales		238,002		58.1	%		270,192		56.0	%		(32,190	)	-11.9	%
Gross profit		171,546		41.9	%		211,993		44.0	%		(40,447	)	-19.1	%
Operating expenses:
Selling and marketing		147,609		36.0	%		137,887		28.6	%		9,722		7.1	%
General and administrative		42,858		10.5	%		40,399		8.4	%		2,459		6.1	%
Research and development		9,568		2.3	%		8,321		1.7	%		1,247		15.0	%
Royalties		4,610		1.1	%		3,991		0.8	%		619		15.5	%
Litigation settlement		(18,300	)	-4.5	%		—		0.0	%		(18,300	)	0.0	%
Total operating expenses		186,345		45.5	%		190,598		39.5	%		(4,253	)	-2.2	%
Operating income (loss)		(14,799	)	-3.6	%		21,395		4.4	%		(36,194	)	-169.2	%
Interest income		265		0.1	%		582		0.1	%		(317	)	-54.5	%
Interest expense		(3,603	)	-0.9	%		(1,734	)	-0.4	%		(1,869	)	-107.8	%
Other income, net		1,697		0.4	%		1,220		0.3	%		477		39.1	%
Total other income (expense)		(1,641	)	-0.4	%		68		0.1	%		(1,709	)	-2513.2	%
Income (loss) before income taxes		(16,440	)	-4.0	%		21,463		4.5	%		(37,903	)	-176.6	%
Income tax expense (benefit)		(6,565	)	-1.6	%		5,215		1.1	%		(11,780	)	-225.9	%
Net income (loss)	$	(9,875	)	-2.4	%	$	16,248		3.4	%	$	(26,123	)	-160.8	%

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Net Sales

Fitness Equipment Business Total net sales for the Fitness Equipment Business were $301.5 million in the first nine months of 2007 compared to $389.2 million in the same period of 2006, a decrease of $87.7 million or 22.5%. The decrease is primarily attributable to reduced sales in the North American market for home fitness equipment, especially in home exercise strength products. Specific channel net sales information is detailed below:

In the commercial channel, net sales were $51.4 million in the first nine months of 2007 compared to $52.1 million in the same period of 2006, a decrease of $0.7 million or 1.3%. The decrease in net sales is due to a delay in the introduction of the new Nautilus One and free weights product lines that started shipping in limited quantities late during the third quarter of 2007. In addition, refinement of our customer relationships has resulted in lower sales to certain customers with the goal of overall improvements in profitability. This decline was offset by increased demand for our commercial grade TreadClimber and Nautilus upright and recumbent bikes. The TreadClimber product continues to overcome initial quality issues and is becoming a staple product for our commercial customers. We refreshed the Nautilus brand commercial bikes in early 2007 which has resulted in an increase of volume in the first nine months of 2007.

In the retail channel, net sales were $62.4 million in the first nine months of 2007 compared to $125.9 million in the same period of 2006, a decrease of $63.5 million or 50.4%. The decline in this channel is mainly due to a shift in strategy by limiting the number of power-rod home gyms being offered into this channel. In addition, we have seen general softness in the consumer retail market for overall home fitness equipment, especially in the market for home exercise strength products where we have historically sold our rod-based home gyms. Additionally, lower sales volume as a result of reduced sales to our current retail partners as they sell through their existing inventory.

In the direct channel, net sales were $186.1 million in the first nine months of 2007 compared to $211.0 million in the same period of 2006, a decrease of $24.9 million or 11.8%. The decrease in net sales is primarily due to reduced sales of our rod-based home gyms, which resulted from a combination of factors, including reduced advertising early in the year, increased competition for media space, lower conversion rates due to the slow-down in the North American market for home fitness equipment and a large inventory of rod-based products at our retail partners. This decrease was offset by an increase in sales volume for our Bowflex TreadClimbers and the Bowflex Revolution due to additional media support during 2007.

International Equipment Business Net sales from the International Equipment Business were $53.2 million for the first nine months of 2007 compared to $43.0 million in the same period of 2006, an increase of $10.2 million or 23.7%. The increase in net sales is due to expansion of our commercial sales channel in our four western European subsidiaries and distributor business following the successful introduction of the TreadClimber in international sales markets in the third quarter of 2006. In addition, the International Equipment business successfully established a subsidiary in China during the third quarter of 2006 and has added an Australian outlet in 2007 that has helped to grow sales.

Fitness Apparel Business Net sales from the Fitness Apparel Business were $54.8 million for the first nine months of 2007 compared to $50.0 million in the same period of 2006, an increase of $4.8 million or 9.6%. The revenue stream of the Fitness Apparel Business is generally seasonal with the first and third quarters having the highest sales and the second and fourth quarters having lower sales. The increase in net sales is primarily due to increasing net sales of our core Pearl Izumi cycling and running apparel and cycling footwear products in the domestic market and in the international direct markets.

Gross Profit

As a result of lower net sales, total gross profit was $171.5 million in the first nine months of 2007 compared to $212.0 million in the same period of 2006, a decrease of $40.5 million or 19.1%. As a percentage of net sales, gross profit margins decreased to 41.9% in the first nine months of 2007 compared to 44.0% in the comparable period of 2006. The decrease is primarily the result of a shift in sales mix between customers, channels, and products as well as the overall decline in sales volume, offset by cost reductions implemented during our cost control and containment efforts within our owned manufacturing facilities and with our manufacturing partners. Sales in the Fitness Equipment Business, which traditionally earn a higher gross margin, declined while sales in the International Equipment Business, which generally have a lower gross margin due to additional freight costs, increased. These items have been offset by reductions in our warranty costs by recovering a portion of such costs from our suppliers.

Fitness Equipment Business - Gross profit for the Fitness Equipment Business decreased to $132.0 million in the first nine months of 2007 compared to $179.6 million in the same period of 2006, a decrease of $47.6 million or 26.5%. The decrease in gross profit was due primarily to lower net sales. As a percentage of net sales, gross profit margins decreased to 43.8% in the first nine months of 2007 compared to 46.2% in the comparable period of 2006. Factors

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affecting gross profit margin include sales channel and product sales mix and additional promotions in the direct and retail channels. Most notable is the reduction of sales in power-rod home gyms sold in both the direct and retail channels that historically provide higher margins than most of our other finished goods. These items have been offset by reductions in our warranty costs by recovering a portion of such costs from our Asian manufacturers and realizing reduced parts and labor costs due to improved quality. Further, we have reduced the cost of products sourced from our Asian manufacturing partners and we continue to focus on improving operating efficiencies and cost and quality engineering.

International Equipment Business - Gross profit for the International Equipment Business was $15.9 million in the first nine months of 2007 compared to $10.5 million in the same period of 2006, an increase of $5.4 million or 51.4%. As a percentage of net sales, gross profit margin was 29.8% in the first nine months of 2007 compared to 24.4% in the comparable period of 2006. The increase in gross profit is the result of a better sales mix in the retail channel and improved margins resulting from a shift to a direct sales model in China and Australia.

Fitness Apparel Business - Gross profit for the Fitness Apparel Business was $23.7 million in the first nine months of 2007 compared to $21.9 million in the same period of 2006, an increase of $1.8 million or 8.2%. As a percentage of net sales, gross profit margin decreased to 43.2% in the first nine months of 2007 compared to 43.8% in the comparable period of 2006. The increase in profit margin dollars is due to increased sales within the core Pearl Izumi cycling and running apparel and cycling footwear products. The decreased margin percentage is due to the mix of products sold and lower than normal volume of close out and discounted items sold in the first half of 2006.

Operating Expenses

Selling and Marketing

Selling and marketing expenses were $147.6 million in the first nine months of 2007 compared to $137.9 million in the same period of 2006, an increase of $9.7 million or 7.0%. The increase is the result of increased expenses within the Fitness Equipment business related to incremental bad debt reserves primarily related to the bankruptcy filing by a former customer. In addition, selling and marketing expenses within the International Equipment and Apparel businesses increased in support of growing revenue, costs related to expansion into new markets for International equipment (China and Australia) and the opening of new retail stores for the Apparel business. These increases were offset by a sales volume decline in the direct channel resulting in lower marketing expenses and financing fees within the Fitness Equipment Business but an increase as a percentage of sales in the direct channel. As a percentage of net sales, selling and marketing expenses were 36.0% in the first nine months of 2007 compared to 28.6% in the same period of 2006.

General and Administrative

General and administrative expenses were $42.9 million in the first nine months of 2007 compared to $40.4 million in the same period of 2006, an increase of $2.5 million or 6.2%. As a percentage of net sales, general and administrative expenses were 10.5% in the first nine months of 2007 compared to 8.4% in the same period of 2006. The increase in expense is primarily due to increased costs associated with the termination of employment of our former Chief Executive Officer along with increased amortization related to intangible assets acquired during our legal settlement with ICON in the second quarter 2007.

Research and Development

Research and development expenses of $9.6 million in the first nine months of 2007 were comparable to $8.3 million in the same period of 2006, an increase of $1.3 million or 15.7%. The increase in expense is due to increases in wages, recruiting and prototyping expense for our research and development focus on introducing the new “Nautilus One” and other new equipment and apparel products.

Royalties

Royalty expenses of $4.6 million in the first nine months of 2007 were comparable to $4.0 million in the same period of 2006. As a percentage of net sales, royalty expenses were 1.1% in the first nine months of 2007 compared to 0.8% in the same period of 2006. This increase is a result of product mix with a higher portion of total net sales being related to the Bowflex Revolution and Bowflex and Nautilus TreadClimber products.

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Litigation Settlement

During the first nine months of 2007, the Company settled a lawsuit with ICON Health & Fitness, Inc. and as a result we received the rights to utilize a variety of fitness equipment related patents and technologies. We have valued those assets and recorded them as a reduction to operating expenses of $18.3 million.

Other Income (Expense)

Interest Expense

Interest expense increased to $3.6 million in the first nine months of 2007 compared to $1.7 million in the same period of 2006. The increase in interest expense is due to the increased average short-term borrowings outstanding during the first nine months of 2007 as compared to 2006.

Other Income, net

Other Income, net increased to $1.7 million in the first nine months of 2007 from $1.2 million in the comparable period of 2006. The increase is due to higher foreign currency gains realized by the Company in 2007.

Income Tax Expense (Benefit)

The provision for income tax was a benefit of $6.6 million in the first nine months of 2007 compared to an expense of $5.2 million in the same period of 2006, a change of $11.8 million. This change was due primarily to a pre-tax loss in 2007 compared to pre-tax income in 2006. Our effective tax rate for the first nine months of 2007 was 39.9% compared to 24.3% in the same period of 2006. The increase in our annual effective tax rate was primarily due to the change to pre-tax loss from pre-tax income, and a $3.0 million reduction of tax contingency reserves during the third quarter of 2006.

LIQUIDITY AND CAPITAL RESOURCES

During the first nine months of 2007, our operating activities provided $8.6 million in net cash compared to generating $36.7 million in the same period of the prior year. The decrease from the prior year is related to a net loss due to a significant reduction in sales, and decreases in payables and accrued liabilities offset by a reduction in accounts receivable. The decline in sales has led to lower accounts receivable and higher inventory balances outstanding at September 30, 2007.

Net cash used in investing activities was $44.8 million in the first nine months of 2007 compared to net cash used in investing activities of $9.9 million in the same period of 2006. The Company deposited $34.0 million in the Land America acquisition during the first nine months of 2007. Capital expenditures were $9.3 million in the first nine months of 2007 compared to $8.4 million in the same period of 2006. Capital expenditures during the first nine months of 2007 consisted of manufacturing equipment and tooling to support new, innovative product offerings, and computer equipment to maintain and expand current information systems. In the prior year period, we sold a building and received $6.1 million in net proceeds and acquired intellectual property for $5.8 million.

Net cash provided by financing activities was $52.8 million in the first nine months of 2007 compared to net cash used of $32.9 million in the same period of the prior year. Cash dividends paid were $9.5 million in the first nine months of 2007 versus $9.8 million in the first nine months of 2006. The Company repurchased $16.7 million of stock in the prior year period. Due to the current year operating losses and other activities, the Company borrowed $61.5 million in the current year period while paying down borrowings by $5.1 million in the prior year period.

As part of our restructuring efforts, we announced there would be no quarterly dividend paid starting in the fourth quarter of 2007.

Acquisition

On October 17, 2007 the Company entered into the following agreements: (i) Asset Purchase Agreement by and among the Company and Land America Health &Fitness Co., Ltd., a company formed under the laws of the People’s Republic of China (“Land America”), Michael C. Bruno (“Bruno”) and Yang Lin Qing (“Yang”) (the “Land America Agreement”); (ii) Asset Purchase Agreement by and among the Company and Treuriver Investments Limited a British Virgin Islands company (“Treuriver”), Bruno and Yang (the “Treuriver Agreement”); (iii) Post-Closing Audit Agreement by and among the Company, Land America, Bruno and Yang (the “Audit Agreement”); and (iv) First Amendment to Escrow Agreement by and among the Company, Treuriver, Bruno (in his capacity as Representative under the Treuriver Agreement), and U.S. Bank National Association (in its capacity as Escrow Agent) (the “First Amendment”). (The Land America Agreement, Treuriver Agreement, Audit Agreement and First Amendment are collectively referred to as the “Agreements”, and Land America, Treuriver, Bruno and Yang are collectively referred to as “Sellers”).

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The Agreements provide for the terms and conditions under which the Company or its wholly-owned subsidiaries will acquire or lease substantially all of the assets of Land America and Treuriver. Land America is primarily engaged in the manufacture of products for the Company in a manufacturing facility located in Xiamen, People’s Republic of China (“PRC”), and Treuriver is Land America’s related trading company. The Agreements were entered into following the exercise, on June 29, 2007, of purchase options set forth in Purchase Option Agreements with Land America, Treuriver, Bruno and Yang which the Company entered into on February 1, 2007.

In connection with execution of the Purchase Option Agreements, the Company delivered a non-refundable deposit of $6 million to Sellers. Upon exercise of the options, the Company deposited an additional $30 million into escrow. Under the terms of the First Amendment to Escrow Agreement entered into as part of the Agreements, $12.5 million was released from escrow to Sellers as an additional nonrefundable deposit and $12.5 million was released to the Company. The remaining $5.0 million is to remain in escrow until closing.

Under the terms of the Agreements, on January 1, 2008 a wholly-owned direct or indirect subsidiary of the Company to be formed in Xiamen, Fujian, PRC (“Buyer”) will acquire substantially all of the assets currently used by Land America to manufacture products on behalf of the Company. In addition, Buyer will enter into a Lease Agreement providing for the lease of the land and buildings in which Land America currently conducts its manufacturing operations. The Lease Agreement includes a purchase option and it is anticipated that Buyer will complete the purchase of the buildings and land use rights on or before October 31, 2008. In addition, on January 1, 2008 the Company or a direct or indirect wholly-owned subsidiary of the Company will acquire substantially all of the assets of Treuriver.

In addition to applying the previously delivered deposits as described above, within five business days of closing on January 1, 2008 the Company or its subsidiaries will pay $21.5 million to Sellers. The portion of the total purchase price attributable to inventory is subject to adjustment based on the actual value of inventory on the closing date. On the earlier of October 31, 2008 and the date on which Buyer completes the purchase of the land rights and buildings pursuant to the Lease Agreement, an additional $11 million will be paid to Sellers. The purchase price for the land rights and buildings is $11.5 million. The total acquisition cost, including the purchase of the land rights and buildings, but excluding inventory, is expected to be $63.0 million. The additional purchase of inventory at closing is expected to range from $4.0 million to $6.0 million.

Credit Facility

In February 2007, the Company paid off the outstanding balances under the $65 million credit facility that it entered in fiscal 2005 as well as the $25 million facility that it entered into October 2006. Thereafter, the Company entered into a new revolving credit agreement (the “Facility”) with several financing institutions. The Facility provides for an unsecured revolving credit facility to include revolving loans and a $10 million swing line, for a maximum commitment amount of $125 million with an option to increase the facility to $175 million. The Facility expires on February 14, 2012 and is intended for general corporate purposes, working capital requirements, financing permitted acquisitions and share repurchases.

The Facility provides for either Base Rate loans in the principal amount of $1.0 million or in increments of $0.1million thereof or Eurodollar Rate loans in the principal amount of $2.5 million or in increments of $0.5 million in excess thereof. It also allows for swing loans in minimum amounts of $0.1 million subject to its sub-limit of $10.0 million for the duration of up to ten business days, and letters of credit in the minimum amount of $0.1 million.

The Facility requires DashAmerica, Inc. d/b/a Pearl Izumi, Inc. (“Pearl Izumi”), a wholly-owned subsidiary of the Company, to be a guarantor; other domestic subsidiaries may be required to become guarantors under certain circumstances. The Facility also contains certain financial and non-financial covenants which include a consolidated leverage ratio, a consolidated asset coverage ratio, and a requirement to maintain a minimum consolidated EBITDA.

On October 5, 2007, the Company and Pearl Izumi entered into a Security and Pledge Agreement with Bank of America, N.A. (“Security Agreement”) in its capacity as administrative agent under the Company’s existing five-year $125 million Facility. The Security Agreement covers substantially all of the personal property assets of the Company and Pearl Izumi and secures the Company’s existing line of credit, swingline credit line and letter of credit subfacility, which had previously been unsecured.

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On October 12, 2007, the Company and its subsidiary Pearl Izumi entered into a First Amendment and Waiver to Credit Agreement (the “Amendment”) in respect of the Facility dated as of February 14, 2007 among Bank of America, N.A. in its capacity as Administrative Agent and the lenders party thereto.

Pursuant to the Amendment, the lenders under the credit facility agreed to waive defaults of the financial covenants under the Facility with respect to the four fiscal quarter period ended September 30, 2007. The applicable margin on borrowings was increased: (i) with respect to Eurodollar Rate loans, to 2.00% per annum, (ii) with respect to Base Rate loans, to 0.50% per annum, and (iii) with respect to Swing Line loans, to 0.50% per annum. Additionally, effective as of January 1, 2008, the maximum amount of the credit line will be restricted to $75,000,000 unless the Company’s consolidated EBITDA is at least $32,500,000 for each of the two most recently ended quarterly periods.

The Company is in the process of negotiating a new expanded asset-based credit facility for an anticipated $150.0 million with an accordion of $50.0 million. We anticipate completing this process by year-end.

We believe our existing cash and cash equivalents, cash generated from operations and borrowings available under our credit facilities will be sufficient to meet our capital requirements in the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

As described in notes to the consolidated financial statements in our most recent Annual Report on Form 10-K, from time to time, we arrange for leases or other financing sources with third parties to enable certain of our commercial customers to purchase our commercial products. While most of these financings are without recourse, in certain cases we may offer a guarantee or other recourse provisions. At September 30, 2007 and December 31, 2006, the maximum contingent liability under all recourse provisions were approximately $1.3 million and $1.6 million, respectively.

The Company has an agreement with a financing company to provide second tier financing for its consumers in which the Company shared financial responsibility if consumer default rates exceeded contractual expectations. During the third quarter 2007, the Company renegotiated its second tier financing agreements and transferred risk of loss to the financing company for a settlement payment of $0.7 million the majority of which was accrued prior to June 30,2007. As a result, a reserve is no longer established for consumer default on second tier financing arrangements. Our financing partners review consumer credit information and determine which consumers will receive financing and approve the amount of financing provided. The Company had a reserve for second tier consumer financing of $0.3 million at December 31, 2006. Refer to Note 9 of the Notes to Consolidated Financial Statements for further discussion of the accounting treatment for these arrangements.

INFLATION AND PRICE CHANGES

Although we cannot accurately anticipate the effect of inflation on our operations, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material adverse effect on our financial position, results of operations or cash flows. Increases in inflation over historical levels or uncertainty in the general economy could decrease discretionary consumer spending for products like ours.

During both 2006 and 2007, we experienced increases in transportation costs due to increases in the price for fuel. To the extent these costs continue to increase and we are unable to pass these costs to the customer, our gross margins may continue to be negatively impacted.

SEASONALITY

In general, based on historic trends, we expect our sales from fitness equipment products both in the U.S. and internationally to vary seasonally with net sales typically strongest in the fourth quarter, followed by the first and third quarters, and the weakest in the second quarter. Our analysis shows that such factors as the broadcast of national network season finales and seasonal weather patterns influence television viewership and cause our television commercials on national cable television to be less effective in the second quarter than in other periods of the year. In addition, during the spring and summer consumers tend to do more activities outside including exercise, which impacts sales of fitness equipment used indoors. Sales of our fitness apparel products are strongest in the first and third quarters and weakest during the fourth quarter. We expect the fluctuation in our net sales between our highest and lowest quarters to be approximately 40%.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements. As described by the Securities and Exchange Commission (“SEC”),

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critical accounting estimates and assumptions are those that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on the financial condition or operating performance of the company. There were no changes to our critical accounting estimates and assumptions in the three and nine month periods ended September 30, 2007. Refer to our most recent Annual Report on Form 10-K for a complete description of our critical accounting estimates and assumptions.

NEW ACCOUNTING PRONOUNCEMENTS

For a description of the new accounting standards that affect us, refer to Note 1 to our Consolidated Financial Statements included under Part I, Item 1 of this Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks since the filing of our 2006 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2007.

We hold our cash and cash equivalents primarily in bank deposits and in liquid debt instruments with maturity dates of less than one year. We are subject to concentration of credit risk as bank deposits may exceed federally insured limits.

FOREIGN EXCHANGE RISK

We are exposed to foreign exchange risk from currency fluctuations, mainly in Canada and Europe, due to sourcing of our products in U.S. Dollars and selling of products in Canadian Dollars, Swiss Francs, and Euros. Given the relative size of our current foreign operations, the exposure to the exchange risk could have a material impact in the results of operations. Management estimates the maximum impact on stockholders’ equity of a ten percent change in any applicable foreign currency to be approximately $1.4 million.

INTEREST RATE RISK

Fluctuations in the general level of interest rates on our current variable rate credit agreements expose us to market risk. As of September 30, 2007, our outstanding borrowings under the credit facilities were $109.0 million and represented 51.3% of our total liabilities. Due to the short-term nature of these borrowings, management believes that any reasonably possible near-term changes in related interest rates would not have a material impact on the Company’s financial position, results of operations, or cash flows.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chairman, Chief Executive Officer and President, and Chief Financial Officer, Treasurer and Secretary, the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended) as of the end of the period covered by this quarterly report on Form 10-Q pursuant to Rule 13a-15(b) and 15d-15(b) under the Exchange Act. Based on this evaluation, our Chairman, Chief Executive Officer and President, and Chief Financial Officer, Treasurer and Secretary, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level that information required to be disclosed in our Exchange Act reports is: (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Chairman, Chief Executive Officer and President, and Chief Financial Officer, Treasurer and Secretary, as appropriate to allow timely decisions regarding required disclosure. Management does not expect that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute assurance, that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

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Changes in Internal Controls

There have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various claims, lawsuits and other proceedings incidental to our business from time to time. Such litigation involves uncertainty as to possible losses we may ultimately realize when one or more future events occur or fail to occur. We accrue and charge to income estimated losses from contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. Differences between estimates recorded and actual amounts determined in subsequent periods are treated as changes in accounting estimates. The Company estimates the probability of losses on legal contingencies based on the advice of internal and external counsels, outcomes from similar litigation, the status of the lawsuits (including settlement initiatives), legislative developments, and other factors. Due to numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates significantly. A significant change in our estimates, or a result that materially differs from our estimates, could have a significant impact on our financial position, results of operations and cash flows.

On April 26, 2007, the Company and ICON Health & Fitness, Inc. (“ICON”) settled a series of pending lawsuits between the parties. This settlement included a number of claims and lawsuits between ICON and the Company going back to 2002-2003, and which were pending in federal courts in Salt Lake City, Utah, and Seattle, Washington, and before the Federal Circuit Court of Appeals. Both the Company and ICON have filed dismissals of their respective lawsuits against each other. This settlement and dismissals cleared the previous contingent liability claim of $8.1 million against the Company following a trial in November 2005 in Salt Lake City, and ICON granted the Company use of certain intellectual property for the Company’s use in product development and enhancement valued at $18.3 million.

In October 2006, the Company filed a complaint in the Superior Court for Clark County, Washington against Gately’s LLC (“Gately’s”) seeking damages in the amount of $5.1 million plus interest, attorney’s fees and costs, for collection of outstanding accounts receivable for product purchased by Gately’s. This case has been dismissed and refiled by the Company in state court in Boulder County, Colorado. In its answer to the complaint, Gately’s has asserted defenses to payment and counterclaims against Nautilus in an unspecified amount. In September 2007, Gately’s filed a petition for bankruptcy which has stayed the litigation in Colorado. In September 2007, the Company reserved an additional $4.8 million to be fully reserved for this unpaid receivable as a result of the bankruptcy filing.

In addition to the matters described above, from time to time the Company is subject to litigation, claims and assessments that arise in the ordinary course of business, including disputes that may arise from intellectual property related matters. Many of our legal matters are covered in whole or in part by insurance. Management believes that any liability resulting from such matters will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Item 1A. Risk Factors

There have been no material changes to the risk factors identified in our annual report on Form 10-K for the year-ended December 31, 2006, except that the following risk factor is added to supplement the risk factors identified in our annual report:

If we fail to comply with our debt covenants our ability to borrow under our existing credit facility may be limited and we may be required to obtain alternative financing. Compliance with our debt covenants may be adversely affected by various economic, financial and industry factors. Noncompliance with the covenants would constitute an event of default under our credit facility, allowing the lenders to accelerate repayment of any outstanding borrowings and/or suspend future borrowings. We have negotiated a waiver of certain financial covenants with the lenders under our current credit facility through December 31, 2007, however, if we fail to comply with such financial covenants after December 31, 2007, or fail to enter into a new Credit Facility prior to that time, the amount we would be permitted to borrow under our existing credit facility would be limited. There is no assurance that we would be able to obtain an additional waiver or amendments to our current credit facility, or enter into a new credit facility, on favorable terms, or at all.

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Item 6. Exhibits

The following exhibits are filed herewith.

Exhibit No.	Description
10.1	Security and Pledge Agreement dated as of October 5, 2007 by and among Nautilus, Inc., DashAmerica, Inc. and Bank of America N.A., as Administrative Agent
10.2	First Amendment and Waiver to Credit Agreement dated as of October 12, 2007 by and among Nautilus, Inc., DashAmerica, Inc. and Bank of America N.A., as Administrative Agent
10.3	Asset Purchase Agreement dated as of October 17, 2007 by and among Nautilus, Inc., Land America Health & Fitness Co., LTD., Michael C. Bruno and Yang Lin Qing.
10.4	Asset Purchase Agreement dated as of October 17, 2007 by and among Nautilus, Inc., Treuriver Investments Limited, Michael C. Bruno and Yang Lin Qing.
10.5	First Amendment to Escrow Agreement dated as of October 17, 2007 by and among Nautilus, Inc., Treuriver Investments Limited, Michael C. Bruno and U.S. Bank National Association, as Escrow Agent.
10.6	Post-Closing Audit Agreement dated as of October 17, 2007 by and among Nautilus, Inc., Land America Health & Fitness Co., LTD., Michael C. Bruno and Yang Lin Qing.
31.1	Certification of Principal Executive Officer pursuant to Rule 13a - 14 (a) of the Securities Exchange Act of 1934, as amended
31.2	Certification of Principal Financial Officer pursuant to Rule 13a - 14 (a) of the Securities Exchange Act of 1934, as amended
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a - 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NAUTILUS, INC.
November 9, 2007	By:	/s/ Robert S. Falcone
Date		Robert S. Falcone, Chairman, Chief Executive Officer and President (Principal Executive Officer)

November 9, 2007	By:	/s/ William D. Meadowcroft
Date		William D. Meadowcroft, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer)

November 9, 2007	By:	/s/ Aaron G. Atkinson
Date		Aaron G. Atkinson, Corporate Controller, (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
10.1	Security and Pledge Agreement dated as of October 5, 2007 by and among Nautilus, Inc., DashAmerica, Inc. and Bank of America N.A., as Administrative Agent
10.2	First Amendment and Waiver to Credit Agreement dated as of October 12, 2007 by and among Nautilus, Inc., DashAmerica, Inc. and Bank of America N.A., as Administrative Agent
10.3	Asset Purchase Agreement dated as of October 17, 2007 by and among Nautilus, Inc., Land America Health & Fitness Co., LTD., Michael C. Bruno and Yang Lin Qing.
10.4	Asset Purchase Agreement dated as of October 17, 2007 by and among Nautilus, Inc., Treuriver Investments Limited, Michael C. Bruno and Yang Lin Qing.
10.5	First Amendment to Escrow Agreement dated as of October 17, 2007 by and among Nautilus, Inc., Treuriver Investments Limited, Michael C. Bruno and U.S. Bank National Association, as Escrow Agent.
10.6	Post-Closing Audit Agreement dated as of October 17, 2007 by and among Nautilus, Inc., Land America Health & Fitness Co., LTD., Michael C. Bruno and Yang Lin Qing.
31.1	Certification of Principal Executive Officer pursuant to Rule 13a - 14 (a) of the Securities Exchange Act of 1934, as amended
31.2	Certification of Principal Financial Officer pursuant to Rule 13a - 14 (a) of the Securities Exchange Act of 1934, as amended
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a - 14(b) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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EX-10.1

Exhibit 10.1

SECURITY AND PLEDGE AGREEMENT

THIS SECURITY AND PLEDGE AGREEMENT (this “Agreement”) is entered into as of October 5, 2007 among NAUTILUS, INC., a Washington corporation (the “Borrower”), the other parties identified as “Obligors” on the signature pages hereto and such other parties that may become Obligors hereunder after the date hereof (together with the Borrower, individually an “Obligor”, and collectively the “Obligors”) and BANK OF AMERICA, N.A., in its capacity as administrative agent (in such capacity, the “Administrative Agent”) for the holders of the Secured Obligations (defined below).

RECITALS

WHEREAS, pursuant to that certain Credit Agreement dated as of February 14, 2007 (as amended, modified, extended, renewed or replaced from time to time, the “Credit Agreement”) among the Borrower, the Guarantors identified therein, the Lenders identified therein and the Administrative Agent, the Lenders have agreed to make Loans and issue Letters of Credit upon the terms and subject to the conditions set forth therein; and

WHEREAS, this Agreement is required by the terms of the Credit Agreement.

NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1. Definitions.

(a) Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement, and the following terms shall have the meanings set forth in the UCC (defined below): Accession, Account, Adverse Claim, As-Extracted Collateral, Chattel Paper, Commercial Tort Claim, Consumer Goods, Deposit Account, Document, Electronic Chattel Paper, Equipment, Farm Products, Financial Asset, Fixtures, General Intangible, Goods, Instrument, Inventory, Investment Company Security, Investment Property, Letter-of-Credit Right, Manufactured Home, Money, Proceeds, Securities Account, Security Entitlement, Security, Software, Supporting Obligation and Tangible Chattel Paper.

(b) In addition, the following terms shall have the meanings set forth below:

“Collateral” has the meaning provided in Section 2 hereof.

“Copyright License” means any written agreement, naming any Obligor as licensor, granting any right under any Copyright.

“Copyrights” means (a) all registered United States copyrights in all Works, now existing or hereafter created or acquired, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Copyright Office, and (b) all renewals thereof.

“Patent License” means any agreement, whether written or oral, providing for the grant by or to a Obligor of any right to manufacture, use or sell any invention covered by a Patent.

“Patents” means (a) all letters patent of the United States or any other country and all reissues and extensions thereof, and (b) all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof.

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“Pledged Equity” means, with respect to each Obligor, (i) 100% of the issued and outstanding Equity Interests of each Domestic Subsidiary of the Borrower that is directly owned by such Obligor and (ii) 65% (or such greater percentage that, due to a change in an applicable Law after the date hereof, (A) could not reasonably be expected to cause the undistributed earnings of such Foreign Subsidiary as determined for United States federal income tax purposes to be treated as a deemed dividend to such Foreign Subsidiary’s United States parent and (B) could not reasonably be expected to cause any material adverse tax consequences) of the issued and outstanding Equity Interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and 100% of the issued and outstanding Equity Interests not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) in each Foreign Subsidiary of the Borrower that is directly owned by such Obligor, including the Equity Interests of the Subsidiaries owned by such Obligor as set forth on Schedule 1(b) hereto, in each case together with the certificates (or other agreements or instruments), if any, representing such shares, and all options and other rights, contractual or otherwise, with respect thereto, including, but not limited to, the following:

(1) all Equity Interests representing a dividend thereon, or representing a distribution or return of capital upon or in respect thereof, or resulting from a stock split, revision, reclassification or other exchange therefor, and any subscriptions, warrants, rights or options issued to the holder thereof, or otherwise in respect thereof; and

(2) in the event of any consolidation or merger involving the issuer thereof and in which such issuer is not the surviving Person, all shares of each class of the Equity Interests of the successor Person formed by or resulting from such consolidation or merger, to the extent that such successor Person is a direct Subsidiary of an Obligor.

“Secured Obligations” means, without duplication, (a) all Obligations and (b) all costs and expenses incurred in connection with enforcement and collection of the Obligations, including the fees, charges and disbursements of counsel.

“Trademark License” means any agreement, written or oral, providing for the grant by or to an Obligor of any right to use any Trademark.

“Trademarks” means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and the goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state thereof or any other country or any political subdivision thereof, or otherwise and (b) all renewals thereof.

“UCC” means the Uniform Commercial Code as in effect from time to time in the state of New York except as such term may be used in connection with the perfection of the Collateral and then the applicable jurisdiction with respect to such affected Collateral shall apply.

“Work” means any work that is subject to copyright protection pursuant to Title 17 of the United States Code.

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2. Grant of Security Interest in the Collateral. To secure the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Secured Obligations, each Obligor hereby grants to the Administrative Agent, for the benefit of the holders of the Secured Obligations, a continuing security interest in, and a right to set off against, any and all right, title and interest of such Obligor in and to all of the following, whether now owned or existing or owned, acquired, or arising hereafter (collectively, the “Collateral”): (a) all Accounts; (b) all Chattel Paper; (c) those certain Commercial Tort Claims set forth on Schedule 2(c) hereto; (d) all Copyrights; (e) all Copyright Licenses; (f) all Deposit Accounts; (g) all Documents; (h) all Equipment; (i) all Fixtures; (j) all General Intangibles; (k) all Instruments; (l) all Inventory; (m) all Investment Property; (n) all Letter-of-Credit Rights; (o) all Money; (p) all Patents; (q) all Patent Licenses; (r) all Pledged Equity; (s) all Software; (t) all Supporting Obligations; (u) all Trademarks; (v) all Trademark Licenses; and (w) all Accessions and all Proceeds of any and all of the foregoing.

Notwithstanding anything to the contrary contained herein, the security interests granted under this Agreement shall not extend to (i) Excluded Property and (ii) any General Intangible, permit, lease, license, contract or Instrument of an Obligor if the grant of a security interest in such General Intangible, permit, lease, license, contract or Instrument in the manner contemplated by this Agreement, under the terms thereof or under applicable Law, is prohibited and would result in the termination thereof or give the other parties thereto the right to terminate, accelerate or otherwise alter such Obligor’s rights, titles and interests thereunder (including upon the giving of notice or the lapse of time or both); provided that (a) any such limitation described in the foregoing clause (ii) on the security interests granted hereunder shall only apply to the extent that any such prohibition could not be rendered ineffective pursuant to the UCC or any other applicable Law (including Debtor Relief Laws) or principles of equity and (b) in the event of the termination or elimination of any such prohibition or the requirement for any consent contained in any applicable Law, General Intangible, permit, lease, license, contract or Instrument, to the extent sufficient to permit any such item to become Collateral hereunder, or upon the granting of any such consent, or waiving or terminating any requirement for such consent, a security interest in such General Intangible, permit, lease, license, contract or Instrument shall be automatically and simultaneously granted hereunder and shall be included as Collateral hereunder.

The Obligors and the Administrative Agent, on behalf of the holders of the Secured Obligations, hereby acknowledge and agree that the security interest created hereby in the Collateral (i) constitutes continuing collateral security for all of the Secured Obligations, whether now existing or hereafter arising and (ii) is not to be construed as an assignment of any Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks or Trademark Licenses.

3. Representations and Warranties. Each Obligor hereby represents and warrants to the Administrative Agent, for the benefit of the holders of the Secured Obligations, that:

(a) Ownership. Each Obligor is the legal and beneficial owner of its Collateral and has the right to pledge, sell, assign or transfer the same. There exists no Adverse Claim with respect to the Pledged Equity of such Obligor.

(b) Security Interest/Priority. This Agreement creates a valid security interest in favor of the Administrative Agent, for the benefit of the holders of the Secured Obligations, in the Collateral of such Obligor and, when properly perfected by filing, shall constitute a valid and perfected, first priority security interest in such Collateral (including all uncertificated Pledged Equity consisting of partnership or limited liability company interests that do not constitute Securities), to the extent such security interest can be perfected by filing under the UCC, free and clear of all Liens except for Permitted Liens. The taking possession by the Administrative Agent of the certificated securities (if any) evidencing the Pledged Equity and all other Instruments constituting Collateral will perfect and establish the first priority of the Administrative Agent’s security interest in all the Pledged Equity evidenced by such certificated securities and such

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Instruments. With respect to any Collateral consisting of a Deposit Account, Securities Entitlement or held in a Securities Account, upon execution and delivery by the applicable Obligor, the applicable Securities Intermediary and the Administrative Agent of an agreement granting control to the Administrative Agent over such Collateral, the Administrative Agent shall have a valid and perfected, first priority security interest in such Collateral subject to customary setoff rights of depository institutions.

(c) Types of Collateral. None of the Collateral consists of, or is the Proceeds of, As-Extracted Collateral, Consumer Goods, Farm Products, Manufactured Homes or standing timber.

(d) Accounts. (i) Each Account of the Obligors and the papers and documents relating thereto are genuine and in all material respects what they purport to be, (ii) each Account arises out of (A) a bona fide sale of goods sold and delivered by such Obligor (or is in the process of being delivered) or (B) services theretofore actually rendered by such Obligor to, the account debtor named therein, (iii) no Account of an Obligor is evidenced by any Instrument or Chattel Paper unless such Instrument or Chattel Paper, to the extent requested by the Administrative Agent, has been endorsed over and delivered to, or submitted to the control of, the Administrative Agent and (iv) the right to receive payment under each Account is assignable.

(e) Equipment and Inventory. With respect to any Equipment and/or Inventory of an Obligor, each such Obligor has exclusive possession and control of such Equipment and Inventory of such Obligor except for (i) Equipment leased by such Obligor as a lessee, (ii) Equipment or Inventory in transit with common carriers, (iii) inventory at third party warehouses or (iv) sample inventory at third party research firms and/or prospective customers. No Inventory of an Obligor is held by a Person other than an Obligor pursuant to consignment, sale or return, sale on approval or similar arrangement.

(f) Authorization of Pledged Equity. All Pledged Equity is duly authorized and validly issued, is fully paid and, to the extent applicable, nonassessable and is not subject to the preemptive rights of any Person.

(g) No Other Equity Interests, Instruments, Etc. As of the date hereof, (i) no Obligor owns any certificated Equity Interests in any Subsidiary that are required to be pledged and delivered to the Administrative Agent hereunder except as set forth on Schedule 1(b) hereto, and (ii) no Obligor holds any Instruments, Documents or Tangible Chattel Paper required to be pledged and delivered to the Administrative Agent pursuant to Section 4(a)(i) of this Agreement other than as set forth on Schedule 3(g) hereto. All such certificated securities, Instruments, Documents and Tangible Chattel Paper have been delivered to the Administrative Agent.

(h) Partnership and Limited Liability Company Interests. Except as previously disclosed to the Administrative Agent, none of the Collateral (i) is dealt in or traded on a securities exchange or in a securities market, (ii) by its terms expressly provides that it is a Security governed by Article 8 of the UCC, (iii) is an Investment Company Security, (iv) is held in a Securities Account or (v) constitutes a Security or a Financial Asset.

(i) Consents; Etc. There are no restrictions in any Organization Document governing any Pledged Equity or any other document related thereto which would limit or restrict (i) the grant of a Lien pursuant to this Agreement on such Pledged Equity, (ii) the perfection of such Lien or (iii) the exercise of remedies in respect of such perfected Lien in the Pledged Equity as contemplated by this Agreement. Except for (i) the filing or recording of UCC financing statements, (ii) the filing of appropriate notices with the United States Patent and Trademark Office and the United States

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Copyright Office, (iii) obtaining control to perfect the Liens created by this Agreement (to the extent required under Section 4(a) hereof), (iv) such actions as may be required by Laws affecting the offering and sale of securities, (v) such actions as may be required by applicable foreign Laws affecting the pledge of the Pledged Equity of Foreign Subsidiaries and (vi) consents, authorizations, filings or other actions which have been obtained or made, no consent or authorization of, filing with, or other act by or in respect of, any arbitrator or Governmental Authority and no consent of any other Person (including, without limitation, any stockholder, member or creditor of such Obligor), is required for (A) the grant by such Obligor of the security interest in the Collateral granted hereby or for the execution, delivery or performance of this Agreement by such Obligor, (B) the perfection of such security interest (to the extent such security interest can be perfected by filing under the UCC, the granting of control (to the extent required under Section 4(a) hereof) or by filing an appropriate notice with the United States Patent and Trademark Office or the United States Copyright Office) or (C) the exercise by the Administrative Agent or the holders of the Secured Obligations of the rights and remedies provided for in this Agreement.

(j) Commercial Tort Claims. As of the date hereof, no Obligor has any Commercial Tort Claims seeking damages in excess of $100,000 other than as set forth on Schedule 2(c) hereto.

(k) Copyrights, Patents and Trademarks.

(i) To the best of each Obligor’s knowledge, each Copyright, Patent and Trademark of such Obligor is valid, subsisting, unexpired, enforceable and has not been abandoned.

(ii) To the best of each Obligor’s knowledge, no holding, decision or judgment has been rendered by any Governmental Authority that would limit, cancel or question the validity of any Copyright, Patent or Trademark of any Obligor.

(iii) No action or proceeding is pending seeking to limit, cancel or question the validity of any Copyright, Patent or Trademark of any Obligor, or that, if adversely determined, could reasonably be expected to have a material adverse effect on the value of any Copyright, Patent or Trademark of any Obligor.

(iv) All applications pertaining to the Copyrights, Patents and Trademarks of each Obligor have been duly and properly filed, and all registrations or letters pertaining to such Copyrights, Patents and Trademarks have been duly and properly filed and issued.

(v) No Obligor has made any assignment or agreement in conflict with the security interest in the Copyrights, Patents or Trademarks of any Obligor hereunder.

4. Covenants. Each Obligor covenants that until such time as the Secured Obligations arising under the Loan Documents have been paid in full and the Commitments have expired or been terminated, such Obligor shall:

(a) Instruments/Chattel Paper/Pledged Equity/Control.

(i) If any amount in excess of $100,000 payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Tangible Chattel Paper, or if any property constituting Collateral shall be stored or shipped subject to a Document, ensure that such Instrument, Tangible Chattel Paper or Document is either in the possession of such Obligor at all times or, if reasonably requested by the Administrative Agent to

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perfect its security interest in such Collateral, is delivered to the Administrative Agent duly endorsed in a manner satisfactory to the Administrative Agent. Such Obligor shall ensure that any Collateral consisting of Tangible Chattel Paper is marked with a legend acceptable to the Administrative Agent indicating the Administrative Agent’s security interest in such Tangible Chattel Paper.

(ii) Deliver to the Administrative Agent promptly upon the receipt thereof by or on behalf of an Obligor, all certificates and instruments constituting Pledged Equity. Prior to delivery to the Administrative Agent, all such certificates constituting Pledged Equity shall be held in trust by such Obligor for the benefit of the Administrative Agent pursuant hereto. All such certificates representing Pledged Equity shall be delivered in suitable form for transfer by delivery or shall be accompanied by duly executed instruments of transfer or assignment in blank, substantially in the form provided in Exhibit 4(a)(ii) hereto.

(iii) Promptly execute and deliver all agreements, assignments, instruments or other documents as reasonably requested by the Administrative Agent for the purpose of obtaining and maintaining control with respect to any Collateral consisting of (i) Deposit Accounts, (ii) Investment Property, (iii) Letter-of-Credit Rights and (iv) Electronic Chattel Paper.

(b) Filing of Financing Statements, Notices, etc. Each Obligor shall execute and deliver to the Administrative Agent such agreements, assignments or instruments (including affidavits, notices, reaffirmations and amendments and restatements of existing documents) as the Administrative Agent may reasonably request and do all such other things as the Administrative Agent may reasonably deem necessary or appropriate (i) to assure to the Administrative Agent its security interests hereunder, including (A) such instruments as the Administrative Agent may from time to time reasonably request in order to perfect and maintain the security interests granted hereunder in accordance with the UCC, (B) with regard to Copyrights, a Notice of Grant of Security Interest in Copyrights in the form of Exhibit 4(b)(i), (C) with regard to Patents, a Notice of Grant of Security Interest in Patents for filing with the United States Patent and Trademark Office in the form of Exhibit 4(b)(ii) hereto and (D) with regard to Trademarks, a Notice of Grant of Security Interest in Trademarks for filing with the United States Patent and Trademark Office in the form of Exhibit 4(b)(iii) hereto, (ii) to consummate the transactions contemplated hereby and (iii) to otherwise protect and assure the Administrative Agent of its rights and interests hereunder. Furthermore, each Obligor also hereby irrevocably makes, constitutes and appoints the Administrative Agent, its nominee or any other person whom the Administrative Agent may designate, as such Obligor’s attorney in fact with full power and for the limited purpose to sign in the name of such Obligor any financing statements, or amendments and supplements to financing statements, renewal financing statements, notices or any similar documents which in the Administrative Agent’s reasonable discretion would be necessary or appropriate in order to perfect and maintain perfection of the security interests granted hereunder, such power, being coupled with an interest, being and remaining irrevocable until such time as the Secured Obligations arising under the Loan Documents have been paid in full and the Commitments have expired or been terminated. Each Obligor hereby agrees that a carbon, photographic or other reproduction of this Agreement or any such financing statement is sufficient for filing as a financing statement by the Administrative Agent without notice thereof to such Obligor wherever the Administrative Agent may in its sole discretion desire to file the same.

(c) Collateral Held by Warehouseman, Bailee, etc. If any material Collateral is at any time in the possession or control of a warehouseman, bailee or any agent or processor of such Obligor and the Administrative Agent so requests (i) notify such Person in writing of the Administrative Agent’s security interest therein, (ii) instruct such Person to hold all such Collateral

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for the Administrative Agent’s account and subject to the Administrative Agent’s instructions and (iii) use reasonable best efforts to obtain a written acknowledgment from such Person that it is holding such Collateral for the benefit of the Administrative Agent.

(d) Treatment of Accounts. Not grant or extend the time for payment of any Account, or compromise or settle any Account for less than the full amount thereof, or release any person or property, in whole or in part, from payment thereof, or allow any credit or discount thereon, other than as normal and customary in the ordinary course of an Obligor’s business.

(e) Commercial Tort Claims. (i) Promptly forward to the Administrative Agent an updated Schedule 2(c) listing any and all Commercial Tort Claims by or in favor of such Obligor seeking damages in excess of $100,000 and (ii) execute and deliver such statements, documents and notices and do and cause to be done all such things as may be required by the Administrative Agent, or required by Law to create, preserve, perfect and maintain the Administrative Agent’s security interest in any Commercial Tort Claims initiated by or in favor of any Obligor.

(f) Books and Records. If requested by the Administrative Agent, mark its books and records (and shall cause the issuer of the Pledged Equity of such Obligor to mark its books and records) to reflect the security interest granted pursuant to this Agreement.

(g) Nature of Collateral. At all times maintain the material Collateral as personal property and not affix any such Collateral to any real property in a manner which would change its nature from personal property to real property or a Fixture to real property, unless the Administrative Agent shall have a perfected Lien on such Fixture or real property.

(h) Issuance or Acquisition of Equity Interests. Not without executing and delivering, or causing to be executed and delivered, to the Administrative Agent such agreements, documents and instruments as the Administrative Agent may reasonably require, issue or acquire any Pledged Equity consisting of an interest in a partnership or a limited liability company that (i) is dealt in or traded on a securities exchange or in a securities market, (ii) by its terms expressly provides that it is a Security governed by Article 8 of the UCC, (iii) is an Investment Company Security, (iv) is held in a Securities Account or (v) constitutes a Security or a Financial Asset.

(i) Intellectual Property.

(i) Not do any act or knowingly omit to do any act whereby any material Copyright may become invalidated and (A) not do any act, or knowingly omit to do any act, whereby any material Copyright may become injected into the public domain; (B) notify the Administrative Agent immediately if it knows that any material Copyright may become injected into the public domain or of any materially adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any court or tribunal in the United States or any other country) regarding an Obligor’s ownership of any such Copyright or its validity; (C) take all necessary steps as it shall deem appropriate under the circumstances, to maintain and pursue each application (and to obtain the relevant registration) of each material Copyright owned by an Obligor and to maintain each registration of each material Copyright owned by an Obligor including, without limitation, filing of applications for renewal where necessary; and (D) promptly notify the Administrative Agent of any material infringement of any material Copyright of an Obligor of which it becomes aware and take such actions as it shall reasonably deem appropriate under the circumstances to protect such Copyright, including, where appropriate, the bringing of suit for infringement, seeking injunctive relief and seeking to recover any and all damages for such infringement.

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(ii) Not make any assignment or agreement in conflict with the security interest in the Copyrights of each Obligor hereunder (except as permitted by the Credit Agreement).

(iii)(A) Continue to use each material Trademark on each and every trademark class of goods applicable to its current line as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (B) maintain as in the past the quality of products and services offered under such Trademark, (C) employ such Trademark with the appropriate notice of registration, if applicable, (D) not adopt or use any mark that is confusingly similar or a colorable imitation of such Trademark unless the Administrative Agent, for the ratable benefit of the holders of the Secured Obligations, shall obtain a perfected security interest in such mark pursuant to this Agreement, and (E) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any such Trademark may become invalidated.

(iv) Not do any act, or omit to do any act, whereby any material Patent may become abandoned or dedicated.

(v) Notify the Administrative Agent and the holders of the Secured Obligations immediately if it knows that any application or registration relating to any material Patent or Trademark may become abandoned or dedicated, or of any materially adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding such Obligor ownership of any Patent or Trademark or its right to register the same or to keep and maintain the same.

(vi) Take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of each material Patent and Trademark, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.

(vii) Promptly notify the Administrative Agent and the holders of the Secured Obligations after it learns that any material Patent or Trademark included in the Collateral is infringed, misappropriated or diluted by a third party and promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or to take such other actions as it shall reasonably deem appropriate under the circumstances to protect such Patent or Trademark.

(viii) Not make any assignment or agreement in conflict with the security interest in the Patents or Trademarks of each Obligor hereunder (except as permitted by the Credit Agreement).

Notwithstanding the foregoing, the Obligors may, in their reasonable business judgment, fail to maintain, pursue, preserve or protect any Copyright, Patent or Trademark which is not material to their businesses.

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5. Authorization to File Financing Statements. Each Obligor hereby authorizes the Administrative Agent to prepare and file such financing statements (including continuation statements) or amendments thereof or supplements thereto or other instruments as the Administrative Agent may from time to time deem necessary or appropriate in order to perfect and maintain the security interests granted hereunder in accordance with the UCC (including authorization to describe the Collateral as “all personal property”, “all assets” or words of similar meaning).

6. Advances. On failure of any Obligor to perform any of the covenants and agreements contained herein, the Administrative Agent may, at its sole option and in its sole discretion, perform the same and in so doing may expend such sums as the Administrative Agent may reasonably deem advisable in the performance thereof, including, without limitation, the payment of any insurance premiums (subject to Section 22), the payment of any taxes, a payment to obtain a release of a Lien or potential Lien, expenditures made in defending against any adverse claim and all other expenditures which the Administrative Agent may make for the protection of the security hereof or which may be compelled to make by operation of Law. All such sums and amounts so expended shall be repayable by the Obligors on a joint and several basis promptly upon timely notice thereof and demand therefor, shall constitute additional Secured Obligations and shall, subject to Section 22, bear interest from the date said amounts are expended at the Default Rate. No such performance of any covenant or agreement by the Administrative Agent on behalf of any Obligor, and no such advance or expenditure therefor, shall relieve the Obligors of any Default or Event of Default. The Administrative Agent may make any payment hereby authorized in accordance with any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien, title or claim except to the extent such payment is being contested in good faith by an Obligor in appropriate proceedings and against which adequate reserves are being maintained in accordance with GAAP.

7. Remedies.

(a) General Remedies. Upon the occurrence of an Event of Default and during continuation thereof, the Administrative Agent shall have, in addition to the rights and remedies provided herein, in the Loan Documents, in any other documents relating to the Secured Obligations, or by Law (including, but not limited to, levy of attachment, garnishment and the rights and remedies set forth in the UCC of the jurisdiction applicable to the affected Collateral), the rights and remedies of a secured party under the UCC (regardless of whether the UCC is the law of the jurisdiction where the rights and remedies are asserted and regardless of whether the UCC applies to the affected Collateral), and further, the Administrative Agent may, with or without judicial process or the aid and assistance of others, (i) enter on any premises on which any of the Collateral may be located and, without resistance or interference by the Obligors, take possession of the Collateral, (ii) dispose of any Collateral on any such premises, (iii) require the Obligors to assemble and make available to the Administrative Agent at the expense of the Obligors any Collateral at any place and time designated by the Administrative Agent which is reasonably convenient to both parties, (iv) remove any Collateral from any such premises for the purpose of effecting sale or other disposition thereof, and/or (v) without demand and without advertisement, notice, hearing or process of law, all of which each of the Obligors hereby waives to the fullest extent permitted by Law, at any place and time or times, sell and deliver any or all Collateral held by or for it at public or private sale (which in the case of a private sale of Pledged Equity, shall be to a restricted group of purchasers who will be obligated to agree, among other things, to acquire such securities for their own account, for investment and not with a view to the distribution or resale thereof), at any exchange or broker’s board or elsewhere, by one or more contracts, in one or more parcels, for Money, upon credit or otherwise, at such prices and upon such commercially reasonable terms as the Administrative Agent

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deems advisable, in its sole discretion (subject to any and all mandatory legal requirements). Each Obligor acknowledges that any such private sale may be at prices and on terms less favorable to the seller than the prices and other terms which might have been obtained at a public sale and, notwithstanding the foregoing, agrees that such fact shall not, in itself, be deemed to detract from the commercial reasonableness of the sale and, in the case of a sale of Pledged Equity, the Administrative Agent shall have no obligation to delay sale of any such securities for the period of time necessary to permit the issuer of such securities to register such securities for public sale under the Securities Act of 1933. Neither the Administrative Agent’s compliance with applicable Law nor its disclaimer of warranties relating to the Collateral shall be considered to adversely affect the commercial reasonableness of any sale. To the extent the rights of notice cannot be legally waived hereunder, each Obligor agrees that any requirement of reasonable notice shall be met if such notice, specifying the place of any public sale or the time after which any private sale is to be made, is personally served on or mailed, postage prepaid, to the Borrower in accordance with the notice provisions of Section 11.02 of the Credit Agreement at least 10 days before the time of sale or other event giving rise to the requirement of such notice. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Obligor further acknowledges and agrees that any offer to sell any Pledged Equity which has been (i) publicly advertised on a bona fide basis in a newspaper or other publication of general circulation in the financial community of New York, New York (to the extent that such offer may be advertised without prior registration under the Securities Act of 1933), or (ii) made privately in the manner described above shall be deemed to involve a “public sale” under the UCC, notwithstanding that such sale may not constitute a “public offering” under the Securities Act of 1933, and the Administrative Agent may, in such event, bid for the purchase of such securities. The Administrative Agent shall not be obligated to make any sale or other disposition of the Collateral regardless of notice having been given. To the extent permitted by applicable Law, any holder of Secured Obligations may be a purchaser at any such sale. To the extent permitted by applicable Law, each of the Obligors hereby waives all of its rights of redemption with respect to any such sale. Subject to the provisions of applicable Law, the Administrative Agent may postpone or cause the postponement of the sale of all or any portion of the Collateral by announcement at the time and place of such sale, and such sale may, without further notice, to the extent permitted by Law, be made at the time and place to which the sale was postponed, or the Administrative Agent may further postpone such sale by announcement made at such time and place.

(b) Remedies relating to Accounts. During the continuation of an Event of Default, whether or not the Administrative Agent has exercised any or all of its rights and remedies hereunder, (i) each Obligor will promptly upon request of the Administrative Agent instruct all account debtors to remit all payments in respect of Accounts to a mailing location selected by the Administrative Agent and (ii) the Administrative Agent shall have the right to enforce any Obligor’s rights against its customers and account debtors, and the Administrative Agent or its designee may notify any Obligor’s customers and account debtors that the Accounts of such Obligor have been assigned to the Administrative Agent or of the Administrative Agent’s security interest therein, and may (either in its own name or in the name of an Obligor or both) demand, collect (including without limitation by way of a lockbox arrangement), receive, take receipt for, sell, sue for, compound, settle, compromise and give acquittance for any and all amounts due or to become due on any Account, and, in the Administrative Agent’s discretion, file any claim or take any other action or proceeding to protect and realize upon the security interest of the holders of the Secured Obligations in the Accounts. Neither the Administrative Agent nor the holders of the Secured Obligations shall have any liability or responsibility to any Obligor for acceptance of a check, draft or other order for payment of money bearing the legend “payment in full” or words of similar import or any other

10

restrictive legend or endorsement or be responsible for determining the correctness of any remittance. Furthermore, during the continuation of an Event of Default, (i) the Administrative Agent shall have the right, but not the obligation, to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and the Obligors shall furnish all such assistance and information as the Administrative Agent may require in connection with such test verifications, (ii) upon the Administrative Agent’s request and at the expense of the Obligors, the Obligors shall cause independent public accountants or others satisfactory to the Administrative Agent to furnish to the Administrative Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts and (iii) the Administrative Agent in its own name or in the name of others may communicate with account debtors on the Accounts to verify with them to the Administrative Agent’s satisfaction the existence, amount and terms of any Accounts.

(c) Access. In addition to the rights and remedies hereunder, upon the occurrence of an Event of Default and during the continuance thereof, the Administrative Agent shall have the right to enter and remain upon the various premises of the Obligors without cost or charge to the Administrative Agent, and use the same, together with materials, supplies, books and records of the Obligors for the purpose of collecting and liquidating the Collateral, or for preparing for sale and conducting the sale of the Collateral, whether by foreclosure, auction or otherwise. In addition, the Administrative Agent may remove Collateral, or any part thereof, from such premises and/or any records with respect thereto, in order to effectively collect or liquidate such Collateral.

(d) Nonexclusive Nature of Remedies. Failure by the Administrative Agent or the holders of the Secured Obligations to exercise any right, remedy or option under this Agreement, any other Loan Document, any other document relating to the Secured Obligations, or as provided by Law, or any delay by the Administrative Agent or the holders of the Secured Obligations in exercising the same, shall not operate as a waiver of any such right, remedy or option. No waiver hereunder shall be effective unless it is in writing, signed by the party against whom such waiver is sought to be enforced and then only to the extent specifically stated, which in the case of the Administrative Agent or the holders of the Secured Obligations shall only be granted as provided herein. To the extent permitted by Law, neither the Administrative Agent, the holders of the Secured Obligations, nor any party acting as attorney for the Administrative Agent or the holders of the Secured Obligations, shall be liable hereunder for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct hereunder. The rights and remedies of the Administrative Agent and the holders of the Secured Obligations under this Agreement shall be cumulative and not exclusive of any other right or remedy which the Administrative Agent or the holders of the Secured Obligations may have.

(e) Retention of Collateral. In addition to the rights and remedies hereunder, the Administrative Agent may, in compliance with Sections 9-620 and 9-621 of the UCC or otherwise complying with the requirements of applicable Law of the relevant jurisdiction, accept or retain the Collateral in satisfaction of the Secured Obligations. Unless and until the Administrative Agent shall have provided such notices, however, the Administrative Agent shall not be deemed to have retained any Collateral in satisfaction of any Secured Obligations for any reason.

(f) Deficiency. In the event that the proceeds of any sale, collection or realization are insufficient to pay all amounts to which the Administrative Agent or the holders of the Secured Obligations are legally entitled, the Obligors shall be jointly and severally liable for the deficiency, together with interest thereon at the Default Rate, together with the costs of collection and the fees, charges and disbursements of counsel. Any surplus remaining after the full payment and satisfaction of the Secured Obligations shall be returned to the Obligors or to whomsoever a court of competent jurisdiction shall determine to be entitled thereto.

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8. Rights of the Administrative Agent.

(a) Power of Attorney. In addition to other powers of attorney contained herein, each Obligor hereby designates and appoints the Administrative Agent, on behalf of the holders of the Secured Obligations, and each of its designees or agents, as attorney-in-fact of such Obligor, irrevocably and with power of substitution, with authority to take any or all of the following actions upon the occurrence and during the continuance of an Event of Default:

(i) to demand, collect, settle, compromise, adjust, give discharges and releases, all as the Administrative Agent may reasonably determine;

(ii) to commence and prosecute any actions at any court for the purposes of collecting any Collateral and enforcing any other right in respect thereof;

(iii) to defend, settle or compromise any action brought with respect to the Collateral and, in connection therewith, give such discharge or release as the Administrative Agent may deem reasonably appropriate;

(iv) receive, open and dispose of mail addressed to an Obligor and endorse checks, notes, drafts, acceptances, money orders, bills of lading, warehouse receipts or other instruments or documents evidencing payment, shipment or storage of the goods giving rise to the Collateral of such Obligor on behalf of and in the name of such Obligor, or securing, or relating to such Collateral;

(v) sell, assign, transfer, make any agreement in respect of, or otherwise deal with or exercise rights in respect of, any Collateral or the goods or services which have given rise thereto, as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes;

(vi) adjust and settle claims under any insurance policy relating thereto;

(vii) execute and deliver all assignments, conveyances, statements, financing statements, renewal financing statements, security agreements, affidavits, notices and other agreements, instruments and documents that the Administrative Agent may determine necessary in order to perfect and maintain the security interests and liens granted in this Agreement and in order to fully consummate all of the transactions contemplated therein;

(viii) institute any foreclosure proceedings that the Administrative Agent may deem appropriate;

(ix) to sign and endorse any drafts, assignments, proxies, stock powers, verifications, notices and other documents relating to the Collateral;

(x) to exchange any of the Pledged Equity or other property upon any merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof and, in connection therewith, deposit any of the Pledged Equity with any committee, depository, transfer agent, registrar or other designated agency upon such terms as the Administrative Agent may reasonably deem appropriate;

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(xi) to vote for a shareholder resolution, or to sign an instrument in writing, sanctioning the transfer of any or all of the Pledged Equity into the name of the Administrative Agent or one or more of the holders of the Secured Obligations or into the name of any transferee to whom the Pledged Equity or any part thereof may be sold pursuant to Section 7 hereof;

(xii) to pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against the Collateral;

(xiii) to direct any parties liable for any payment in connection with any of the Collateral to make payment of any and all monies due and to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct;

(xiv) to receive payment of and receipt for any and all monies, claims, and other amounts due and to become due at any time in respect of or arising out of any Collateral; and

(xv) do and perform all such other acts and things as the Administrative Agent may reasonably deem to be necessary, proper or convenient in connection with the Collateral.

This power of attorney is a power coupled with an interest and shall be irrevocable until such time as the Secured Obligations arising under the Loan Documents have been paid in full and the Commitments have expired or been terminated. The Administrative Agent shall be under no duty to exercise or withhold the exercise of any of the rights, powers, privileges and options expressly or implicitly granted to the Administrative Agent in this Agreement, and shall not be liable for any failure to do so or any delay in doing so. The Administrative Agent shall not be liable for any act or omission or for any error of judgment or any mistake of fact or law in its individual capacity or its capacity as attorney-in-fact except acts or omissions resulting from its gross negligence or willful misconduct. This power of attorney is conferred on the Administrative Agent solely to protect, preserve and realize upon its security interest in the Collateral.

(b) Assignment by the Administrative Agent. The Administrative Agent may from time to time assign the Secured Obligations to a successor Administrative Agent appointed in accordance with the Credit Agreement, and such successor shall be entitled to all of the rights and remedies of the Administrative Agent under this Agreement in relation thereto.

(c) The Administrative Agent’s Duty of Care. Other than the exercise of reasonable care to assure the safe custody of the Collateral while being held by the Administrative Agent hereunder, the Administrative Agent shall have no duty or liability to preserve rights pertaining thereto, it being understood and agreed that the Obligors shall be responsible for preservation of all rights in the Collateral, and the Administrative Agent shall be relieved of all responsibility for the Collateral upon surrendering it or tendering the surrender of it to the Obligors. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property, which shall be no less than the treatment employed by a reasonable and prudent agent in the industry, it being understood that the Administrative Agent shall not have responsibility for taking any necessary steps to preserve rights against any parties with respect to any of the Collateral. In the event of a public or private sale of Collateral pursuant to Section 7 hereof, the Administrative Agent shall have no responsibility for (i) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Collateral, whether or not the Administrative Agent has or is deemed to have knowledge of such matters, or (ii) taking any steps clean, repair or otherwise prepare the Collateral for sale.

13

(d) Liability with Respect to Accounts. Anything herein to the contrary notwithstanding, each of the Obligors shall remain liable under each of the Accounts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account. Neither the Administrative Agent nor any holder of Secured Obligations shall have any obligation or liability under any Account (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any holder of Secured Obligations of any payment relating to such Account pursuant hereto (other than accounting to the Borrower for proceeds applied under Section 9), nor shall the Administrative Agent or any holder of Secured Obligations be obligated in any manner to perform any of the obligations of an Obligor under or pursuant to any Account (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times.

(e) Voting and Payment Rights in Respect of the Pledged Equity.

(i) So long as no Event of Default shall exist, each Obligor may (A) exercise any and all voting and other consensual rights pertaining to the Pledged Equity of such Obligor or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement and (B) receive and retain any and all dividends (other than stock dividends and other dividends constituting Collateral which are addressed hereinabove), principal or interest paid in respect of the Pledged Equity to the extent they are allowed under the Credit Agreement; and

(ii) During the continuance of an Event of Default and upon written notice to the Borrower, (A) all rights of an Obligor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to clause (i)(A) above shall cease and all such rights shall thereupon become vested in the Administrative Agent which shall then have the sole right to exercise such voting and other consensual rights, (B) all rights of an Obligor to receive the dividends, principal and interest payments which it would otherwise be authorized to receive and retain pursuant to clause (i)(B) above shall cease and all such rights shall thereupon be vested in the Administrative Agent which shall then have the sole right to receive and hold as Collateral such dividends, principal and interest payments, and (C) all dividends, principal and interest payments which are received by an Obligor contrary to the provisions of clause (ii)(B) above shall be received in trust for the benefit of the Administrative Agent, shall be segregated from other property or funds of such Obligor, and shall be forthwith paid over to the Administrative Agent as Collateral in the exact form received, to be held by the Administrative Agent as Collateral and as further collateral security for the Secured Obligations.

(f) Releases of Collateral. (i) If any Collateral shall be sold, transferred or otherwise disposed of by any Obligor in a transaction permitted by the Credit Agreement, then the Administrative Agent, at the request and sole expense of such Obligor, shall promptly execute and deliver to such Obligor all releases and other documents, and take such other action, reasonably necessary for the release of the Liens created hereby or by any other Collateral Document on such

14

Collateral. (ii) The Administrative Agent may release any of the Pledged Equity from this Agreement or may substitute any of the Pledged Equity for other Pledged Equity without altering, varying or diminishing in any way the force, effect, lien, pledge or security interest of this Agreement as to any Pledged Equity not expressly released or substituted, and this Agreement shall continue as a first priority lien on all Pledged Equity not expressly released or substituted.

9. Application of Proceeds. Upon the acceleration of the Obligations pursuant to Section 9.02 of the Credit Agreement, any payments in respect of the Secured Obligations and any proceeds of the Collateral, when received by the Administrative Agent or any holder of the Secured Obligations in Money, will be applied in reduction of the Secured Obligations in the order set forth in Section 9.03 of the Credit Agreement.

10. Continuing Agreement.

(a) This Agreement shall remain in full force and effect until such time as the Secured Obligations arising under the Loan Documents have been paid in full and the Commitments have expired or been terminated, at which time this Agreement shall be automatically terminated and the Administrative Agent shall, upon the request and at the expense of the Obligors, forthwith release all of its liens and security interests hereunder and shall execute and deliver all UCC termination statements and/or other documents reasonably requested by the Obligors evidencing such termination.

(b) This Agreement shall continue to be effective or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the Secured Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any holder of the Secured Obligations as a preference, fraudulent conveyance or otherwise under any Debtor Relief Law, all as though such payment had not been made; provided that in the event payment of all or any part of the Secured Obligations is rescinded or must be restored or returned, all reasonable costs and expenses (including without limitation any reasonable legal fees and disbursements) incurred by the Administrative Agent or any holder of the Secured Obligations in defending and enforcing such reinstatement shall be deemed to be included as a part of the Secured Obligations.

11. Amendments; Waivers; Modifications, etc. This Agreement and the provisions hereof may not be amended, waived, modified, changed, discharged or terminated except as set forth in Section 11.01 of the Credit Agreement; provided that any update or revision to Schedule 2(c) hereof delivered by any Obligor shall not constitute an amendment for purposes of this Section 11 or Section 11.01 of the Credit Agreement.

12. Successors in Interest. This Agreement shall be binding upon each Obligor, its successors and assigns and shall inure, together with the rights and remedies of the Administrative Agent and the holders of the Secured Obligations hereunder, to the benefit of the Administrative Agent and the holders of the Secured Obligations and their successors and permitted assigns.

13. Notices. All notices required or permitted to be given under this Agreement shall be in conformance with Section 11.02 of the Credit Agreement.

14. Counterparts. This Agreement may be executed in any number of counterparts, each of which where so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart.

15

15. Headings. The headings of the sections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement.

16. Governing Law; Submission to Jurisdiction; Venue; WAIVER OF JURY TRIAL. The terms of Sections 11.14 and 11.15 of the Credit Agreement with respect to governing law, submission to jurisdiction, venue and waiver of jury trial are incorporated herein by reference, mutatis mutandis, and the parties hereto agree to such terms.

17. Severability. If any provision of any of the Agreement is determined to be illegal, invalid or unenforceable, such provision shall be fully severable and the remaining provisions shall remain in full force and effect and shall be construed without giving effect to the illegal, invalid or unenforceable provisions.

18. Entirety. This Agreement, the other Loan Documents and the other documents relating to the Secured Obligations represent the entire agreement of the parties hereto and thereto, and supersede all prior agreements and understandings, oral or written, if any, including any commitment letters or correspondence relating to the Loan Documents, any other documents relating to the Secured Obligations, or the transactions contemplated herein and therein.

19. Other Security. To the extent that any of the Secured Obligations are now or hereafter secured by property other than the Collateral (including, without limitation, real property and securities owned by an Obligor), or by a guarantee, endorsement or property of any other Person, then the Administrative Agent shall have the right to proceed against such other property, guarantee or endorsement upon the occurrence of any Event of Default, and the Administrative Agent shall have the right, in its sole discretion, to determine which rights, security, liens, security interests or remedies the Administrative Agent shall at any time pursue, relinquish, subordinate, modify or take with respect thereto, without in any way modifying or affecting any of them or the Secured Obligations or any of the rights of the Administrative Agent or the holders of the Secured Obligations under this Agreement, under any other of the Loan Documents or under any other document relating to the Secured Obligations.

20. Joinder. At any time after the date of this Agreement, one or more additional Persons may become party hereto by executing and delivering to the Administrative Agent a Joinder Agreement. Immediately upon such execution and delivery of such Joinder Agreement (and without any further action), each such additional Person will become a party to this Agreement as an “Obligor” and have all of the rights and obligations of an Obligor hereunder and this Agreement and the schedules hereto shall be deemed amended by such Joinder Agreement.

21. Rights of Required Lenders. All rights of the Administrative Agent hereunder, if not exercised by the Administrative Agent, may be exercised by the Required Lenders.

22. Warning Regarding Insurance.

WARNING

UNLESS THE OBLIGORS PROVIDE THE ADMINISTRATIVE AGENT WITH EVIDENCE OF THE INSURANCE COVERAGE AS REQUIRED BY THE CREDIT AGREEMENT OR THE OTHER LOAN DOCUMENTS, THE ADMINISTRATIVE AGENT MAY PURCHASE INSURANCE AT THE OBLIGORS’ EXPENSE TO PROTECT THE INTERESTS OF THE ADMINISTRATIVE AGENT AND THE HOLDERS OF THE SECURED OBLIGATIONS (“SECURED PARTIES”). THIS INSURANCE MAY, BUT NEED NOT, ALSO PROTECT THE OBLIGORS’ INTERESTS. IF THE COLLATERAL BECOMES DAMAGED, THE

16

COVERAGE THE ADMINISTRATIVE AGENT PURCHASES MAY NOT PAY ANY CLAIM OBLIGORS MAKE OR ANY CLAIM MADE AGAINST ANY OBLIGORS. THE OBLIGORS MAY LATER CANCEL THIS COVERAGE BY PROVIDING EVIDENCE THAT THEY HAVE OBTAINED PROPERTY COVERAGE ELSEWHERE.

THE OBLIGORS ARE RESPONSIBLE FOR THE COST OF ANY INSURANCE PURCHASED BY THE ADMINISTRATIVE AGENT. THE COST OF THIS INSURANCE MAY BE ADDED TO THE OBLIGORS’ CONTRACT OR LOAN BALANCES. IF THE COST IS ADDED TO THEIR CONTRACT OR LOAN BALANCES, THE INTEREST RATE ON THE UNDERLYING CONTRACT OR LOANS WILL APPLY TO THIS ADDED AMOUNT. THE EFFECTIVE DATE OF COVERAGE MAY BE THE DATE THE OBLIGORS’ PRIOR COVERAGE LAPSED OR THE DATE THEY FAILED TO PROVIDE PROOF OF COVERAGE.

THE COVERAGE THE ADMINISTRATIVE AGENT PURCHASES MAY BE CONSIDERABLY MORE EXPENSIVE THAN INSURANCE THE OBLIGORS CAN OBTAIN ON THEIR OWN AND MAY NOT SATISFY ANY NEED FOR PROPERTY DAMAGE COVERAGE OR ANY MANDATORY LIABILITY INSURANCE REQUIREMENTS IMPOSED BY WASHINGTON OR OTHER APPLICABLE LAW.

[remainder of page intentionally left blank]

17

Each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written.

OBLIGORS:	NAUTILUS, INC.,
	By:
	Name:
	Title:

DASHAMERICA, INC.

By:

Name:

Title:

Accepted and agreed to as of the date first above written.

BANK OF AMERICA, N.A., as Administrative Agent

By:

Name:

Title:

18

SCHEDULE 1(b)

PLEDGED EQUITY

OBLIGOR: Nautilus, Inc.
Name of Subsidiary	Number of Shares	Certificate Number	Percentage Ownership
DashAmerica, Inc.	TBD	TBD	100	%
Nautilus Fitness Australia Pty Ltd.	TBD	TBD	65	%
Nautilus (Shanghai) Fitness Co., Ltd.	TBD	TBD	65	%
Nautilus Fitness International Holdings S.A.	TBD	TBD	65	%
Nautilus Fitness Canada, Inc.	TBD	TBD	65	%
DFI Leaseco, LLC	N/A	N/A	100	%
OBLIGOR: DashAmerica, Inc.
Name of Subsidiary	Number of Shares	Certificate Number	Percentage Ownership
Pearl Izumi GmbH	TBD	TBD	65	%
Pearl Izumi Europe BV	TBD	TBD	65	%

19

SCHEDULE 2(c)

COMMERCIAL TORT CLAIMS

None.

20

SCHEDULE 3(g)

INSTRUMENTS, DOCUMENTS, TANGIBLE CHATTEL PAPER

Promissory note made by Champion Nutrition in favor of Nautilus, Inc. in the approximate amount of $2,500,000 due on November 24, 2007

21

IRREVOCABLE STOCK POWER

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers to

the following Equity Interests of                     , a                     corporation:

No. of Shares Certificate No.

and irrevocably appoints                     its agent and attorney-in-fact to transfer all or any part of such Equity Interests and to take all necessary and appropriate action to effect any such transfer. The agent and attorney-in-fact may substitute and appoint one or more persons to act for him. The effectiveness of a transfer pursuant to this stock power shall be subject to any and all transfer restrictions referenced on the face of the certificates evidencing such interest or in the certificate of incorporation or bylaws of the subject corporation, to the extent they may from time to time exist.

By:

Name:

Title:

22

EXHIBIT 4(b)(i)

NOTICE

OF

GRANT OF SECURITY INTEREST

IN

COPYRIGHTS

United States Copyright Office

Ladies and Gentlemen:

Please be advised that pursuant to the Security and Pledge Agreement dated as of                 , 20    (as the same may be amended, modified, extended or restated from time to time, the “Agreement”) by and among the Obligors party thereto (each an “Obligor” and collectively, the “Obligors”) and Bank of America, N.A., as administrative agent (the “Administrative Agent”) for the holders of the Secured Obligations referenced therein, the undersigned Obligor has granted a continuing security interest in and continuing lien upon the copyrights and copyright applications shown below to the Administrative Agent for the ratable benefit of the holders of the Secured Obligations:

COPYRIGHTS

Copyright No. Description of Copyright Date of Copyright

COPYRIGHT APPLICATIONS

Copyright Applications No. Description of Copyright Applied For Date of Copyright Applications

23

The Obligors and the Administrative Agent, on behalf of the holders of the Secured Obligations, hereby acknowledge and agree that the security interest in the foregoing copyrights and copyright applications (i) may only be terminated in accordance with the terms of the Agreement and (ii) is not to be construed as an assignment of any copyright or copyright application.

Very truly yours,

[Obligor]

By:

Name:

Title:

Acknowledged and Accepted:

BANK OF AMERICA, N.A., as Administrative Agent

By:

Name:

Title:

24

EXHIBIT 4(b)(ii)

NOTICE

OF

GRANT OF SECURITY INTEREST

IN

PATENTS

United States Patent and Trademark Office

Ladies and Gentlemen:

Please be advised that pursuant to the Security and Pledge Agreement dated as of                 , 20    (as the same may be amended, modified, extended or restated from time to time, the “Agreement”) by and among the Obligors party thereto (each an “Obligor” and collectively, the “Obligors”) and Bank of America, N.A., as administrative agent (the “Administrative Agent”) for the holders of the Secured Obligations referenced therein, the undersigned Obligor has granted a continuing security interest in and continuing lien upon the patents and patent applications shown below to the Administrative Agent for the ratable benefit of the holders of the Secured Obligations:

PATENTS

Patent No. Description of Patent Item Date of
Patent

PATENT APPLICATIONS

Patent Applications No. Description of Patent
Applied For Date of Patent Applications

25

The Obligors and the Administrative Agent, on behalf of the holders of the Secured Obligations, hereby acknowledge and agree that the security interest in the foregoing patents and patent applications (i) may only be terminated in accordance with the terms of the Agreement and (ii) is not to be construed as an assignment of any patent or patent application.

Very truly yours,

[Obligor]

By:

Name:

Title:

Acknowledged and Accepted:

BANK OF AMERICA, N.A., as Administrative Agent

By:

Name:

Title:

26

EXHIBIT 4(b)(iii)

NOTICE

OF

GRANT OF SECURITY INTEREST

IN

TRADEMARKS

United States Patent and Trademark Office

Ladies and Gentlemen:

Please be advised that pursuant to the Security and Pledge Agreement dated as of                 , 20    (as the same may be amended, modified, extended or restated from time to time, the “Agreement”) by and among the Obligors party thereto (each an “Obligor” and collectively, the “Obligors”) and Bank of America, N.A., as Administrative Agent (the “Administrative Agent”) for the holders of the Secured Obligations referenced therein, the undersigned Obligor has granted a continuing security interest in and continuing lien upon the trademarks and trademark applications shown below to the Administrative Agent for the ratable benefit of the holders of the Secured Obligations:

TRADEMARKS

Trademark No. Description of Trademark Item Date of Trademark

TRADEMARK APPLICATIONS

Trademark Applications No. Description of Trademark Applied For Date of Trademark Applications

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The Obligors and the Administrative Agent, on behalf of the holders of the Secured Obligations, hereby acknowledge and agree that the security interest in the foregoing trademarks and trademark applications (i) may only be terminated in accordance with the terms of the Agreement and (ii) is not to be construed as an assignment of any trademark or trademark application.

Very truly yours,

[Obligor]

By:

Name:

Title:

Acknowledged and Accepted:

BANK OF AMERICA, N.A., as Administrative Agent

By:

Name:

Title:

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EX-10.2

Exhibit 10.2

FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT

THIS FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT dated as of October 12, 2007 (this “Agreement”), is entered into among NAUTILUS, INC. (the “Borrower”), the Guarantors party to the Credit Agreement (as defined below), the Lenders party to the Credit Agreement and BANK OF AMERICA, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement.

RECITALS

A. The Borrower, the Guarantors, the Lenders and the Administrative Agent entered into that certain Credit Agreement, dated as of February 14, 2007 (the “Credit Agreement”).

B. The Borrower has informed the Lenders that it will not be able to comply with Sections 8.11(a) and 8.11(b) of the Credit Agreement with respect to the four fiscal quarter period ended September 30, 2007 (the “Acknowledged Defaults”);

C. The Borrower is requesting that the Lenders (i) waive the Acknowledged Defaults and (ii) modify certain other provisions of the Credit Agreement; and

D. The Lenders have agreed to (i) waive the Acknowledged Defaults and (ii) amend certain terms of the Credit Agreement, in each case, on the terms, and subject to the conditions, set forth below.

E. In consideration of the agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

AGREEMENT

1. Amendments.

(a) Existing Definitions. The following definitions in Section 1.01 of the Credit Agreement is hereby amended to read as follows:

“Applicable Rate” means the following percentages per annum: (a) with respect to Eurodollar Rate Loans and Letter of Credit Fees, 2.00%, (b) with respect to Base Rate Loans (other than Swing Line Loans), 0.50%, (c) with respect to Swing Line Loans, -0.50% and (d) with respect to the commitment fee payable pursuant to Section 2.09(a), 0.425%.

“Loan Documents” means this Agreement, each Note, each Issuer Document, each Joinder Agreement, the Collateral Documents and the Fee Letter.

(b) Pro Forma Basis. The parenthetical “(including for purposes of determining the Applicable Rate)” is hereby deleted from the definition of “Pro Forma Basis” in Section 1.01 of the Credit Agreement.

(c) New Definitions. The following definitions are added to Section 1.01 of the Credit Agreement in the appropriate alphabetical order to read as follows:

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“Collateral” means a collective reference to all real and personal property with respect to which Liens in favor of the Administrative Agent, for the benefit of itself and the Lenders, are purported to be granted pursuant to and in accordance with the terms of the Collateral Documents.

“Collateral Documents” means a collective reference to the Security Agreement, the Mortgages and other security documents as may be executed and delivered by the Loan Parties pursuant to the terms of Section 7.14.

“Debt Issuance” means the issuance by any Loan Party or any Subsidiary of any Indebtedness other than Indebtedness permitted under Section 8.03 (other than Section 8.03(f)).

“Equity Issuance” means any issuance by any Loan Party or any Subsidiary to any Person of its Equity Interests, other than (a) any issuance of its Equity Interests pursuant to the exercise of options or warrants, (b) any issuance of its Equity Interests pursuant to the conversion of any debt securities to equity or the conversion of any class equity securities to any other class of equity securities, (c) any issuance of options or warrants relating to its Equity Interests, and (d) any issuance by the Borrower of its Equity Interests as consideration for a Permitted Acquisition. The term “Equity Issuance” shall not be deemed to include any Disposition.

“Excluded Property” means, with respect to any Loan Party, (a) unless requested by the Administrative Agent or the Required Lenders, any owned real property which is located outside of the United States, (b) unless requested by the Administrative Agent or the Required Lenders, any leasehold interests in real property, (c) unless requested by the Administrative Agent or the Required Lenders, any IP Rights for which a perfected Lien thereon is not effected either by filing of a Uniform Commercial Code financing statement or by appropriate evidence of such Lien being filed in either the United States Copyright Office or the United States Patent and Trademark Office, (d) unless requested by the Administrative Agent or the Required Lenders, any personal property (other than personal property described in clause (c) above) for which the attachment or perfection of a Lien thereon is not governed by the Uniform Commercial Code, (e) the Equity Interests of any direct Foreign Subsidiary of a Loan Party to the extent not required to be pledged to secure the Obligations pursuant to Section 7.14(a) and (f) any property which, subject to the terms of Section 8.09, is subject to a Lien of the type described in Section 8.01(i) pursuant to documents which prohibit such Loan Party from granting any other Liens in such property.

“First Amendment Effective Date” means October 12, 2007.

“Interim Availability Amount” means the lesser of (a) $75,000,000 and (b) the Aggregate Revolving Commitments; provided that if Consolidated EBITDA is at least $32,500,000 for each of the two most recently ended four fiscal quarter periods, then the “Interim Availability Amount” shall mean the Aggregate Revolving Commitments.

“Mortgaged Property” means, with respect to any Loan Party, any owned real property or any leasehold interest in real property that, in either case, is subject to a Mortgage.

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“Mortgages” means the mortgages, deeds of trust, assignments of leases for security or deeds to secure debt that purport to grant to the Administrative Agent a security interest in the fee interests and/or leasehold interests of any Loan Party in any real property.

“Net Cash Proceeds” means the aggregate cash or Cash Equivalents proceeds received by any Loan Party or any Subsidiary in respect of any Disposition, Equity Issuance, Debt Issuance or Involuntary Disposition, net of (a) direct costs incurred in connection therewith (including, without limitation, legal, accounting and investment banking fees, and sales commissions), (b) taxes paid or payable as a result thereof and (c) in the case of any Disposition or any Involuntary Disposition, the amount necessary to retire any Indebtedness secured by a Permitted Lien (ranking senior to any Lien of the Administrative Agent) on the related property; it being understood that “Net Cash Proceeds” shall include, without limitation, any cash or Cash Equivalents received upon the sale or other disposition of any non-cash consideration received by any Loan Party or any Subsidiary in any Disposition, Equity Issuance, Debt Issuance or Involuntary Disposition.

“Security Agreement” means the security and pledge agreement dated as of October 5, 2007 executed in favor of the Administrative Agent by each of the Loan Parties.

(d) Section 1.03. The parenthetical “(including for purposes of determining the Applicable Rate)” is hereby deleted from Section 1.03(c) of the Credit Agreement.

(e) Section 2.01(a). The following sentence is added to the end of Section 2.01(a) of the Credit Agreement:

Notwithstanding anything to the contrary herein, commencing on January 1, 2008 and until such time as the Required Lenders agree otherwise, the Total Revolving Outstandings shall not exceed the Interim Availability Amount.

(f) Section 2.03(a)(i). The following sentence is added to the end of Section 2.03(a)(i) of the Credit Agreement:

Notwithstanding anything to the contrary herein, commencing on January 1, 2008 and until such time as the Required Lenders agree otherwise, the Total Revolving Outstandings shall not exceed the Interim Availability Amount.

(g) Section 2.04(a). The following sentence is added to the end of Section 2.04(a) of the Credit Agreement:

Notwithstanding anything to the contrary herein, commencing on January 1, 2008 and until such time as the Required Lenders agree otherwise, the Total Revolving Outstandings shall not exceed the Interim Availability Amount.

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(h) Section 2.05. (i) Section 2.05(b) of the Credit Agreement is amended and restated in its entirety and (ii) a new Section 2.05(c) is added to the Credit Agreement, each to read as follows:

(b) Mandatory Prepayments of Loans.

(i) Revolving Commitments. If for any reason the Total Revolving Outstandings at any time exceed the Aggregate Revolving Commitments then in effect, the Borrower shall immediately prepay Revolving Loans and/or the Swing Line Loans and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess; provided, however, that the Borrower shall not be required to Cash Collateralize the L/C Obligations pursuant to this Section 2.05(b) unless after the prepayment in full of the Revolving Loans and Swing Line Loans the Total Revolving Outstandings exceed the Aggregate Revolving Commitments then in effect.

(ii) Dispositions and Involuntary Dispositions. The Borrower shall prepay the Loans and/or Cash Collateralize the L/C Obligations as hereafter provided in an aggregate amount equal to 100% of the Net Cash Proceeds of all (A) Dispositions (other than Permitted Transfers) in excess of $1,000,000 in the aggregate after the First Amendment Effective Date and (B) Involuntary Dispositions.

(iii) Debt Issuances. Immediately upon receipt by any Loan Party or any Subsidiary of the Net Cash Proceeds of any Debt Issuance, the Borrower shall prepay the Loans and/or Cash Collateralize the L/C Obligations as hereafter provided in an aggregate amount equal to 100% of such Net Cash Proceeds in excess of $1,000,000 in the aggregate after the First Amendment Effective Date.

(iv) Equity Issuances. Immediately upon the receipt by any Loan Party or any Subsidiary of the Net Cash Proceeds of any Equity Issuance, the Borrower shall prepay the Loans and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to 100% of such Net Cash Proceeds.

(v) Application of Mandatory Prepayments. All amounts required to be paid pursuant to this Section 2.05(b) shall be applied first ratably to the L/C Borrowings and the Swing Line Loans, second, to the outstanding Revolving Loans, and, third, to Cash Collateralize the remaining L/C Obligations. Within the parameters of the applications set forth above, prepayments shall be applied first to Base Rate Loans and then to Eurodollar Rate Loans in direct order of Interest Period maturities. All prepayments under this Section 2.05(b) shall be subject to Section 3.05, but otherwise without premium or penalty, and shall be accompanied by interest on the principal amount prepaid through the date of prepayment.

(c) Interim Availability Amount. Commencing on January 1, 2008 and until such time as the Required Lenders agree otherwise, if for any reason the Total Revolving Outstandings exceed the Interim Availability Amount, the Borrower shall immediately prepay Revolving Loans and/or the Swing Line Loans and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess; provided, however, that the Borrower shall not be required to Cash Collateralize the L/C Obligations pursuant to this Section 2.05(c) unless after the prepayment in full of the Revolving Loans and Swing Line Loans the Total Revolving Outstandings exceed the Interim Availability Amount.

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(i) Section 2.06. Section 2.06 of the Credit Agreement is amended and restated in its entirety to read as follows:

(a) Optional Reductions. The Borrower may, upon notice to the Administrative Agent, terminate the Aggregate Revolving Commitments, or from time to time permanently reduce the Aggregate Revolving Commitments to an amount not less than the Outstanding Amount of Revolving Loans, Swing Line Loans and L/C Obligations; provided that (i) any such notice shall be received by the Administrative Agent not later than 12:00 noon five (5) Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $5,000,000 or any whole multiple of $1,000,000 in excess thereof and (iii) if, after giving effect to any reduction of the Aggregate Revolving Commitments, the Letter of Credit Sublimit or the Swing Line Sublimit exceeds the amount of the Aggregate Revolving Commitments, such sublimit shall be automatically reduced by the amount of such excess. The Administrative Agent will promptly notify the Lenders of any such notice of termination or reduction of the Aggregate Revolving Commitments. Any reduction of the Aggregate Revolving Commitments shall be applied to the Revolving Commitment of each Lender according to its Applicable Percentage. All fees accrued with respect thereto until the effective date of any termination of the Aggregate Revolving Commitments shall be paid on the effective date of such termination.

(b) Mandatory Reductions. Within three Business Days after any Loan Party or Subsidiary receives Net Cash Proceeds, the Aggregate Revolving Commitments shall be permanently reduced in an amount equal to (i) with respect to Sections 2.05(b)(ii), 80%, (ii) with respect to Section 2.05(b)(iii), 100% and (iii) with respect to 2.05(b)(iv), 50%, of the amount of Net Cash Proceeds that is available to be applied to the prepayment of Revolving Loans, Swing Line Loans and L/C Obligations pursuant to Section 2.05(b)(ii), (iii), and (iv), irrespective of the Total Revolving Outstandings at such time.

(j) Section 4.05. The following sentence is added to the end of Section 4.05 of the Credit Agreement:

The Guarantors acknowledge and agree that their obligations hereunder are secured in accordance with the terms of the Collateral Documents and that the Lenders may exercise their remedies thereunder in accordance with the terms thereof.

(k) Section 6.02. Subclause (b)(i) of Section 6.02 of the Credit Agreement is amended by inserting the word “material” immediately prior to the word “Contractual”.

(l) Section 6.03. Section 6.03 of the Credit Agreement is amended and restated in its entirety to read all follows:

No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, any Loan Party of this Agreement or any other Loan Document other than (i) those that have already been obtained and are in full force and effect and (ii) filings to perfect the Liens created by the Collateral Documents.

(m) Section 6.13. Section 6.13 of the Credit Agreement is amended by deleting “(i)” from such Section.

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(n) Section 6.17. Section 6.17 of the Credit Agreement is amended and restated in its entirety to read all follows:

Except for the effect of matters disclosed in Schedule 6.06 (none of which could reasonably be expected to have a Material Adverse Effect), the Borrower and its Subsidiaries own, or possess the legal right to use, all of the trademarks, service marks, trade names, copyrights, patents, patent rights, franchises, licenses and other intellectual property rights (collectively, “IP Rights”) that are reasonably necessary for the operation of their respective businesses. Set forth on Schedule 6.17 is a list of all IP Rights registered or pending registration with the United States Copyright Office or the United States Patent and Trademark Office and owned by each Loan Party as of the date of delivery of such Schedule to the Administrative Agent. Except for such claims and infringements that could not reasonably be expected to have a Material Adverse Effect: (a) no claim has been asserted and is pending by any Person challenging or questioning the use of any IP Rights or the validity or effectiveness of any IP Rights, nor does any Loan Party know of any such claim, and (b) to the knowledge of the Responsible Officers of the Loan Parties, the use of any IP Rights by the Borrower or any Subsidiary or the granting of a right or a license in respect of any IP Rights from the Borrower or any Subsidiary does not infringe on the rights of any Person. As of the date of delivery of such Schedule to the Administrative Agent, none of the IP Rights owned by any of the Loan Parties is subject to any licensing agreement or similar arrangement except as set forth on Schedule 6.17. The parties hereto acknowledge that Schedule 6.17 as delivered on the First Amendment Effective Date is in draft form and that the Loan Parties shall deliver a final Schedule 6.17 to the Administrative Agent on or before November 10, 2007 (such final Schedule shall replace and supersede such prior draft).

(o) Section 6.19. Section 6.19 of the Credit Agreement is amended and restated in its entirety to read as follows:

6.19 Business Locations; Taxpayer Identification Number.

Set forth on Schedule 6.19(a) is a list of all real property located in the United States that is owned or leased by the Loan Parties as of the First Amendment Effective Date. Set forth on Schedule 6.19(b) is the chief executive office, U.S. tax payer identification number, organizational identification number and exact legal name and state of organization of each Loan Party as of the First Amendment Effective Date. Except as set forth on Schedule 6.19(c), no Loan Party has during the five years preceding the First Amendment Effective Date (i) changed its legal name, (ii) changed its state of formation, or (iii) been party to a merger, consolidation or other change in structure.

(p) Section 7.02(d). Section 7.02(d) of the Credit Agreement is amended and restated in its entirety to read all follows:

(d) concurrently with the delivery of the financial statements referred to in Sections 7.01(a) and (b), a report signed by a Responsible Officer of the Borrower that supplements Schedules 6.13, 6.17 and 6.19(a), 6.19(b) and 6.19(c), such that, as supplemented, such Schedules would be to be accurate and complete as of such date;

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(q) Section 7.07. Section 7.07 of the Credit Agreement is amended and restated in its entirety to read as follows:

(a) Maintain in full force and effect insurance (including worker’s compensation insurance, liability insurance, casualty insurance and business interruption insurance) with financially sound and reputable insurance companies not Affiliates of the Borrower, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Borrower or the applicable Subsidiary operates.

(b) On or before the date that is thirty days after the First Amendment Effective Date and at all times thereafter, cause the Administrative Agent to be named as loss payee or mortgagee, as its interest may appear, and/or additional insured with respect to any such insurance providing liability coverage (except workers’ compensation insurance) or coverage in respect of any Collateral, and cause each provider of any such insurance to agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Administrative Agent, that it will give the Administrative Agent thirty (30) days prior written notice before any such policy or policies shall be changed in a manner affecting the endorsements in favor of the Administrative Agent or canceled.

(r) Section 7.10. Section 7.10 of the Credit Agreement is amended and restated in its entirety to read as follows:

(a) Permit representatives and independent contractors of the Administrative Agent and each Lender to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at the expense of the Borrower and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Borrower; provided, however, that when an Event of Default exists the Administrative Agent or any Lender (or any of their respective representatives or independent contractors) may do any of the foregoing at the expense of the Borrower at any time during normal business hours and without advance notice.

(b) If requested by the Administrative Agent in its sole discretion, permit the Administrative Agent, and its representatives, upon reasonable advance notice to the Borrower, to conduct an annual audit of the Collateral at the expense of the Borrower.

(c) If requested by the Administrative Agent in its sole discretion, promptly deliver to the Administrative Agent (a) asset appraisal reports with respect to all of the real and personal property owned by the Borrower and its Subsidiaries (limited to one per year so long as no Event of Default exists), and (b) a written audit of the accounts receivable, inventory, payables, controls and systems of the Borrower and its Subsidiaries (limited to one per year so long as no Event of Default exists).

(d) Upon the reasonable written request of the Administrative Agent following the occurrence of any event or the discovery of any condition which the Administrative Agent or the Required Lenders reasonably believe has caused (or could be reasonably expected to cause) the representations and warranties set forth in Section 6.09 to be untrue in any material respect, furnish or cause to be furnished to the Administrative Agent, at the Loan Parties’ expense, a report of an environmental assessment of reasonable scope, form and depth, (including, where appropriate, invasive soil or groundwater sampling) by a consultant reasonably acceptable to the Administrative Agent as to the nature and extent of

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the presence of any Hazardous Materials on any real properties and as to the compliance by the Borrower or any of its Subsidiaries with Environmental Laws at such real properties. If the Loan Parties fail to deliver such an environmental report within seventy-five (75) days after receipt of such written request then the Administrative Agent may arrange for the same, and the Loan Parties hereby grant to the Administrative Agent and its representatives access to the real properties to reasonably undertake such an assessment (including, where appropriate, invasive soil or groundwater sampling). The reasonable cost of any assessment arranged for by the Administrative Agent pursuant to this provision will be payable by the Loan Parties on demand and added to the obligations secured by the Collateral Documents.

(s) Section 7.14. A new Section 7.14 is added to the Credit Agreement to read as follows:

7.14 Pledged Assets.

On or before the date that is thirty days after the First Amendment Effective Date and at all times thereafter:

(a) Equity Interests. Cause (a) 100% of the issued and outstanding Equity Interests of each Domestic Subsidiary and (b) 65% (or such greater percentage that, due to a change in an applicable Law after the date hereof, (1) could not reasonably be expected to cause the undistributed earnings of such Foreign Subsidiary as determined for United States federal income tax purposes to be treated as a deemed dividend to such Foreign Subsidiary’s United States parent and (2) could not reasonably be expected to cause any material adverse tax consequences) of the issued and outstanding Equity Interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and 100% of the issued and outstanding Equity Interests not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) in each Foreign Subsidiary directly owned by any Loan Party to be subject at all times to a first priority, perfected Lien in favor of the Administrative Agent pursuant to the terms and conditions of the Collateral Documents, together with such other documents as may be reasonably requested by the Administrative Agent.

(b) Other Property. (i) Except for Excluded Property, cause (A) all owned real property, (B) to the extent available using commercially reasonable efforts, all leasehold interests in real property and (C) all personal property of each Loan Party to be subject at all times to first priority, perfected Liens in favor of the Administrative Agent to secure the Obligations as required from time to time pursuant to the terms and conditions of the Collateral Documents, subject in any case to Permitted Liens and (ii) deliver such other documentation as the Administrative Agent may reasonably request in connection with the foregoing, including, without limitation, appropriate UCC-1 financing statements, intellectual property notices, mortgages, real estate title insurance policies, flood hazard certifications, surveys, environmental reports, zoning letters, landlord’s waivers, certified resolutions and other organizational and authorizing documents of such Person, favorable opinions of counsel to such Person, all in form, content and scope reasonably satisfactory to the Administrative Agent.

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(t) Section 8.03. Section 8.03(e) of the Credit Agreement is amended and restated in its entirety to read as follows:

(e) purchase money Indebtedness (including obligations in respect of Capital Leases or Synthetic Leases) hereafter incurred by the Borrower or any of its Subsidiaries to (i) finance the purchase of real property, and renewals, refinancings and extensions thereof (so long as the principal amount is not increased), and (ii) finance the purchase of fixed personal property assets and renewals, refinancings and extensions thereof (so long as the principal amount is not increased), provided that (A) in the case of both subclauses (i) and (ii), no such Indebtedness when incurred shall exceed the purchase price of the asset(s) financed and (B) in the case of subclause (ii), the total of all such Indebtedness incurred for all such Persons taken together shall not exceed an aggregate principal amount of $10,000,000 at any one time outstanding;

(u) Section 8.06. Section 8.06 of the Credit Agreement is amended and restated in its entirety to read as follows:

Declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except that:

(a) each Subsidiary may make Restricted Payments to any Loan Party and any other Person that owns an Equity Interest in such Subsidiary, ratably according to their respective holdings of the type of Equity Interest in respect of which such Restricted Payment is being made; and

(b) the Borrower and each Subsidiary may declare and make dividend payments or other distributions payable solely in common Equity Interests of such Person.

(c) Section 10.03. The last paragraph of Section 10.03 of the Credit Agreement is amended and restated in its entirety to read as follows:

The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document, or the creation, perfection or priority of any Lien purported to be created by the Collateral Documents, (v) the value or the sufficiency of any Collateral, or (vi) the satisfaction of any condition set forth in Article V or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

(d) Section 10.10. Section 10.10 of the Credit Agreement is amended and restated in its entirety to read as follows:

10.10 Collateral and Guaranty Matters.

The Lenders and the L/C Issuer irrevocably authorize the Administrative Agent, at its option and in its discretion,

(a) to release any Lien on any property granted to or held by the Administrative Agent under any Loan Document (i) upon termination of the Aggregate Revolving Commitments and payment in full of all Obligations (other

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than contingent indemnification obligations) and the expiration or termination of all Letters of Credit, (ii) that is transferred or to be transferred as part of or in connection with any Disposition permitted hereunder or under any other Loan Document or any Involuntary Disposition, or (iii) as approved in accordance with Section 11.01;

(b) to subordinate any Lien on any property granted to or held by the Administrative Agent under any Loan Document to the holder of any Lien on such property that is permitted by Section 8.01(i); and

(c) to release any Guarantor from its obligations under the Guaranty if such Person ceases to be a Subsidiary as a result of a transaction permitted hereunder.

Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent’s authority to release or subordinate its interest in particular types or items of property, or to release any Guarantor from its obligations under the Guaranty, pursuant to this Section 10.10.

(e) Section 11.01. (i) the word “and” is moved from the end of Section 11.01(c) to the end of Section 11.01(d) and (ii) a new Section 11.01(e) is added to the Credit Agreement to read as follows:

(e) no amendment, waiver or consent shall release all or substantially all of the Collateral unless signed by each Lender whose Obligations are secured by such Collateral;

(f) Schedules. (i) Schedule 6.17 is added to the Credit Agreement and (ii) Schedule 6.19 is replaced with Schedules 6.19(a), 6.19(b) and 6.19(c), each to read as attached hereto; provided that parties hereto acknowledge that Schedule 6.17 as delivered on the First Amendment Effective Date is in draft form and that the Loan Parties shall deliver a final Schedule 6.17 to the Administrative Agent on or before November 10, 2007 (such final Schedule shall replace and supersede such prior draft).

(g) Exhibits. Exhibit 7.12 is amended and restated in its entirety to read as attached hereto.

2. Waiver. The Lenders hereby waive the Acknowledged Defaults. This waiver is a one-time waiver and shall not be construed to be a waiver of any other Default that may exist.

3. Effectiveness; Conditions Precedent. This Agreement shall be effective as of the date hereof when all of the conditions set forth in this Section 3 shall have been satisfied in form and substance satisfactory to the Administrative Agent.

(a) Execution and Delivery of this Agreement. The Administrative Agent shall have received copies of this Agreement duly executed by a Responsible Officer of the signing Loan Party, the Required Lenders and the Administrative Agent.

(b) Execution and Delivery of the Security Agreement. The Administrative Agent shall have received an executed copy of the Security Agreement, together with appropriate UCC-1 financing statements naming the Loan Parties as debtors and the Administrative Agent as the secured party.

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(c) Resolutions. The Administrative Agent shall have received copies of certified resolutions for each Loan Party approving this Agreement and the granting of a security interests to the Administrative Agent to secure the Obligations.

(d) Opinions of Counsel. The Administrative Agent shall have received a favorable opinion of Garvey Schubert Barer, addressed to the Administrative Agent and the Lenders, in form and substance satisfactory to the Administrative Agent.

(e) Amendment Fee. The Administrative Agent shall have received (i) for the account of each Lender executing this Agreement by 12:00 Noon, October 11, a fee of 0.10% of such Lender’s Commitment and (ii) for the account of each Lender executing this Agreement after 12:00 Noon, October 11 but prior to 12:00 Noon, October 17, a fee of 0.05% of such Lender’s Commitment.

(f) Fees and Expenses. The Borrower shall have paid all fees and expenses owed by the Borrower to the Administrative Agent and the Arranger.

4. Ratification of Credit Agreement. The Loan Parties acknowledge and consent to the terms set forth herein and agree that this Agreement does not impair, reduce or limit any of their obligations under the Loan Documents.

5. Authority/Enforceability. Each of the Loan Parties represents and warrants as follows:

(a) It has taken all necessary action to authorize the execution, delivery and performance of this Agreement.

(b) This Agreement has been duly executed and delivered by such Person and constitutes such Person’s legal, valid and binding obligations, enforceable in accordance with its terms.

(c) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Person of this Agreement.

(d) The execution and delivery of this Agreement does not (i) violate, contravene or conflict with any provision of its, or its Subsidiaries’ Organization Documents or (ii) materially violate, contravene or conflict with any Laws applicable to it or any of its Subsidiaries.

6. Representations and Warranties of the Loan Parties. The Loan Parties represent and warrant to the Lenders that after giving effect to this Agreement (a) the representations and warranties of the Loan Parties set forth in Article VI of the Credit Agreement are true and correct in all material respects as of the date hereof, and (b) no event has occurred and is continuing which constitutes a Default.

7. Release. In consideration of the Lenders entering into this Agreement, the Loan Parties hereby release the Administrative Agent, the Lenders, the L/C Issuer and the Administrative Agent’s and the Lenders’ respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises from any action or failure to act solely in connection with the Loan Documents on or prior to the date hereof.

11

8. Counterparts/Telecopy. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of executed counterparts of this Agreement by telecopy or pdf shall be effective as an original.

9. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

10. Reference to and Effect on Credit Agreement. Except as specifically modified herein, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are each hereby ratified and confirmed. The execution, delivery and effectiveness of this Agreement shall not operate as a waiver of any right, power or remedy of the Lenders or the Administrative Agent under the Credit Agreement or any of the other Loan Documents, or constitute a waiver or cones of any provision of the Credit Agreement or any of the other Loan Documents, except as expressly set forth herein. This Agreement shall be considered a Loan Document from and after the date hereof.

11. Estoppel, Acknowledgement and Reaffirmation. The obligations of the Loan Parties under the Loan Documents constitute valid and subsisting obligations of such Persons that are not subject to any credits, offsets, defenses, claims, counterclaims or adjustments of any kind. Each Loan Party hereby acknowledges its respective obligations under the Loan Documents as amended hereby and reaffirms that each of the liens and security interests created and granted in or pursuant to the Loan Documents are valid and subsisting and that this Agreement shall in no manner impair or otherwise adversely affect such liens and security interests.

[remainder of page intentionally left blank]

12

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.

BORROWER:	NAUTILUS, INC.,
	a Washington corporation
	By:
	Name:
	Title:
GUARANTORS:	DASHAMERICA, INC.
	a Colorado corporation
	By:
	Name:
	Title:

13

ADMINISTRATIVE
AGENT:	BANK OF AMERICA, N.A.,
	By:
	Name:
	Title:

14

LENDERS:	BANK OF AMERICA, N.A.,
	By:
	Name:
	Title:
	U.S. BANK NATIONAL ASSOCIATION,
	By:
	Name:
	Title:
	KEYBANK NATIONAL ASSOCIATION,
	By:
	Name:
	Title:
	UNION BANK OF CALIFORNIA, N.A.,
	By:
	Name:
	Title:
	WELLS FARGO HSBC TRADE BANK,
	By:
	Name:
	Title:

15

Exhibit 7.12

FORM OF JOINDER AGREEMENT

THIS JOINDER AGREEMENT (the “Agreement”), dated as of                     , 20    , is by and between                     , a                     (the “Subsidiary”), and BANK OF AMERICA, N.A., in its capacity as Administrative Agent under that certain Credit Agreement (as it may be amended, modified, restated or supplemented from time to time, the “Credit Agreement”), dated as of February 14, 2007, by and among NAUTILUS, INC., a Washington corporation (the “Borrower”), the Guarantors, the Lenders and Bank of America, N.A., as Administrative Agent. All of the defined terms in the Credit Agreement are incorporated herein by reference.

The Loan Parties are required by Section 7.12 of the Credit Agreement to cause the Subsidiary to become a “Guarantor”.

Accordingly, the Subsidiary hereby agrees as follows with the Agent, for the benefit of the Lenders:

1. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Credit Agreement and a “Guarantor” for all purposes of the Credit Agreement, and shall have all of the obligations of a Guarantor thereunder as if it had executed the Credit Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Guarantors contained in the Credit Agreement. Without limiting the generality of the foregoing terms of this paragraph 1, the Subsidiary hereby jointly and severally together with the other Guarantors, guarantees to each Lender and the Administrative Agent, as provided in Article IV of the Credit Agreement, the prompt payment and performance of the Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) strictly in accordance with the terms thereof.

2. The Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, the Subsidiary will be deemed to be a party to the Security Agreement, and shall have all the obligations of an “Obligor” (as such term is defined in the Security Agreement) thereunder as if it had executed the Security Agreement. The Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Security Agreement. Without limiting generality of the foregoing terms of this paragraph 2, the Subsidiary hereby grants to the Administrative Agent, for the benefit of the Lenders, a continuing security interest in, and a right of set off against any and all right, title and interest of the Subsidiary in and to the Collateral (as such term is defined in Section 2 of the Security Agreement) of the Subsidiary. The Subsidiary hereby represents and warrants to the Administrative Agent that:

(i) Attached hereto as Schedule 1 are revised Schedules 6.13, 6.17, 6.19(a) and 6.19(b) to the Credit Agreement.

(ii) Except as set forth on Schedule 2, the Subsidiary has not during the past five years (a) changed its legal name, (b) changed its state of formation, or (c) been party to a merger, consolidation or other change in structure.

3. The address of the Subsidiary for purposes of all notices and other communications is the same as the Borrower and Guarantors as set forth on Schedule 11.02 of the Credit Agreement.

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4. The Subsidiary hereby waives acceptance by the Administrative Agent and the Lenders of the guaranty by the Subsidiary under Article IV of the Credit Agreement upon the execution of this Agreement by the Subsidiary.

5. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract.

6. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, the Subsidiary has caused this Joinder Agreement to be duly executed by its authorized officers, and the Administrative Agent, for the benefit of the Lenders, has caused the same to be accepted by its authorized officer, as of the day and year first above written.

[SUBSIDIARY],

a                     corporation

By:

Name:

Title:

Acknowledged and accepted:

BANK OF AMERICA, N.A.,

as Administrative Agent

By:

Name:

Title:

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EX-10.3

Exhibit 10.3

Execution Original

ASSET PURCHASE AGREEMENT

BY AND AMONG

NAUTILUS, INC.

AND

LAND AMERICA HEALTH & FITNESS CO., LTD.

MICHAEL C. BRUNO

YANG LIN QING

Dated as of October 17, 2007

TABLE OF CONTENTS

	Page
GENERAL PROVISIONS	1
PURCHASE AND SALE OF BUSINESS AND ASSETS	5
REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS	8
REPRESENTATIONS AND WARRANTIES OF NAUTILUS	17
ACTION PRIOR TO THE CLOSING DATE	18
CONDITIONS PRECEDENT TO OBLIGATIONS OF NAUTILUS	20
SELLER AND THE SHAREHOLDERS	23
INDEMNIFICATION	23
STAFF AND EMPLOYEE MATTERS	24
SUBSEQUENT TO THE CLOSING DATE	24
TERMINATION	26
OTHER PROVISIONS	27

LIST OF SCHEDULES

Assigned Contracts	Schedule 2.1.5
Land Use Rights	Schedule 3.5.1
Buildings	Schedule 3.5.2
Leased Premises	Schedule 3.5.3
Tangible Property Owned	Schedule 3.5.4
Tangible Property Leased	Schedule 3.5.5
Inventory Locations	Schedule 3.5.6
Intellectual Property	Schedule 3.5.7
Contracts	Schedule 3.5.8
Additional Required Assets	Schedule 3.6
Tangible Personal Property	Schedule 3.7
Compliance with Law	Schedule 3.8
Litigation	Schedule 3.9
Brokers’ or Finders’ Fees	Schedule 3.10
Subsidiaries and Branches	Schedule 3.11
Financial Statements	Schedule 3.12
Liabilities	Schedule 3.13
Taxes	Schedule 3.14
Material Changes	Schedule 3.15
Insurance	Schedule 3.16
Suppliers	Schedule 3.17
Environmental Matters	Schedule 3.18
Employees	Schedule 3.19
Labor Contracts	Schedule 3.20.1
Employee Plans	Schedule 3.20.2
Compliance with the Foreign Corrupt Practices Act and Export Control and Anti-Boycott Laws	Schedule 3.21
Sales to Affiliates	Schedule 3.22
Services from Affiliates	Schedule 3.23

-i-

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (hereinafter, “Agreement”), dated as of October 17, 2007, is entered into by and among the following parties (each a “Party” and collectively, the “Parties”):

1. NAUTILUS, INC., a Washington corporation (“Nautilus”);

2. LAND AMERICA HEALTH & FITNESS CO., LTD., a wholly foreign-owned limited liability company duly organized and existing under the laws of the PRC (“Seller”);

3. MICHAEL C. BRUNO (“Bruno” or a “Shareholder”), who together with his spouse, Yang Lin Qing, are the indirect sole shareholders of Seller; and

4. YANG LIN QING (“Yang” or a “Shareholder”), who together with her spouse, Michael C. Bruno, are the indirect sole shareholders of Seller.

PRELIMINARY STATEMENTS

1. Seller is engaged in the manufacture of certain of Nautilus’s proprietary line of health and fitness equipment and other fitness equipment (the “Business”).

2. Nautilus and Seller have entered into a Purchase Option Agreement, dated effective January 29, 2007 (the “Option Agreement”), pursuant to which Nautilus was granted an option to purchase substantially all of the assets related to the Business. Nautilus has previously given notice of exercise of this option.

3. Certain of the assets used in the Business and owned by Seller were previously owned and operated by World Gear Sports Goods Co., Ltd. (“World Gear”).

4. Upon the terms and subject to the conditions of this Agreement, Seller is willing to sell substantially all of the moveable assets of the Business to a wholly-owned direct or indirect subsidiary of Nautilus to be formed in Xiamen, Fujian, PRC (“Buyer”), and Nautilus is willing to cause Buyer to purchase such assets from Seller.

5. Together with this Agreement, the Parties are entering into certain additional agreements as referenced herein.

NOW, THEREFORE, the Parties hereby agree as follows:

CHAPTER 1

GENERAL PROVISIONS

Article 1.1 Definitions.

The following terms as used in this Agreement shall have the meanings set forth below:

“Affiliate” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such Person. The term “control” (including the terms “controlled by” or “under the common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of an equity interest or by contract or otherwise.

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“Audited Closing Financial Statements” has the meaning given such term in Article 2.4.

“Agreement” means this Asset Purchase Agreement and the Schedules hereto.

“Appraiser” has the meaning given in Article 5.2.

“Assets” has the meaning given such term in Article 2.1.

“2006 Balance Sheet” has the meaning given such term in Article 3.12.

“Books and Records” shall mean all books, ledgers, files, reports, plans and operating records of, or maintained by, the Business, in both physical and electronic form, as the case may be.

“Bruno Consulting Agreement” has the meaning given such term in Section 6.16.

“Business” has the meaning given such term in the Preliminary Statements hereof.

“Business Day” means any day when banks are open for business in Xiamen, Fujian Province, PRC.

“Buyer” has the meaning given such term in the Preliminary Statements hereof.

“Closing” and “Closing Date” have the meanings given such terms in Article 2.5.

“Computer Software” means all computer applications software, owned or licensed, whether for general business usage (e.g., accounting, word processing, graphics, spreadsheet analysis, etc.) or specific, unique-to-the-business usage (e.g., order processing, manufacturing, process control, design, shipping, etc.) and all computer operating, security or programming software, owned or licensed.

“Employee Plans” shall mean all welfare and benefit plans maintained by Seller for the benefit of the staff and workers of Seller, including, without limitation, all bonus, retirement, pension, health and medical, life insurance, disability and accident insurance, vacation and/or annual leave, sick-leave and housing plans.

“Escrow and Indemnification Agreement” has the meaning given such term in the Article 8.1.

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“Excluded Assets” shall mean all assets of Seller not used in or relating to the Business, the Real Property, Inventory other than work in progress inventory as described in Section 2.1.8, and all cash and accounts receivable relating to the Business.

“Facilities” means the Real Property and any leasehold interests in land or buildings currently owned or operated by Seller and any machinery or other equipment used or operated by Seller at the respective locations of the land and buildings specified in Articles 3.5.1, 3.5.2 and 3.5.3.

“Government Authority” shall mean the government of the PRC, any subdivision thereof and any provincial or local government authority having jurisdiction over Seller, the Business or any Assets.

“Improvements” means all buildings, structures, fixtures, and other infrastructure located on the Land.

“Intellectual Property” shall mean trademarks, service marks, brand names, certification marks, trade dress, trade names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not in any jurisdiction; patents, applications for patents (including, without limitation, divisions, continuations, continuations in-part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; non-public information, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any Person; writings and other works, whether copyrightable or not in any jurisdiction; registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; Computer Software (including, but not limited to, data, source codes, object codes, specifications and related documentation), any similar intellectual property or proprietary rights; and any claims arising out of or related to any infringement or misappropriation of any of the foregoing.

“Interim Balance Sheets” has the meaning given such term in Article 3.12.

“Inventory” means all inventories of Seller relating to the Business, wherever located, including all finished goods, work in process, raw materials, spare parts and all other materials and supplies to be used or consumed by Seller in the production of finished goods of the Business.

“Land” means the land described in Article 3.5.1.

“Lease Agreement” has the meaning given such term in Article 2.8.

“Lien” shall mean any mortgage, lien, pledge, security interest or other type of charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor, any easement, right of way or other encumbrance on title to real property, options or any other restrictions or third party rights.

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“M&A Regulations” has the meaning given such term in Article 5.1.

“Option Agreement” has the meaning given such term in the Preliminary Statements hereof.

“Party” shall mean each of Nautilus, Seller, Bruno and Yang, who are sometimes collectively referred to as the “Parties”.

“Person” shall mean an individual, partnership, corporation, joint stock company, limited liability company, state-owned enterprise, joint venture or other entity, or a government or any political subdivision or agency thereof.

“Post-Closing Audit Agreement” has the meaning given such term in Article 2.4.

“PRC” or “China” shall mean the People’s Republic of China.

“Purchase Price” has the meaning given such term in Article 2.3.

“Real Property” means the Land and Improvements.

“RMB,” “Renminbi” or “¥”shall mean the currency of the PRC.

“Seller” has the meaning given such term in the Preliminary Statements hereof.

“Seller’s Non-Competition Agreement” shall mean the Non-Competition, Non-Disclosure and Non-Solicitation Agreement, between Seller and Nautilus in the form agreed to by the Parties.

“Shareholder” shall mean each of Bruno and Yang, who are sometimes collectively referred to as the “Shareholders”

“Shareholders’ Non-Competition Agreement” shall mean the Non-Competition, Non-Disclosure and Non-Solicitation Agreement, among the Shareholders and Nautilus, in the form agreed to by the Parties.

“Taxes” shall mean all tax and stamp duties charges, tariffs or other assessments charged by any Government Authority (including, without limitation, business, income, capital gain, value added, use, transfer, sales, deed and excise or custom tax, and stamp duties and however termed).

“Tangible Personal Property” all machinery, equipment, tools, dyes, molds, furniture, fixtures, office equipment, computer hardware, supplies, materials, vehicles and other items of tangible personal property (other than Inventory) of every kind owned or leased by Seller (wherever located and whether or not carried on Seller’s books), together with any express or implied warranty by the manufacturers or sellers or lessors of any item or component part thereof and all maintenance records and other documents relating thereto.

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“Transaction Documents” mean each of this Agreement, Seller’s Non-Competition Agreement, the Shareholders’ Non-Competition Agreement, the Escrow and Indemnification Agreement, the Bruno Consulting Agreement, the Post-Closing Audit Agreement, the Lease Agreement, and each of the documents to be delivered by Seller pursuant to Section 2.6 below.

“U.S. Dollars,” “US$” or “$” shall mean the currency of the United States of America.

“U.S. GAAP” shall mean United States generally accepted accounting principles.

Article 1.2 Construction of Certain Terms and Phrases. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement; and (iv) the terms “Article” or “Clause” refer to the specified Article or Clause of this Agreement. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified.

Article 1.3. Exchange Rate. In determining the U.S. Dollar equivalent of an amount in RMB or vice versa, the exchange rate used shall be the average of the buy and sell exchange rates (or mid-rate) announced by the People’s Bank of China for U.S. Dollars and RMB for the date on or as of which the determination is made.

CHAPTER 2

PURCHASE AND SALE OF BUSINESS AND ASSETS

Article 2.1 Purchase and Sale of the Business and Assets. Subject to the terms and conditions of this Agreement, at the Closing, Seller shall sell and transfer to Buyer, and Nautilus shall cause Buyer to purchase from Seller, all of Seller’s interest in the following assets (the “Assets”), free and clear of all Liens:

2.1.1  Machinery and Equipment Owned by Seller. Good and marketable title to all the Tangible Personal Property used in or related to the Business owned by Seller, including those listed in Schedule 3.5.4.

2.1.2  Machinery and Equipment Leased by Seller. All leasehold interests in all the Tangible Personal Property used in or related to the Business leased by Seller from a third party, including those listed in Schedule 3.5.5.

2.1.3  Leasehold Interests. Seller’s leasehold interests in the premises and leases listed in Schedule 3.5.3, including, without limitation, any prepaid rent, security deposits and options to renew or purchase thereunder and subject only to the respective limitations and obligations of the leases, agreements, charges and instruments listed in Schedule 3.5.3.

2.1.4  Intellectual Property. All interests of Seller in the Intellectual Property used in or related to the Business, including, without limitation that listed in Schedule 3.5.7.

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2.1.5  Contracts Related to the Business. All rights and interests of Seller in and to the agreements or contracts used in or related to the Business that are listed in Schedule 2.1.5.

2.1.6  Warranties or Guarantees. All rights of Seller under or pursuant to all warranties, representations and guarantees made by third parties relating to items included in the Assets, including, without limitation, warranties or guarantees given by manufacturers and/or vendors in respect of the Assets.

2.1.7  Pre-Paid Expenses. All rights and interests of Seller in and to all pre-paid expenses made to any supplier of goods, utilities or services in respect of the Business.

2.1.8  Inventory. That portion of Seller’s Inventory designated as work-in-progress in Seller’s accounting records as of the Closing Date.

Buyer shall not purchase any Excluded Assets and Excluded Assets shall remain the property of Seller after the Closing.

Article 2.2 No Assumption of Liabilities by Buyer. Neither Nautilus nor Buyer will assume, discharge or perform any liabilities or obligations of Seller or the Shareholders incurred or arising prior to or after the Closing, including, without limitation, those liabilities listed below, all of which liabilities will remain with Seller or the Shareholders and which Seller and the Shareholders hereby agree to retain and discharge or perform:

2.2.1  subject to Article 12.3, liabilities for all Taxes;

2.2.2   any environmental, health or public safety claims, liabilities or remedial expenses;

2.2.3  liabilities or obligations with respect to wages, severance or termination, employee welfare benefits and pensions, workers compensation and health care claims or other benefits or funds payable to employees or former employees of the respective Seller;

2.2.4   liabilities for money borrowed and accounts payable;

2.2.5  liabilities arising from any product warranties; and

2.2.6  liabilities or obligations to any supplier of goods, services or utilities or to any customer and;

2.2.7   any other liabilities or obligations to any third party, including, without limitation, liabilities to any Government Authority.

Article 2.3 Purchase Price. The purchase price (the “Purchase Price”) for the Assets shall be US$8,500,000 (EIGHT MILLION FIVE HUNDRED THOUSAND U.S. DOLLARS) and shall be paid by wire transfer of US$8,500,000 to Seller in accordance with Article 2.7.1.

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Article 2.4 Closing Audit; Inventory Purchase.

(a) Within sixty (60) calendar days after the Closing Date, Deloitte Touche Tomatsu, or other independent auditors approved by Buyer, will perform an independent audit of Seller’s balance sheet of the Business, as at the Closing Date, and Seller’s statement of income of the Business for the period beginning January 1, 2007 and ending on the Closing Date (the “Audited Closing Financial Statements”). The audit shall be completed in accordance with the Post-Closing Audit Agreement in the form agreed to by the parties (the “Post-Closing Audit Agreement”), and after Closing Nautilus shall cause Buyer to purchase Seller’s remaining Inventory in accordance with the Post-Closing Audit Agreement. Seller agrees to exercise its best efforts to complete such balance sheet and statement of income within twenty (20) days following the Closing Date and to fully cooperate with the independent auditors in connection with completion of such independent audit.

Article 2.5 Closing. The closing of the transactions contemplated hereby (the “Closing”) shall take place at the offices of Seller in Xiamen, Fujian, PRC on January 1, 2008, 10:00 a.m. Beijing time, or at such other date and place as the Parties may agree in writing (the “Closing Date”).

Article 2.6 Deliveries by Seller. At the Closing, Seller shall deliver to Buyer the following:

2.6.1 Duly executed bills of sale or other instruments of transfer, in form and substance reasonably acceptable to Nautilus, transferring ownership to Buyer of all tangible property listed in Schedule 3.5.4;

2.6.2 Duly executed assignments or, where necessary, subleases, in form and substance reasonably acceptable to Nautilus, assigning or subleasing to Buyer all leasehold interests, if any, in the tangible property listed in Schedule 3.5.5;

2.6.3 Duly executed assignments or other instruments of transfer, in form and substance reasonably acceptable to Nautilus, assigning and transferring to Buyer all of Seller’s interest in all Intellectual Property used in and related to the Business, including that listed in Schedule 3.5.7, including, without limitation, an assignment of Seller’s trade name and trademarks relating to the Business;

2.6.4 Duly executed assignments transferring to Buyer all of Seller’s rights and obligations under all contracts, licenses and similar instruments used in and relating to the Business to which Seller is a party, in form and substance reasonably acceptable to Nautilus, together with the written consent, if required, of the other party to such contracts, licenses and similar instruments; and

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2.6.5 The certificates and other documents to be delivered pursuant to Chapter 6 hereof.

2.6.6 Duly executed VAT invoices for the work in progress Inventory as described in Section 2.1.8.

Article 2.7 Deliveries by Buyer. At the Closing, Buyer shall deliver to Seller the following:

2.7.1 The Purchase Price to Seller, by wire transfer of US$8,500,000 to an account designated by Seller in writing not less than three Business Days prior to the Closing Date; provided, that Buyer may complete such wire transfer within three Business Days following the Closing Date; and

2.7.2 The certificates and other documents to be delivered pursuant to Chapter 7 hereof.

Article 2.8 Lease Agreement. At the Closing, Seller and Buyer shall enter into a Lease Agreement in the form agreed to by the Parties (the “Lease Agreement”), providing for the lease of the Real Property.

CHAPTER 3

REPRESENTATIONS AND WARRANTIES OF SELLER AND THE

SHAREHOLDERS

Seller and each Shareholder hereby represent and warrant, jointly and severally, to Nautilus and Buyer as follows:

Article 3.1 Organization. Seller is a limited liability company duly organized under the Law of the PRC Concerning Enterprises with Sole Foreign Investment and validly existing with the status of a legal person under the laws of the PRC.

Article 3.2 Power and Authority. The execution and performance by Seller of this Agreement and each other Transaction Document to which it is a party (i) are within its corporate power and business scope, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene its articles of association and (iv) do not contravene any law or contractual restriction binding on or affecting it. Each Shareholder has the full legal right and authority to execute and perform his/her obligations under this Agreement and the other Transaction Documents to which he/she is a party and such execution and performance does not contravene any laws or contractual restrictions binding on or affecting him/her.

Article 3.3 Consents and Approvals. All authorizations, consents or approvals or other actions by, and all notices to or filings with, any Government Authority required for the due execution and performance by Seller and the Shareholders of this Agreement and the other Transaction Documents has been obtained.

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Article 3.4 Binding Effect. This Agreement is, and the each other Transaction Document to which Seller or a Shareholder will be a party when executed by such Party will be, the legal, valid and binding obligation of Seller or such Shareholder, enforceable against Seller or such Shareholder in accordance with its respective terms.

Article 3.5 Ownership of Assets. Seller owns leases or has the legal right to use all of the Assets. Seller has good and marketable title to, or, in the case of leases, valid and effective leasehold interests in, all of the Assets, free and clear of all Liens, except as noted in the Schedules hereto.

3.5.1 Land Use Rights. Schedule 3.5.1 sets forth all of the land used in the Business for which Seller owns the land use rights together with copies of the land use rights certificates evidencing Seller’s ownership of the land use rights of such land. All of the land use rights relating to such land are granted land use rights and Seller has the right and power to transfer ownership of such land use rights to Buyer in the event Buyer and Seller enter into an agreement for the purchase and sale of such rights.

3.5.2 Buildings. Schedule 3.5.2 sets forth the buildings owned by Seller and used in the Business together with copies of the building ownership certificates evidencing Seller’s ownership of each such building. Seller has the right and power to transfer ownership of such buildings to Buyer in the event Buyer and Seller enter into an agreement for the purchase and sale of such buildings.

3.5.3 Leased Premises. Schedule 3.5.3 sets forth the premises used in the Business which are leased by Seller. There is no notice of cancellation or termination under any option or right reserved to the lessor under any such lease or any notice of default under any such lease, and no event has occurred which, with notice or lapse of time or both, would constitute a default under any such lease. Each such lease is assignable or the premises subject thereto may be subleased to a third party with the consent of the lessor and no consent from any other Party is required. Seller has not assigned or subleased its interest under any such lease.

3.5.4 Machinery and Equipment Owned by Seller. Schedule 3.5.4 lists all of the Tangible Personal Property of the Business owned by Seller having a book value exceeding Twelve Thousand Five Hundred U.S. Dollars (U.S. $12,500) or the equivalent in RMB. Each item of Tangible Personal Property included in the Assets is suitable for the use in which it is currently employed, is in good operating condition except for such minor defects as do not interfere with the continued use of such equipment and properties in the conduct of the normal operations of the Business, and the Assets include supplies of spare parts for the equipment and machinery included in the Assets in amounts consistent with Seller’s past practices.

3.5.5 Machinery and Equipment Leased by Seller. Schedule 3.5.5 sets forth the machinery and equipment used in the Business in which Seller has a leasehold interest. There is no notice of cancellation or termination under any option or right reserved to the lessor under any such lease or any notice of default under

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any such lease and no event has occurred which, with notice or lapse of time or both, would constitute a default under any such lease. Each such lease is assignable with the consent of the lessor and no consent from any other Party is required. Seller has not assigned its interest under any such lease.

3.5.6 Inventory. Schedule 3.5.6 is a complete list of the addresses of all warehouses or other facilities in which Inventory used in and relating to the Business are located as of the date hereof. All Inventory to be reflected on the balance sheet included in the Audited Closing Financial Statements were and will be usable or saleable in the ordinary course of the business and operations of the Business, and the levels of such Inventory to be reflected on the balance sheet included in the Audited Closing Financial Statements will be consistent with customary levels found in the operations of the Business.

3.5.7 Intellectual Property. Schedule 3.5.7 sets forth all domestic and foreign Intellectual Property used in or relating to the Business, registered in the name of Seller, or of which Seller is a licensor or licensee, used in, or which have been used in, or which are under development or have been conceived in, or which have or potentially have application to, the Business. Seller owns all of the Intellectual Property to be transferred hereunder free and clear of all Liens and pays no royalty to anyone under or with respect to any of them, except as set forth in such Schedule 3.5.7. All rights of Seller in and to each item of the Intellectual Property listed on Schedule 3.5.7 and to all processes, lab journals, toxicological and ecological data, trade secrets, technology including know-how and show-how, product formulae, manufacturing, engineering and other drawings, intellectual property rights, agency agreements, technical information, engineering data, design and engineering specifications and similar materials recording or evidencing Seller’s proprietary expertise used in or residing with the Business, whether purchased or developed internally, included in the Assets are transferable to Buyer as herein contemplated. There is no conflict with the rights of others known to Seller, or any claim or formal charge of infringement, with respect to any Intellectual Property of the Business, or with respect to any license relating to the Business under which Seller is licensor or licensee. Seller has no knowledge of the possible infringement by any third party of any Intellectual Property related to or used in the Business.

3.5.8 Contracts. Schedule 3.5.8 sets forth all of the following contracts of Seller relating to the Business: (a) all existing contracts for the purchase of raw materials, commodities, merchandise, supplies, other materials or personal property with any supplier under the terms of which Seller is likely to pay more than US$100,000 or the equivalent in RMB during the term of the contract, excluding purchase orders issued to suppliers in the ordinary course of business; (b) all existing contracts for the sale of raw materials, commodities, merchandise, supplies, other materials or personal property or for the furnishing of services by or to the Business which involve more than the sum of US$100,000 or the equivalent thereof in RMB; (c) to the extent not included in the foregoing, all broker, distributor, dealer, manufacturer’s representative, sales, agency, sales promotion, market research, marketing consulting or advertising contracts used in or relating to the Business; (d) all

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contracts of, or relating to, employment of any officer or individual employee or contracts of independent contractors or consultants relating to the Business and not cancellable without penalty within 30 days of notice of such cancellation; (e) all mortgages, notes, loan or credit agreements or other contracts or obligations of Seller or to the direct or indirect guaranty or assumption by Seller of obligations of others with respect to the Business or the Assets; and (f) all other contracts, whether or not made in the ordinary course of business, which are material to the Business or the Assets. Except as noted in Schedule 3.5.8, each contract listed therein is in full force and effect and, subject to obtaining the consent of the other Party thereto is assignable to Buyer without penalty or other adverse consequence. Seller (in relation to the Business) is not in default under the terms of any such contract or in the payment of any principal of or interest on any indebtedness for borrowed money. There are no contracts granting any Person any preferential rights to purchase any of the Assets or any of the properties or assets of the Business other than in the ordinary course of the Business. All of the contracts listed in Schedule 3.5.8 are valid and binding.

Article 3.6 Sufficiency of Assets. Except as set forth in Schedule 3.6, the Assets (a) constitute all of the assets, tangible and intangible, of any nature whatsoever, necessary to operate the Business in the manner presently operated by Seller (it being understood that Seller is not responsible for any operational or management errors in the conduct of the Business after the Closing), and (b) except for the Excluded Assets, include all of the operating assets of Seller related to the Business.

Article 3.7 Condition of Facilities.

(a) Use of the Real Property for the various purposes for which it is presently being used is permitted as of right under all applicable land and building use legal requirements. All Improvements are in compliance with all applicable legal requirements, are in good repair and in good condition, ordinary wear and tear excepted, except for such minor defects as do not interfere with the continued use of such Improvements in the conduct of the normal operations of the Business. No part of any Improvement encroaches on any land not included in the Real Property, and there are no buildings, structures, fixtures or other Improvements primarily situated on adjoining property which encroach on any part of the Land. The Land for each owned Facility abuts on and has direct vehicular access to a public road or has access to a public road via a permanent arrangement benefiting such Land and comprising a part of the Real Property, is supplied with public or quasi-public utilities and other services appropriate for the operation of the Facilities located thereon and is not located within any area subject to special environmental regulation as an environmentally sensitive area or any similar restriction. Seller, after reasonable inquiry, is unaware of any plan or proposed plan to modify or realign any street or highway or any existing or proposed requisition proceeding that would result in the taking of all or any part of any Facility or that would prevent or hinder the continued use of any Facility as heretofore used in the conduct of the Business.

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(b) Each item of Tangible Personal Property is in good repair and good operating condition, ordinary wear and tear excepted, is suitable for immediate use in the ordinary course of business except such minor defects as do not interfere with the continued use of such Tangible Personal Property in the conduct of the normal operations of the Business. No item of Tangible Personal Property is in need of repair or replacement other than as part of routine maintenance in the ordinary course of business. Except as disclosed in Schedule 3.7(b), all Tangible Personal Property used in the Business is in the possession of Seller.

Article 3.8 Compliance with Laws. Except as described in Schedule 3.8, Seller is in compliance, and there exists no alleged non-compliance, with all applicable statutes, orders, rules and regulations promulgated by any Government Authority relating in any material respect to the Assets or the operation and conduct of the Business, or the use of the properties of the Business and neither Seller nor any Shareholder has received any notice of alleged violation of any such statute, order, rule or regulation. Schedule 3.8 lists all material governmental licenses, permits, product registrations, filings, authorizations and approvals and any pending applications for any thereof relating to the conduct of the Business or the use of properties held by Seller and such licenses, permits, product registrations, filings, authorizations and approvals are all the governmental licenses, permits, filings, authorizations and approvals necessary to conduct the Business or to use the Assets as currently conducted or used.

Article 3.9 Litigation. Except as set forth in Schedule 3.9, there is no action, lawsuit, claim, proceeding, or investigation pending or, to the best knowledge of Seller and the Shareholders, threatened against or affecting Seller which, if decided adversely against Seller, could have a material adverse effect upon the Business or its financial condition, prospects or operations, or upon the Assets. Seller is not in default, and no condition exists that with notice or the lapse of time or both would constitute a default, with respect to any order, writ, injunction or decree of any court or Government Authority affecting or relating to the Business. No condemnation proceeding has been commenced or, to the knowledge of Seller or any Shareholder, is threatened to be commenced against any of the Assets.

Article 3.10 Brokers’ or Finders’ Fees. Except as set forth in Schedule 3.10, neither Seller nor any Shareholder has paid or will become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions provided for in this Agreement.

Article 3.11 Subsidiaries. Except as set forth in Schedule 3.11, Seller has no subsidiaries or branches.

Article 3.12 Financial Statements. Seller has delivered to Nautilus: (a) a pro forma unaudited balance sheet of the Business as at December 31, 2006 (including the notes thereto, the “2006 Balance Sheet”), and the related pro forma unaudited statements of income, changes in shareholders’ equity and cash flows for the fiscal year then ended, including the notes thereto, certified by the CEO/President and chief financial officer of Seller; and (b) unaudited

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pro forma balance sheets of the Business as at each of March 31, 2007 and June 30, 2007 (the “Interim Balance Sheets”) and the related unaudited pro forma statements of income, changes in shareholders’ equity, and cash flows for the fiscal quarters then ended, including the notes thereto, certified by the CEO/President and chief financial officer of Seller. Such financial statements fairly present (and the financial statements delivered pursuant to Section 5.11 will fairly present) the financial condition and the results of operations, changes in shareholders’ equity and cash flows of the Business, as at the respective dates of and for the periods referred to in such financial statements, all in accordance with U.S. GAAP. The financial statements referred to in this Section 3.12 reflect the consistent application of such accounting principles throughout the periods involved. The financial statements have been prepared from and are in accordance with the accounting records of Seller. Seller has also delivered to Buyer copies of all letters from the Seller’s auditors to the Seller’s board of directors or the audit committee thereof dated during 2007, together with copies of all responses thereto.

Article 3.13 No Undisclosed Liabilities. The Business has no material liabilities except for liabilities reflected or reserved against in the 2006 Balance Sheet or the Interim Balance Sheets and current liabilities incurred in the ordinary course of business of the Business since June 30, 2007.

Article 3.14 Books and Records; Tax Returns. Seller’s books of account reflect all items of income and expense and all assets and liabilities of the Business required to be reflected therein in accordance with PRC generally accepted accounting principles and neither Seller nor any Affiliate of Seller has failed to file any material report or return with respect to the Business which may be required by any law or regulation of the PRC or political subdivision thereof to be filed, and, except as set forth in Schedule 3.14, Seller has duly paid or accrued on it’s books of account all taxes, duties and charges pursuant to such reports and returns or assessed against Seller. Seller has fully filed, on or before the due date therefor or the expiration of any extended period for filing, all returns or reports with respect to any Taxes required to be filed by Seller, which returns or reports disclose as having become due and payable all Taxes becoming due and payable for the periods covered therein. Except as set forth in Schedule 3.14, Seller has paid all Taxes reflected in such returns and reports and all other Taxes currently due or claimed to be due from Seller by any Government Authority.

Article 3.15 Absence of Certain Changes, Events and Conditions. Since December 31, 2006, there has not been any material adverse change in the condition (financial or otherwise) of the Assets, liabilities, business, results of operations or prospects of the Business, including, without limitation, any damage or destruction of property by fire or other casualty involving loss in excess of US$100,000 or the equivalent thereof in RMB in the aggregate, whether or not covered by insurance. Except as described in Schedule 3.15, there are no conditions known to the senior management of Seller or any Shareholder existing with respect to the products, facilities, personnel, raw materials, supplies or Assets of the Business which might reasonably be expected to have a material adverse effect on the Business or its prospects.

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Article 3.16 Insurance. Schedule 3.16 contains a list and brief description (including the name of the insurer, the amount of the annual premium for the current policy period, amount insured and coverage period) of the policies and contracts of insurance held since January 1, 2003 by Seller or World Gear with respect to the Business. Except as indicated on Schedule 3.16, all such policies are in full force and effect. Seller shall keep such policies in such amounts duly in force through the Closing Date.

Article 3.17 Suppliers. Listed on Schedule 3.17 are the names and addresses of each of the suppliers of services materials, components, and supplies used in the Business and involving in the aggregate payments exceeding U.S.$100,000 or the equivalent in RMB for the twelve-month period ended on the date hereof, supplemented prior to Closing to include each such supplier for the period from the date hereof to the Closing Date. Except as set forth in Schedule 3.17, neither Seller nor any Shareholder has any knowledge or information that any of such suppliers will not sell products or provide services to Buyer at any time after the Closing Date on terms and conditions similar to those imposed on prior sales to Seller.

Article 3.18 Environmental Matters. There is no pending, and neither Seller nor any Shareholder knows of any threatened, environmental civil (including actions by private parties), criminal, or administrative proceeding against Seller or any Affiliate of Seller. Neither Seller nor any Shareholder knows of any facts or circumstances which may give rise to any future civil (including actions by private parties), administrative or criminal proceedings against Seller or any Affiliate of Seller relating to environmental matters. Seller has delivered to Nautilus the environmental report of MWH Environmental Engineering (Shanghai) Co., Ltd. (“MWH”), dated December 8, 2006, relating to the Facilities. All matters identified in that report have been remediated by Seller.

Article 3.19 Employees. Schedule 3.19 lists the name, current annual salary rates, bonuses, deferred compensation and other like benefits (in cash or otherwise) paid or payable through the date hereof for fiscal 2007, date of employment and description of position of each of the current employees, officers, directors and agents of Seller employed in the Business or operations of the Business. Except as set forth on Schedule 3.19, no employee of Seller has suffered any industrial injury resulting from employment with Seller or filed a claim for compensation related to any industrial injury or condition of employment resulting from employment with Seller.

Article 3.20 Employee Contracts and Plans.

3.20.1  Labor Contracts. Schedule 3.20.1 contains a complete and accurate list of all labor contracts applicable to persons employed by Seller in the Business. Seller has delivered to Buyer a true and complete copy of the form of contract used for each such labor contract. Seller has not breached or otherwise failed to comply with any provision of any such contract and there are no grievances outstanding against Seller under any such contract. There are no unfair labor practice complaints against Seller involving persons employed in the Business.

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Seller knows of no strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of the Business. Except as set forth on Schedule 3.20.1, since June 30, 2006 there have not been any formally filed grievances involving employees of the Business. The consent of the employees’ trade union is not required to complete the transactions contemplated by this Agreement.

3.20.2  Employee Plans. Schedule 3.20.2 contains a complete and accurate list of all Employee Plans and Seller has no other obligations, contingent or otherwise, relating to any Employee Plans. Seller has delivered to Buyer true and complete copies of all Employee Plans, including trust agreements and insurance contracts embodying such plans, funds, programs or arrangements.

Article 3.21 Compliance with the Foreign Corrupt Practices Act and Export Control and Anti-Boycott Laws.

(a) Except as identified in Schedule 3.21, neither Seller nor any of its representatives or agents have, to obtain or retain business, directly or indirectly offered, paid or promised to pay, or authorized the payment of, any money or other thing of value (including any fee, gift, sample, travel expense or entertainment with a value in excess of one hundred dollars ($100.00) or the equivalent thereof in RMB in the aggregate to any one individual in any year) or any commission payment payable, to:

(i) any person who is an official, officer, agent, employee or representative of any Government Authority or of any existing or prospective customer (whether government owned or non-government owned);

(ii) any political party or official thereof;

(iii) any candidate for political or political party office; or

(iv) any other individual or entity;

while knowing or having reason to believe that all or any portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to any such official, officer, agent, employee, representative, political party, political party official, candidate, individual, or any entity affiliated with such customer, political party or official or political office.

(b) Except as set forth in Schedule 3.21(b), Seller has made all payments to third parties by check mailed to such third parties’ principal place of business or by wire transfer to a bank located in the same jurisdiction as such party’s principal place of business.

(c) Each transaction is properly and accurately recorded on the books and records of Seller, and each document upon which entries in Seller’s books and records are based is complete and accurate in all respects. Seller maintains a system of internal accounting controls adequate to insure that Seller maintains no off-the-books accounts and that Seller’s assets are used only in accordance with Seller’s management directives.

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(d) Seller has at all times been in compliance with all legal requirements relating to export control and trade embargoes. No product sold or service provided by Seller or any Affiliate of Seller during the last five (5) years has been, directly or indirectly, sold to or performed on behalf of Cuba, Iraq, Iran, Libya, North Korea or Sudan.

(e) Except as set forth in Schedule 3.21(e), neither Seller nor any Affiliate of Seller has violated the anti-boycott prohibitions contained in 50 U.S.C. sect. 2401 et seq. or taken any action that can be penalized under Section 999 of the U.S Internal Revenue Code of 1986, as amended. Except as set forth in Schedule 3.21(e), during the last five (5) years, neither Seller nor any Affiliate of Seller has been a party to, nor a beneficiary under and has not performed any service or sold any product under any contract under which a product has been sold to customers in Bahrain, Bangladesh, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Sudan, Syria, United Arab Emirates or the Republic of Yemen.

Article 3.22 Compliance with PRC Anti-Corruption Laws. Seller has not, nor to the best of its knowledge after reasonable inquiry has any Affiliate of Seller or any of their respective employees, representatives or agents has engaged in any conduct which would constitute a violation of PRC law prohibiting bribery, including, without limitation, any conduct or activity which would constitute a violation of Articles 163, 164 or 389 of the PRC Criminal Code, Article 8 of the Law Against Unfair Competition or the Interim Rules on Prohibition of Commercial Bribery.

Article 3.23 Pricing of Sales. Except as set forth in Schedule 3.23, since December 31, 2006, all of the products of the Business have been sold to persons who are not Affiliates or, if Affiliates, have been sold at prices not exceeding prices at which such products are sold in substantial quantities in the marketplace in arms-length transactions.

Article 3.24 Pricing of Services. Except as set forth in Schedule 3.24, since December 31, 2006, all services provided to the Business have been provided by person who are not Affiliates or, if by Affiliates, have been provided at prices not exceeding prices at which such services are provided in the marketplace in arms-length transactions.

Article 3.25 Completeness of Schedules. The Schedules attached hereto, where applicable to Seller, completely and correctly present the information required by this Agreement to be set forth therein, and do not contain any untrue statement of a material fact. Originals or true and complete copies of all documents or other written materials underlying items listed in such Schedules have heretofore been made available for examination by Buyer, including, without limitation, deeds, leases, mortgages, deeds of trust, security instruments, permits, trademarks, patents and other Intellectual Property, litigation files, contracts, employee agreements and licenses, and such documents have not been modified and will not be modified prior to the Closing Date without Nautilus’s prior written consent.

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CHAPTER 4

REPRESENTATIONS AND WARRANTIES OF NAUTILUS

Nautilus hereby represents and warrants to Seller and the Shareholders as follows:

Article 4.1 Organization. Nautilus is a corporation duly organized and validly existing and in good standing under the laws of the State of Washington, U.S.A. When formed and in possession of the government approvals referenced in Article 5.1, Buyer will be a limited liability company duly organized under the Law of the PRC Concerning Enterprises with Sole Foreign Investment and validly existing with the status of a legal person under the laws of the PRC.

Article 4.2 Power and Authority. The execution and performance by Nautilus of this Agreement and the other Transaction Documents to which it is a party (i) are within its corporate power, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene its Articles of Incorporation or By-Laws and (iv) do not contravene any law or contractual restriction binding on or affecting it.

Article 4.3 Consents and Approvals. No authorization, consent or approval or other action by, and no notice to or filing with, any governmental authority is required for the due execution, delivery and performance by Nautilus of this Agreement, except for PRC Government Authority approvals required for the establishment of Buyer and the acquisition by Buyer of the Assets. Nautilus has the financial capacity to satisfy its financial obligations as contemplated herein.

Article 4.4 Binding Effect. This Agreement and each other Transaction Document to which it is a party is the legal, valid and binding obligation of Nautilus, enforceable against Nautilus in accordance with its terms.

Article 4.5 Brokers’ or Finders’ Fees. Nautilus has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions provided for in this Agreement.

Article 4.6 Acknowledgments. Subject to the representations, warranties and covenants of Seller and the Shareholders as set forth in this Agreement and the schedules and attachments hereto, Nautilus is relying on its own investigation as to the condition of the Business and the Assets. Nautilus has been provided access to the books, records and personnel of Seller and has been afforded an opportunity to make inquires and to review such information as Nautilus has requested for the purpose of completing such investigation.

Article 4.7 Periodic Reports. The periodic reports on Form 10-K, Form 10-Q and Form 8-K filed by Nautilus with the U.S. Securities and Exchange Commission (“SEC”) since June 30, 2006 (i) complied as to form in all material respects

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with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

CHAPTER 5

ACTION PRIOR TO THE CLOSING DATE

The following actions have been or will be taken prior to the Closing Date:

Article 5.1 Establishment of Buyer. Prior to the Closing Date, Nautilus shall file an application with the Xiamen Foreign Investment Bureau under the PRC Provisions on Acquisition of Domestic Enterprises by Foreign Investors (the “M&A Regulations”) seeking PRC government approval of (i) the transactions contemplated by this Agreement and (ii) the establishment of a wholly foreign owned enterprise in Xiamen to act as Buyer of the Business and the Assets to be transferred and sold by Seller at the Closing. Seller and the Shareholders shall cooperate with Nautilus with respect to all filings and applications that Nautilus elects to make, or pursuant to law, shall be required to make in obtaining all required government approvals necessary or desirable to consummate the transactions contemplated by this Agreement.

Article 5.2 Valuation of Assets. The Parties shall jointly engage an authorized asset valuation institution or enterprise (the “Appraiser”) to undertake a valuation of the Assets in accordance with the M&A Regulations. The Appraiser shall submit its valuation report to the Parties for their review. If the Parties agree with the valuation of the Assets set forth in the Appraiser’s valuation report, Nautilus shall submit such report to the Xiamen Foreign Investment Bureau in connection with the application for the approval of the transactions contemplated by this Agreement and the establishment of Buyer. The fees and expenses of the Appraiser shall be shared on a 50%-50% basis by Nautilus, on the one hand, and Seller and Shareholders, on the other hand.

Article 5.3 Notification of Creditors. Seller shall notify its creditors and publish a notice of the proposed sale of the Assets in a newspaper with national circulation in accordance with the M&A Regulations.

Article 5.4 Preserve Accuracy of Representations and Warranties. Each Party shall refrain from taking any action which would render any representation and warranty contained in Chapters 3 and 4 of this Agreement inaccurate in any material respect on the Closing Date.

Article 5.5 Operation of Business. From the date hereof through the Closing Date, except with the prior written consent of Nautilus or as otherwise provided below, Seller and the Shareholders shall (i) conduct the business and operations of the Business only in the ordinary course, (ii) continue to meet the contractual obligations incurred by Seller in the ordinary course of business and to pay all obligations as they mature in the ordinary course of business, (iii) exercise best efforts to keep available the services of the present employees of the Business, and (iv) exercise best efforts to preserve the good relations of suppliers, customers and others with whom Seller has business relations relating to the Business.

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Article 5.6 Sale or Pledge of Assets; Borrowing. Seller shall not sell or mortgage or pledge any of the Assets or, for the account of the Business, borrow any money or incur, assume or guarantee or otherwise become directly or indirectly responsible for the payment of any indebtedness or any other obligation of any other Person or agree to do any of the foregoing.

Article 5.7 Compliance with Laws, etc. Seller shall comply with all applicable laws and shall conduct the Business in such a manner that on the Closing Date the representations and warranties contained in this Agreement shall be true as though such representations and warranties were made on and as of such date.

Article 5.8 Best Efforts. Each of the Parties hereto shall use its best efforts to fulfill all of the conditions set forth in this Agreement over which it has control or influence (including obtaining any authorizations, consents, approvals or waivers necessary to the performance of such Party’s obligations hereunder) and to consummate the transactions contemplated herein.

Article 5.9 Nautilus’s Access to Information and Records Before the Closing. Subject to the provisions of Article 5.13 concerning contact with Seller’s suppliers, Seller shall give Nautilus, its employees, counsel, accountants and other representatives full access throughout the period prior to the Closing Date, to all of the properties, books, contracts, commitments, customers, suppliers, distributors and records of the Business, and furnish to Nautilus during such period all such information concerning the Business as Nautilus may reasonably request. Subject to the provisions of Article 5.13, representatives of Nautilus shall be allowed to have unrestricted contact with employees employed in the Business and with past and present customers, suppliers and distributors of the Business, for the purpose of accomplishing an orderly transfer of the Business to Buyer on the Closing Date.

Article 5.10 Removing Excluded Assets. On or before the Closing Date, Seller shall remove all Excluded Assets from all Facilities and other Real Property to be occupied by Buyer. Such removal shall be done in such manner as to avoid any damage to the Facilities and other properties to be occupied by Buyer and any disruption of the business operations to be conducted by Buyer after the Closing. Any damage to the Assets or to the Facilities resulting from such removal shall be paid by Seller at the Closing. Should Seller fail to remove the Excluded Assets as required by this Article, Buyer shall have the right, but not the obligation, (a) to remove the Excluded Assets at Seller’s sole cost and expense; (b) to store the Excluded Assets and to charge Seller all storage costs associated therewith; (c) to treat the Excluded Assets as unclaimed and to proceed to dispose of the same under the laws governing unclaimed property; or (d) to exercise any other right or remedy conferred by this Agreement or otherwise available at law. Seller shall promptly reimburse Buyer for all costs and expenses incurred by Buyer in connection with any Excluded Assets not removed by Seller on or before the Closing Date.

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Article 5.11 Interim Financial Statements. Until the Closing Date, Seller shall deliver to Buyer within twenty (20) days after the end of each month a copy of the internally prepared income statement and balance sheet for such month prepared in a manner and containing information consistent with Seller’s current practices and certified by the CEO/President and chief financial officer of Seller as to compliance with Article 3.12.

Article 5.12 Environmental Report. Seller shall obtain and deliver to Nautilus and Buyer prior to Closing an updated environmental report (the “Closing Environmental Report”), dated within twenty (20) days of the Closing Date, prepared by MWH. Such updated report shall be of similar scope to the report of such firm dated December 8, 2006 (as referenced in Section 3.18 above) and shall confirm that all matters identified in the December 8, 2006 report have been remediated. In the event such updated report identifies material unremediated environmental matters, whether or not included in the December 8, 2006 report, then prior to Closing Seller and/or Shareholders shall contract with an environmental firm reasonably acceptable to Nautilus to remediate such matters at Seller’s or Shareholders’ expense.

Article 5.13 Contact with Suppliers. Prior to Closing neither Nautilus nor Buyer shall communicate with any Person known, solely as a result of Seller’s disclosure as described in Articles 3.5.8 and 3.17 herein, to be a supplier to Seller unless (i) an employee or authorized representative of Seller is present and participates in such communication, and (ii) such communication is limited to the topics of quality and new product development. Seller agrees to assist Nautilus and Buyer in an effective and orderly transition of Seller’s supplier relationships to Buyer prior to and following Closing.

CHAPTER 6

CONDITIONS PRECEDENT TO OBLIGATIONS OF NAUTILUS

In the event Closing does not occur, the obligations of Nautilus and Buyer under this Agreement shall be subject to the satisfaction, on or prior to the Closing Date, of all of the following conditions, any one or more of which may be waived by Nautilus:

Article 6.1 Representations and Warranties Accurate. All representations and warranties of Seller and the Shareholders contained in this Agreement shall have been true in all material respects when made and shall be true in all material respects at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date. Seller shall furnish Nautilus and Buyer with a certificate, dated the Closing Date and signed by the legal representative of Seller and by each Shareholder, stating the above in such form as Nautilus may reasonably request.

Article 6.2 Absence of Certain Changes. Since the date hereof and prior to the Closing Date, there shall not have occurred or been discovered:

(a) any material adverse change in the business, financial condition, prospects or results of operations of the Business, other than a material adverse change resulting from a material reduction in the volume of purchases by Nautilus;

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(b) any new law, rule or regulation or the amendment or interpretation of any existing law, rule or regulation, materially adversely affecting the operation of the Business or the ability of Seller to convey, assign and transfer to Buyer any of the Assets, the Business and other contractual rights pertaining to the Business with the effect of materially affecting the value of, or the ability of Buyer to operate as presently operated, the Business; or

(c) damage or destruction in the nature of a casualty loss or claim, whether covered by insurance or not, materially adversely affecting the operation of the Business or the ability of Seller to convey, assign and transfer to Buyer any of the Assets, the Business and other contractual rights pertaining to the Business with the effect of materially affecting the value of, or the ability of Buyer to operate as presently operated, the Business, and there shall have been delivered to Nautilus a certificate to that effect, dated the Closing Date and signed by the legal representative of Seller.

Article 6.3 Performance by Seller. Seller shall have performed and complied in all materials respects with all agreements and conditions required by this Agreement to be performed and complied with by it prior to or on the Closing Date, and there shall have been delivered to Nautilus and Buyer a certificate to that effect, dated the Closing Date and signed by the legal representative of Seller.

Article 6.4 Opinions of Counsel for Seller and the Shareholders. Nautilus shall have received from The Universal Legal Corp., PRC counsel to Seller and the Shareholders, and from C. Reed Brown, U.S. counsel to Seller and the Shareholders, written opinions, dated the Closing Date, in form and substance satisfactory to Nautilus and Buyer, to the form agreed to by the Parties, respectively. In giving such opinion, such counsel may rely, as to matters of fact, upon certificates of officers of Seller and certificates of the Shareholders, provided that such counsel shall state that they believe that they are justified in relying upon such certificates and deliver copies thereof to Nautilus and Buyer with such opinion.

Article 6.5 Authorizations, Approvals and Consents. Seller shall have received (at Seller’s cost and expense) all authorizations, consents, approvals and waivers or other action required to be obtained in connection with the execution, delivery and performance of this Agreement or the transfer pursuant to this Agreement of all of the Assets. There shall be delivered to Nautilus and Buyer a certificate, dated the Closing Date and signed by the legal representative of Seller, stating that Seller has received all authorizations, consents, approvals and waivers required by this Article 6.5.

Article 6.6 Legal Prohibition. No proceeding shall be pending or threatened before any Government Authority to restrain or prohibit or to obtain material damages or other relief in connection with the consummation of the transactions contemplated by this Agreement and no investigation that might eventuate in any such proceeding shall be pending or threatened.

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Article 6.7 Instruments of Sale, etc. On the Closing Date, Seller shall deliver to Nautilus and Buyer each of the documents set forth in Article 2.6, in form and substance satisfactory to Nautilus.

Article 6.8 Corporate Authorization. Seller shall have provided Nautilus and Buyer with a certificate of the legal representative of Seller certifying copies of the resolutions of the Board of Directors and shareholders of Seller approving this Agreement and the other Transaction Documents to which it is a party and the sale and transfer of the Assets to Buyer under this Agreement.

Article 6.9 [Intentionally left blank]

Article 6.10 Continuance of Insurance. Seller shall have provided Nautilus with certificate(s) from its insurance brokers, certifying the continuation upon substantially the same terms and conditions of the insurance set forth in Schedule 3.16. Seller will make arrangements to insure the continued coverage after the Closing Date of Buyer under an insurance policy for any and all liabilities for injury to persons or property arising out of the sale by Seller of the products of the Business prior to the Closing Date.

Article 6.11 Environmental Report. Nautilus shall have received the Closing Environmental Report and such Report shall confirm that all environmental matters identified in the report of MWH dated December 8, 2006 have been remediated.

Article 6.12 Governmental Approvals. Nautilus and Buyer shall have received such approvals, including, without limitation, the approval by the Xiamen Foreign Investment Bureau and such other approvals from a Government Authority as are necessary or desirable for the completion of the transactions contemplated by this Agreement and the establishment of Buyer as a wholly foreign owned enterprise registered in Xiamen, Fujian Province, PRC and the conduct of the Business by Buyer.

Article 6.13 Escrow and Indemnification Agreement. Seller and the Shareholders shall have executed and delivered the Escrow and Indemnification Agreement.

Article 6.14 Seller’s Non-Competition Agreement. Seller shall have executed and delivered the Seller’s Non-Competition Agreement.

Article 6.15 Shareholders’ Non-Competition Agreement. The Shareholders shall have executed and delivered the Shareholders’ Non-Competition Agreement.

Article 6.16 Bruno Consulting Agreement. Bruno shall have entered into a consulting agreement with Nautilus and/or Buyer whereby Bruno agrees to provide consulting services related to the Business for a period of up to ten months.

Article 6.17 Lease Agreement. Seller shall have executed and delivered the Lease Agreement.

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CHAPTER 7

CONDITIONS PRECEDENT TO OBLIGATIONS OF

SELLER AND THE SHAREHOLDERS

The obligations of Seller and the Shareholders under this Agreement shall be subject to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by Seller:

Article 7.1 Representations and Warranties Accurate. All representations and warranties of Nautilus contained in this Agreement shall have been true in all material respects when made and shall be true in all material respects at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date. Nautilus shall furnish Seller a certificate, dated the Closing Date and signed by a duly authorized officer stating the above in such form as Seller or the Shareholders may reasonably request.

Article 7.2 Performance by Nautilus. Nautilus shall have performed and complied with all agreements and conditions required by this Agreement to be performed and complied with by it prior to or on the Closing Date and there shall be delivered to Seller a certificate to such effect, dated the Closing Date and signed by a duly authorized officer of Nautilus.

Article 7.3 Legal Prohibition. On the Closing Date there shall exist no injunction or final judgment, law or regulation prohibiting the consummation of the transactions contemplated by this Agreement.

Article 7.4 Lease Agreement. Buyer shall have executed and delivered the Lease Agreement.

Article 7.5 Escrow and Indemnification Agreement. Nautilus shall have executed and delivered the Escrow and Indemnification Agreement.

CHAPTER 8

INDEMNIFICATION

Article 8.1 Indemnification by Seller and Shareholders. Seller and Shareholders jointly and severally agree to indemnify and hold each of Nautilus and Buyer harmless at all times from and after the Closing Date as set forth in the Escrow and Indemnification Agreement in the form agreed to by the Parties (the “Escrow and Indemnification Agreement”).

Article 8.2 Indemnification by Nautilus. Nautilus and Buyer hereby agree jointly and severally to indemnify and hold harmless Seller and the Shareholders at all times from and after the Closing Date as set forth in the Escrow and Indemnification Agreement.

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CHAPTER 9

STAFF AND EMPLOYEE MATTERS

Article 9.1 Staff and Employees. Seller has delivered to Nautilus a list, dated within fifteen days prior to the Closing Date, naming by location all of the staff and employees of Seller actively employed in the Business, including each such staff and employee’s current compensation rate and date of employment. Nautilus shall be permitted to interview all of Seller’s staff and employees employed in the Business during business hours, pursuant to schedules to be coordinated with Seller, and Seller shall give Nautilus all information in Seller’s possession reasonably requested by Nautilus in connection with such staff and employees. Nautilus will cause Buyer to offer employment commencing as of the Closing Date to those staff and employees as Nautilus deems, in its sole discretion, appropriate on such terms as Nautilus shall deem appropriate. Seller and the Shareholders will use their best efforts to cause such employees to become employees of Buyer as of the Closing Date.

Article 9.2 Salaries and Benefits. Seller shall be responsible for (i) the payment of all wages and other remuneration due to staff and employees of the Business with respect to their services as employees of Seller through close of business on the Closing Date; (ii) the payment of any termination or severance payments required by contract or law; and (iii) any amounts or benefits due to the staff and employees under welfare benefit, housing, retirement and health plans maintained Seller for such staff and employees pursuant to contract or as required by law. Nautilus agrees to cooperate with Seller to transition the employment of Seller’s employees to Buyer in a manner that minimizes any termination or severance payments. If despite such efforts Seller is required to pay termination or severance payments to former employees of Seller who are employed by Buyer, Nautilus agrees to cause Buyer to reimburse Seller in an amount equal to the lesser of one-half of such payments and U.S.$250,000.

Article 9.3 No Rights to Staff and Employees. Nothing herein expressed or implied shall confer upon any staff or employee hired by Nautilus or Buyer or any other employee or legal representatives of Seller or any trade union representative any rights or remedies, including, without limitation, any right to employment, or continued employment for any specified period, of any nature or kind whatsoever under or by reason of this Agreement.

CHAPTER 10

ACTIONS TO BE TAKEN

SUBSEQUENT TO THE CLOSING DATE

Article 10.1 Further Assurances. Following the Closing, Seller and each Shareholder will, upon request by Nautilus or Buyer, (a) do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances and (b) use its best efforts to obtain all authorizations, approvals, consents and waivers that may be reasonably required for the conveyance, transfer, assignment, delivery, assurance and confirmation to Buyer, or to its successors and assigns, or for aiding and assisting in collecting or reducing to possession, any or all of the Assets of Seller transferred hereunder.

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Article 10.2 Customer and Other Business Relationships. After the Closing, Seller and the Shareholders will cooperate with Nautilus and Buyer in their efforts to continue and maintain for the benefit of Buyer those business relationships of Seller existing prior to the Closing and relating to the Business, including relationships with lessors, employees, regulatory authorities, licensors, customers, suppliers and others, and Seller will satisfy its liabilities in a manner that is not detrimental to any of such relationships. Seller and the Shareholders will refer to Buyer all inquiries relating to the Business. Neither Seller nor either Shareholder nor any of their respective officers, employees, agents or shareholders shall take any action that would tend to diminish the value of the Assets after the Closing or that would interfere with the Business, including disparaging the name or business of Nautilus or Buyer.

Article 10.3 Retention of and Access to Records. After the Closing Date, Buyer shall retain for a period consistent with Nautilus’s record-retention policies and practices those records of Seller delivered to Buyer. Nautilus will ensure that Buyer also shall provide Seller and the Shareholders and their representatives reasonable access thereto, during normal business hours and on at least three days’ prior written notice, to enable them to prepare financial statements or tax returns or deal with tax audits. After the Closing Date, Seller shall provide Buyer and its representatives reasonable access to records that are Excluded Assets, during normal business hours and on at least three days’ prior written notice, for any reasonable business purpose specified by Buyer in such notice.

Article 10.4 Mutual Cooperation with Respect to Taxes. Each of Nautilus and Buyer, on the one hand, and Seller and the Shareholders, on the other, will provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any tax return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liability for any Taxes relating to the transactions contemplated by this Agreement. Each such Party will retain and provide the other with any records or information which may be relevant to such return, audit or examination, proceedings or determination. Such assistance shall include making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder and shall include providing copies of any relevant tax returns and supporting work schedules. The Party requesting assistance hereunder shall reimburse the other for reasonable out-of-pocket expenses incurred in providing such assistance.

Article 10.5 Cooperation in Litigation. In the event that, after the Closing Date, Nautilus, Buyer, Seller or the Shareholders shall require the participation of officers and employees employed by each other to aid in the defense or prosecution of litigation or claims, and so long as there exists no conflict of interest between the Parties, each of Nautilus, Buyer and Seller shall use its best efforts to make such officers and employees available to participate in such defense or

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prosecution, provided that, except as required pursuant to the provisions of Chapter 8, the Party requiring the participation of such officers or employees shall pay all reasonable out-of-pocket costs, charges and expenses arising from such participation.

Article 10.6 Confidentiality. Except in circumstances where the prior consent of Nautilus has been obtained and for a period of five (5) years after the Closing Date, Seller and each Shareholder agrees that it shall not divulge to any Person any trade secret, or secret process, method or means, or any other confidential information concerning the Business, or confidential information concerning Nautilus or Buyer that comes to the knowledge of such Party by reason of its being a Party hereto, unless and to the extent that (i) the disclosure is required by law or (ii) such information is or becomes public knowledge otherwise than through the breach of this Article or (iii) such information was obtained from a third party having no obligation of confidentiality with respect to such information.

Article 10.7 [Intentionally left blank]

Article 10.8 Land America Name. Seller agrees that following the Closing Date it will not, and each Shareholder agrees that it will cause Seller not to, (i) use the name “Land America” in connection with the manufacture, distribution or sale of fitness equipment, or (ii) transfer the name or any rights in the name “Land America”, or any confusingly similar name, to any third party unless such party agrees that such name shall not be used in connection with the manufacture, distribution or sale of fitness equipment.

CHAPTER 11

TERMINATION

Article 11.1 Termination Events. This Agreement may, by notice given on or prior to the Closing Date, in the manner hereinafter provided, be terminated and abandoned:

11.1.1  By Nautilus, on the one hand, or Seller and the Shareholders, on the other, if material default or breach shall be made by the other with respect to the due and timely performance of any of its covenants and agreements contained herein, or with respect to due compliance with any of its representations and warranties contained herein, and such default cannot be cured, or shall have not been cured within forty-five (45) days after receipt of notice specifying particularly such default;

11.1.2  By Nautilus if all of the conditions set forth in Chapter 6 shall not have been satisfied (or are incapable of being satisfied) on or before December 31, 2007 (the “Termination Date”) or waived by it on or before such date; or by Seller and the Shareholders, if all of the conditions set forth in Chapter 7 shall not have been satisfied (or are incapable of being satisfied) on or before the Termination Date or waived by it on or before such date; provided, that the Termination Date shall be extended to January 21, 2008 in the event the inability to satisfy such conditions shall relate solely to delay in obtaining the governmental approvals described in Article 5.1.

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11.1.3  By Nautilus, on the one hand, or Seller and the Shareholders, on the other, if in the case of Seller and the Shareholders, Nautilus, or in the case of Nautilus, Seller or any Shareholder, becomes bankrupt, or is the subject of proceedings for liquidation or dissolution, or ceases to carry on business or becomes unable to pay its or his debts as they become due;

11.1.4  By written mutual consent of Nautilus and Seller; or

11.1.5  By either Nautilus or Seller if the Closing shall not have occurred, through no fault of any Party, on or before the Termination Date, or such later date as may be agreed upon by the Parties; provided, that the Termination Date shall be extended to January 21, 2008 in the event (i) Nautilus applies for the governmental approvals described in Article 5.1 on or before October 31, 2007, and (ii) the Closing shall not have occurred solely as a result of delay in obtaining the governmental approvals described in Article 5.1.

Each Party’s right of termination hereunder is in addition to any other rights it may have hereunder or otherwise, including, without limitation, Nautilus’s rights pursuant to Article 12.2.

Article 11.2 Effect of Termination. In the event this Agreement is terminated pursuant to Article 11.1, all further obligations of the Parties hereunder shall terminate.

CHAPTER 12

OTHER PROVISIONS

Article 12.1 Survival of Representations and Warranties. The representations and warranties contained in this Agreement shall survive the Closing for a period of fifteen (15) months from the Closing Date, provided, that the representations and warranties set forth in Articles 3.2 and 3.14 shall survive for an indefinite period, and the representations and warranties set forth in Article 3.18 shall survive until the thirty-six month anniversary of the Closing Date); and provided further, that in the event a claim for indemnification is made by Nautilus in respect of any representation and warranty made by Seller or either Shareholder prior to the expiration of such representation or warranty, Nautilus shall be entitled to the benefits of the indemnification provisions set forth in the Escrow and Indemnification Agreement as long as such claim is being prosecuted in good faith.

Article 12.2 [intentionally left blank]

Article 12.3 Responsibility for Taxes. Each Party shall pay its own transaction-related Taxes arising out of the transactions contemplated by this Agreement. Seller shall also pay any filing or recording fees payable in connection with the instruments of transfer provided for herein, including, without limitation, any supplemental land grant fee premium required by the Xiamen Municipal Government as a condition to its approval of the lease or transfer of the Land. Prior to the Closing, Seller and Buyer shall have paid stamp duties in respect of this Agreement. Buyer acknowledges that its taxes will include VAT on the amount of Inventory purchased and Deed Tax on applicable items.

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Article 12.4 Complete Agreement. This Agreement, including the Schedules attached hereto and the documents referred to herein, together with the other agreements of the parties expressly referenced herein, shall constitute the entire agreement between the Parties hereto with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter, including without limitation the Option Agreement.

Article 12.5 Passage of Title and Risk of Loss. Title and risk of loss with respect to the Assets and rights to be transferred hereunder shall not pass to Buyer until the Assets or right is transferred at the Closing hereunder.

Article 12.6 Waiver, Discharge, etc. This Agreement may not be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the Parties hereto by their duly authorized representatives. The failure of any Party hereto to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part thereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.

Article 12.7 Notices. Any notice or other communication required or permitted hereunder shall be given in writing and shall be addressed to the relevant Party at the address set forth below or at such other address as such Party may designate by ten Business Days’ advance written notice to the other Parties. Any notice addressed to the relevant Party shall be deemed to have been delivered: (a) if delivered by hand when delivered, (b) if sent by pre-paid United States registered mail, on the fifth (5th) Business Day after the date of posting, (c) if given or made by facsimile, on the following Business Day after the transmission is sent (as long as the sender has a confirmation report specifying the facsimile number of the recipient, the number of pages sent and the date of the transmission) and, (d) if given or made by electronic mail, on the following Business Day after the electronic mail is sent (as long as the sender has confirmation records confirming delivery by the sender and receipt by the recipient of the electronic mail).

Notices and communications shall be delivered as follows:

To Nautilus at:	Nautilus, Inc
	16400 SE Nautilus Drive
	Vancouver, Washington 98683 U.S.A.
	Attn:     Wayne M. Bolio,
	Chief Administrative Officer and
	Senior Vice President, Law & Human Resources
	Facsimile: 1 (360) 859-5915
	E-mail:     wbolio@nautilus.com

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with a copy to:	Garvey Schubert Barer
	1191 Second Avenue, 18th Floor
	Seattle, Washington 98101 U.S.A.
	Attn: Bruce A. Robertson, Esquire
	Facsimile: 1 (206) 464-0125
	E-mail:     brobertson@gsblaw.com
To Seller at:	Land America Health & Fitness Co., Ltd.
	25 North 2nd Road, Xiamen, Xinglin
	Jimei District
	Xiamen, China 361022
	Attn: Michael C. Bruno
	Facsimile: 011 86 592-621-8275
	E-mail: bruno@laxiamen.com
with a copy to:	Reed Brown
	2484 Willow Hills Drive
	Sandy, Utah 84093
	Facsimile: 1 (801) 943-1530
	E-mail: reed.crb@gmail.com
To Bruno at:	Michael C. Bruno
	#7 South Guangxing Road
	Xinglin District
	Xiamen, PRC 361022
	Telephone: 011 86 1390 602-5490
	E-mail: bruno@laxiamen.com
To Yang at:	Yang Lin Qing
	#7 South Guangxing Road
	Xinglin District
	Xiamen, PRC 361022
	Telephone: 011 86 1390 602-5490
	E-mail: bruno@laxiamen.com

Article 12.8 Public Announcements. No Party shall issue any press release or public announcement in connection with this Agreement or the transactions contemplated hereby without the prior written approval of the other Parties hereto.

Article 12.9 Expenses. Whether the transactions contemplated by this Agreement are consummated or fail to be consummated for any reason whatsoever, each Party shall pay its own expenses and the fees and disbursements of its counsel, accountants and other experts.

Article 12.10 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the PRC.

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Article 12.11 Arbitration.

(1) Except as provided in Article 12.2, all disputes arising in connection with or relating to this Agreement shall be finally settled by binding arbitration administered by the American Arbitration Association in accordance with its International Arbitration Rules. The tribunal shall be composed of a sole arbitrator. The arbitration shall be conducted in the English language at San Francisco under the U.S. Federal Arbitration Act.

(2) Any arbitral award rendered shall be final, binding and non-appealable and may be entered and enforced as a judgment with any court having jurisdiction.

(3) To the extent this Article is deemed to be a separate agreement independent from this Agreement, Article 12.10 concerning governing law and Article 12.7 concerning notices are incorporated herein by reference.

(4) Any Party may, without inconsistency with this agreement to arbitrate, seek from a court any provisional remedy that may be necessary to preserve its rights, to protect intellectual property or to prevent the disposal of assets at any time before, during or after the arbitration proceedings.

Article 12.12  Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties and the successors or assigns of the Parties, provided that the rights of Seller herein may not be assigned and the rights of Nautilus may only be assigned (without Seller’s and Shareholders’ consent) to an Affiliate of Nautilus (as long as Nautilus shall remain liable hereunder).

Article 12.13  Language; Schedules; Headings; Counterparts. This Agreement is written both in the Chinese and English languages. Both versions shall have equal validity, but in the event of a conflict between the two versions the English version shall prevail. All Schedules attached to this Agreement are an integral part hereof and are incorporated herein by reference as though set forth in full. The headings used in this Agreement are for convenience only and shall not be used in the interpretation of any provision of this Agreement or affect any right or obligation under this Agreement. This Agreement may be executed in any number of counterparts and by different Parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement.

Article 12.14  Joint and Several Obligations. The liability of Seller and each Shareholder hereunder shall be joint and several with Seller and with the Shareholders. Where in this Agreement provision is made for any action to be taken or not taken by Seller, the Shareholders jointly and severally undertake to cause Seller to take or not take such action, as the case may be. Without limiting the generality of the foregoing, Seller and each Shareholder shall be jointly and severally liable for the indemnities set forth in Article 8.

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Article 12.15 Representative of Seller and the Shareholders.

(a) Seller and each of the Shareholders hereby appoint Bruno as their representative (“Selling Parties Representative”) and their true and lawful attorney in fact, with full power and authority in each of their names and on behalf of each of them:

(i) to act on behalf of each of them in the absolute discretion of the Selling Parties Representative, but only with respect to the following provisions of this Agreement, with the power to: (A) designate the accounts for payment of the Purchase Price pursuant to Article 2.3; (B) act under the Post-Closing Audit Agreement; (C) act under the Indemnification and Escrow Agreement; (D) give and receive notices pursuant to Article12.7; (E) terminate this Agreement pursuant to Section 11.1 or waive any provision of this Agreement pursuant to Chapter 7, Article 11.1 and Article 12.6; and (F) act in connection with any matter as to which Seller and each of the Shareholders, jointly and severally, have obligations, or are Indemnified Persons, under Article 8; and

(ii) in general, to do all things and to perform all acts, including executing and delivering all agreements, certificates, receipts, instructions and other instruments contemplated by or deemed advisable to effectuate the provisions of this Article 12.15.

This appointment and grant of power and authority is coupled with an interest and is in consideration of the mutual covenants made herein and is irrevocable and shall not be terminated by any act of any of the Shareholders or Seller or by operation of law, or by the occurrence of any other event. Each Shareholder and Seller hereby consents to the taking of any and all actions and the making of any decisions required or permitted to be taken or made by the Selling Parties Representative pursuant to this Article 12.15.

(b) Nautilus shall be entitled to rely upon any document or other paper delivered by the Selling Parties Representative as (i) genuine and correct and (ii) having been duly signed or sent by the Selling Parties Representative, and none of Nautilus shall not be liable to any of the Shareholders or Seller for any action taken or omitted to be taken by Nautilus in such reliance.

[Remainder of this page intentionally left blank.]

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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed as of the date first above written.

	NAUTILUS
	NAUTILUS, INC.
By:
	Signature
	Print Name:
	Title:
	SELLER
	LAND AMERICA HEALTH & FITNESS CO., LTD
By:
	Signature
	Print Name:
	Title:
	BRUNO (a Shareholder)
By:
	Michael C. Bruno
	YANG (a Shareholder)
By:
	YANG LIN QING

ACCEPTANCE AND AGREEMENT OF SELLING PARTIES REPRESENTATIVE

The undersigned, being the Selling Parties Representative designated in Article 12.15 of the foregoing Asset Purchase Agreement, agrees to serve as the Selling Parties Representative and to be bound by the terms of such Asset Purchase Agreement pertaining thereto.

Dated: October 17, 2007

MICHAEL C. BRUNO

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EX-10.4

Exhibit 10.4

Execution Original

ASSET PURCHASE AGREEMENT

BY AND AMONG

NAUTILUS, INC.

AND

TREURIVER INVESTMENTS LIMITED

MICHAEL C. BRUNO

YANG LIN QING

Dated as of October 17, 2007

Description	Tab
GENERAL PROVISIONS	2
PURCHASE AND SALE OF BUSINESS AND ASSETS	6
SELLER, BRUNO AND YANG	9
REPRESENTATIONS AND WARRANTIES OF NAUTILUS	15
ACTION PRIOR TO THE CLOSING DATE	16
CONDITIONS PRECEDENT TO OBLIGATIONS OF NAUTILUS	17
SELLER, BRUNO AND YANG	19
INDEMNIFICATION	20
STAFF AND EMPLOYEE MATTERS	23
SUBSEQUENT TO THE CLOSING DATE	23
TERMINATION	25
OTHER PROVISIONS	26
LIST OF SCHEDULES AND EXHIBITS
Assigned Contracts	Schedule 2.1.8
Certain Fixed Assets	Schedule 2.4
Land Use Rights	Schedule 3.5.1
Buildings	Schedule 3.5.2
Leased Premises	Schedule 3.5.3
Tangible Property Owned	Schedule 3.5.4
Tangible Property Leased	Schedule 3.5.5
Inventory Locations	Schedule 3.5.6
Intellectual Property	Schedule 3.5.2
Contracts	Schedule 3.5.3
Additional Required Assets	Schedule 3.6
Tangible Personal Property	Schedule 3.7
Compliance with Law	Schedule 3.8
Litigation	Schedule 3.9
Brokers’ or Finders’ Fees	Schedule 3.10
Subsidiaries and Branches	Schedule 3.11
Financial Statements	Schedule 3.12
Liabilities	Schedule 3.13
Taxes	Schedule 3.14
Material Changes	Schedule 3.15
Insurance	Schedule 3.16
Suppliers	Schedule 3.17
Environmental Matters	Schedule 3.18
Employees	Schedule 3.19
Labor Contracts	Schedule 3.20.1
Employee Plans	Schedule 3.20.2
Compliance with the Foreign Corrupt Practices Act and Export Control and Anti-Boycott Laws	Schedule 3.21
Sales to Affiliates	Schedule 3.22
Services from Affiliates	Schedule 3.23

Exhibit A:	Form of Seller Non-Competition Agreement
Exhibit B:	Form of Shareholders Non-Competition Agreement
Exhibit C:	Form of Opinion of The Universal Legal Corp., PRC counsel to Seller and the Shareholders
Exhibit D:	Form of Opinion of Reed Brown, counsel to Seller and the Shareholders

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (hereinafter, “Agreement”), dated as of October 17, 2007, is entered into by and among the following parties (each a “Party” and collectively, the “Parties”):

1. NAUTILUS, INC., a Washington corporation (“Nautilus”);

2. TREURIVER INVESTMENTS LIMITED, a British Virgin Islands company (“Seller”);

3. MICHAEL C. BRUNO (“Bruno”), the spouse of Yang Lin Qing; and

4. YANG LIN QING (“Yang” or a “Shareholder”), the sole shareholder of Seller.

PRELIMINARY STATEMENTS

1. Seller is engaged in the procurement and distribution of certain of Nautilus’s proprietary line of health and fitness equipment and other fitness equipment (the “Business”).

2. Nautilus and Seller have entered into a Purchase Option Agreement, dated effective January 29, 2007 (the “Option Agreement”), pursuant to which Nautilus was granted an option to purchase substantially all of the assets related to the Business.

3. In accordance with the terms of the Option Agreement, Nautilus has given notice of exercise and the Parties have entered into an Escrow Agreement dated July 2, 2007, as amended by First Amendment dated October 17, 2007 (the “Escrow Agreement”), pursuant to which, following the release of US$25,000,000 in accordance with the Joint Instruction Letter referenced in such First Amendment, Nautilus has deposited with the escrow agent US$ 5,000,000 (the “Option Exercise Deposit”), to be held and disbursed in accordance with the terms of the Escrow Agreement.

4. This Agreement is being entered in conjunction with the following additional agreements: (a) Nautilus, Bruno and Yang are entering into that certain Asset Purchase Agreement, of even date herewith (the “Land America Agreement”), pursuant to which substantially all of the assets of Land America Health & Fitness Co., Ltd. (“Land America”) are being acquired by Nautilus (Xiamen) Fitness Co., Ltd., a wholly-owned direct or indirect subsidiary of Nautilus to be formed in Xiamen, Fujian, PRC (“Nautilus WOFE”); (b) Nautilus, Seller, Bruno (as Representative of Seller) and U.S. Bank National Association are entering into that certain First Amendment to Escrow Agreement of even date herewith; (c) Nautilus and Bruno (as Representative of Seller) are executing and delivering a Joint Instruction Letter, of even date herewith, directing U.S. Bank National Association to release US$12,500,000 from escrow to each of Seller and Nautilus, and to deliver certain accrued interest to Seller, in each case pursuant to the Escrow Agreement; and (d) Nautilus, Land America, Bruno and Yang are entering into a Post-Closing Audit Agreement, of even date herewith.

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5. Upon the terms and subject to the conditions of this Agreement and the other agreements referenced in Preliminary Statement 4 above, Seller is willing to sell substantially all of the assets of the Business to Nautilus or a direct or indirect wholly-owned subsidiary of Nautilus (“Buyer”), and Nautilus is willing to purchase the Assets or, at Nautilus’s option, to cause Buyer to purchase such assets from Seller.

NOW, THEREFORE, the Parties hereby agree as follows:

CHAPTER 1

GENERAL PROVISIONS

Article 1.1 Definitions.

The following terms as used in this Agreement shall have the meanings set forth below:

“Affiliate” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with, such Person. The term “control” (including the terms “controlled by” or “under the common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through ownership of an equity interest or by contract or otherwise.

“After Acquired Assets” has the meaning given such term in Article 2.4 (c).

“Audit Report” has the meaning given such term in Article 2.4 (a).

“Audited Closing Financial Statements” has the meaning given such term in Article 2.4 (a).

“Agreement” means this Asset Purchase Agreement and the Schedules hereto.

“Appraiser” has the meaning given in Article 5.2.

“Assets” has the meaning given such term in Article 2.1.

“2006 Balance Sheet” has the meaning given such term in Article 3.12.

“Books and Records” shall mean all books, ledgers, files, reports, plans and operating records of, or maintained by, the Business, in both physical and electronic form, as the case may be.

“Business” has the meaning given such term in the Preliminary Statements hereof.

“Business Day” means any day when banks are open for business in Xiamen, Fujian

Province, PRC.

“Buyer” has the meaning given such term in the Preliminary Statements hereof.

“Closing” and “Closing Date” have the meanings given such terms in Article 2.5.

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“Computer Software” means all computer applications software, owned or licensed, whether for general business usage (e.g., accounting, word processing, graphics, spreadsheet analysis, etc.) or specific, unique-to-the-business usage (e.g., order processing, manufacturing, process control, design, shipping, etc.) and all computer operating, security or programming software, owned or licensed.

“Customer Complaint” has the meaning given such term in Article 10.7.

“Disposed Assets” has the meaning given such term in Article 2.4 (c).

“Employee Plans” shall mean all welfare and benefit plans maintained by Seller for the benefit of the staff and workers of Seller, including, without limitation, all bonus, retirement, pension, health and medical, life insurance, disability and accident insurance, vacation and/or annual leave, sick-leave and housing plans.

“Excluded Assets” shall mean all assets of Seller not used in or relating to the Business and all cash and accounts receivable relating to the Business.

“Escrow Agent” has the meaning given such term in the Escrow Agreement.

“Escrow Agreement” has the meaning given such term in the Preliminary Statements hereof.

“Escrow Property” has the meaning given such term in the Escrow Agreement.

“Facilities” means the land and buildings and any leasehold interests in land or buildings currently owned or operated by Seller and any machinery or other equipment used or operated by Seller at the respective locations of the land and buildings specified in Articles 3.5.1, 3.5.2 and 3.5.3.

“Final Inventory Value” has the meaning given such term in Article 2.4 (b).

“Government Authority” shall mean the government of the PRC, any subdivision thereof and any provincial or local government authority having jurisdiction over Seller, the Business or any Assets.

“Improvements” means all buildings, structures, fixtures, and other infrastructure located on the land described in Article 3.5.1.

“Indemnity Cut-Off Date” has the meaning given such term in Article 8.2 hereof.

“Intellectual Property” shall mean trademarks, service marks, brand names, certification marks, trade dress, trade names and other indications of origin, the goodwill associated with the foregoing and registrations in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not in any jurisdiction; patents, applications for patents (including, without limitation, divisions, continuations, continuations in-part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; non-public information, trade secrets and

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confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any Person; writings and other works, whether copyrightable or not in any jurisdiction; registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; Computer Software (including, but not limited to, data, source codes, object codes, specifications and related documentation), any similar intellectual property or proprietary rights; and any claims arising out of or related to any infringement or misappropriation of any of the foregoing.

“Interim Balance Sheet” has the meaning given such term in Article 3.12.

“Inventory” means all inventories of Seller relating to the Business, wherever located, including all finished goods, work in process, raw materials, spare parts and all other materials and supplies to be used or consumed by Seller in the production of finished goods of the Business.

“Land” means the land described in Article 3.5.1.

“Lien” shall mean any mortgage, lien, pledge, security interest or other type of charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor, any easement, right of way or other encumbrance on title to real property, options or any other restrictions or third party rights.

“M&A Regulations” has the meaning given such term in Article 5.1.

“Option Agreement” has the meaning given such term in the Preliminary Statements hereof.

“Option Exercise Deposit” has the meaning given such term in the Preliminary Statements hereof.

“Party” shall mean each of Nautilus, Buyer, Seller, Bruno and Yang, who are sometimes collectively referred to as the “Parties”.

“Person” shall mean an individual, partnership, corporation, joint stock company, limited liability company, state-owned enterprise, joint venture or other entity, or a government or any political subdivision or agency thereof.

“PRC” or “China” shall mean the People’s Republic of China.

“Purchase Price” has the meaning given such term in Article 2.3.

“Purchase Price Adjustment Amount” has the meaning given such term in Article 2.4(d).

“Real Property” means the Land and Improvements.

“RMB,” “Renminbi” or “¥”shall mean the currency of the PRC.

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“Seller” has the meaning given such term in the Preliminary Statements hereof.

“Seller’s Non-Competition Agreement” shall mean the Non-Competition, Non-Disclosure and Non-Solicitation Agreement, between Land America, Nautilus and Nautilus WOFE, in substantially the form of Exhibit A hereto.

“Shareholder” shall mean Yang.

“Shareholders’ Non-Competition Agreement” shall mean the Non-Competition, Non Disclosure and Non-Solicitation Agreement, among Bruno, Yang, Nautilus and Nautilus WOFE, in substantially the form of Exhibit B hereto.

“Taxes” shall mean all tax and stamp duties charges, tariffs or other assessments charged by any Government Authority (including, without limitation, business, income, capital gain, value added, use, transfer, sales, deed and excise or custom tax, and stamp duties and however termed).

“Tangible Personal Property” all machinery, equipment, tools, dyes, molds, furniture, fixtures, office equipment, computer hardware, supplies, materials, vehicles and other items of tangible personal property (other than Inventory) of every kind owned or leased by Seller (wherever located and whether or not carried on Seller’s books), together with any express or implied warranty by the manufacturers or sellers or lessors of any item or component part thereof and all maintenance records and other documents relating thereto.

“Transaction Documents” mean each of this Agreement, Seller’s Non-Competition Agreement, the Shareholders’ Non-Competition Agreement, the Escrow Agreement, the Bruno Consulting Agreement, and each of the documents to be delivered by Seller pursuant to Section 2.6 below.

“U.S. Dollars,” “US$” or “$” shall mean the currency of the United States of America.

“U.S. GAAP” shall mean United States generally accepted accounting principles.

Article 1.2 Construction of Certain Terms and Phrases. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement; and (iv) the terms “Article” or “Clause” refer to the specified Article or Clause of this Agreement. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified.

Article 1.3 Exchange Rate. In determining the U.S. Dollar equivalent of an amount in RMB or vice versa, the exchange rate used shall be the average of the buy and sell exchange rates (or mid-rate) announced by the People’s Bank of China for U.S. Dollars and RMB for the date on or as of which the determination is made.

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CHAPTER 2

PURCHASE AND SALE OF BUSINESS AND ASSETS

Article 2.1 Purchase and Sale of the Business and Assets. Subject to the terms and conditions of this Agreement, at the Closing, Seller shall sell and transfer to Nautilus or Buyer, and Nautilus shall purchase or cause Buyer to purchase from Seller, all of Seller’s interest in the following assets (the “Assets”), free and clear of all Liens:

2.1.1  Intellectual Property. All interests of Seller in the Intellectual Property used in or related to the Business, including, without limitation that listed in Schedule 3.5.2.

2.1.2  Contracts Related to the Business. All rights and interests of Seller in and to the agreements or contracts used in or related to the Business that are listed in Schedule 2.1.3.

2.1.3  Warranties or Guarantees. All rights of Seller under or pursuant to all warranties, representations and guarantees made by third parties relating to items included in the Assets, including, without limitation, warranties or guarantees given by manufacturers and/or vendors in respect of the Assets.

2.1.4  Pre-Paid Expenses. All rights and interests of Seller in and to all pre-paid expenses made to any supplier of goods, utilities or services in respect of the Business.

Buyer shall not purchase any Excluded Assets and Excluded Assets shall remain the property of Seller after the Closing.

Article 2.2 No Assumption of Liabilities by Buyer. Neither Nautilus nor Buyer will assume, discharge or perform any liabilities or obligations of Seller or the Shareholders incurred or arising prior to or after the Closing, including, without limitation, those liabilities listed below, all of which liabilities will remain with Seller or the Shareholders and which Seller and the Shareholders hereby agree to retain and discharge or perform:

2.2.1  subject to Article 12.3, liabilities for all Taxes;

2.2.2  any environmental, health or public safety claims, liabilities or remedial expenses;

2.2.3  liabilities or obligations with respect to wages, severance or termination, employee welfare benefits and pensions, workers compensation and health care claims or other benefits or funds payable to employees or former employees of the respective Seller;

2.2.4  liabilities for money borrowed and accounts payable;

2.2.5  liabilities arising from any product warranties; and

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2.2.6  liabilities or obligations to any supplier of goods, services or utilities or to any customer and;

2.2.7  any other liabilities or obligations to any third party, including, without limitation, liabilities to any Government Authority.

Article 2.3 Purchase Price. The purchase price (the “Purchase Price”) for the Assets shall be US$43,000,000 (FORTY THREE MILLION U.S. DOLLARS). The Purchase Price shall be paid or credited as paid by or on behalf of Buyer as follows:

(a) the US$14,500,000 option fee previously paid to Seller (including the US$12,500,000 released from escrow as described in the third Preliminary Statement of this Agreement) and the US$4,000,000 option fee paid pursuant to the Land America Agreement shall be credited against the Purchase Price;

(b) US$8,500,000 of the Purchase Price shall be paid at Closing by wire transfer to a bank account designated by Seller in writing not less than three Business Days prior to the Closing Date;

(c) US$5,000,000 of the Purchase Price shall be paid to Seller by release of the Option Exercise Deposit in accordance with the terms of the Escrow Agreement at Closing. Seller acknowledges and agrees that US$1,000,000 of the US$5,000,000 to be released from escrow shall be placed into escrow pursuant to the terms of the Indemnification and Escrow Agreement, as defined in the Land America Agreement; and

(d) US$11,000,000 of the Purchase Price shall be paid to Seller on the earlier of October 31, 2008 or the date on which Nautilus or its subsidiary completes the purchase of the Land America land and buildings pursuant to the Lease Agreement entered into in connection with the Land America Agreement.

Article 2.4 Closing Audit. Within sixty (60) calendar days after the Closing Date, Deloitte Touche Tomatsu (“Deloitte”), or other independent auditors approved by Buyer will prepare an audited balance sheet of the Business, as at the Closing Date, and an audited statement of income of the Business for the period beginning January 1, 2007 and ending on the Closing Date. The fees and expenses of such audit shall be paid by Seller; provided, that Buyer will reimburse Seller for the incremental audit fees as compared to the fees associated with Seller’s previous statutory audit. Promptly after completion of such audit Deloitte shall supply Seller with copies of the Audited Closing Financial Statements and Deloitte’s opinion thereon (together with the Audited Closing Financial Statements, the “Audit Report”) stating that the Audited Closing Financial Statements have been prepared in accordance with U.S. GAAP on a going concern basis consistently applied.

Article 2.5 Closing. The completion of the transactions contemplated hereby (the “Closing”) shall take place at a location mutually approved by Nautilus and Seller on January 1, 2008, 10:00 a.m. Beijing time, or on such other date as the Parties may agree in writing (the “Closing Date”).

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Article 2.6 Deliveries by Seller. At the Closing, Seller shall deliver to Buyer the following:

2.6.1  Duly executed bills of sale or other instruments of transfer, in form and substance reasonably acceptable to Nautilus, transferring ownership to Buyer of all tangible property listed in Schedule 3.5.4;

2.6.2  Duly executed assignments or, where necessary, subleases, in form and substance reasonably acceptable to Nautilus, assigning or subleasing to Buyer all leasehold interests, if any, in the tangible property listed in Schedule 3.5.5;

2.6.3  Duly executed assignments or other instruments of transfer, in form and substance reasonably acceptable to Nautilus, assigning and transferring to Buyer all of Seller’s interest in all Intellectual Property used in and related to the Business, including that listed in Schedule 3.5.2, including, without limitation, an assignment of Seller’s trade name and trademarks relating to the Business;

2.6.4  Duly executed assignments transferring to Buyer all of Seller’s rights and obligations under all contracts, licenses and similar instruments used in and relating to the Business to which Seller is a party, in form and substance reasonably acceptable to Nautilus, together with the written consent, if required, of the other party to such contracts, licenses and similar instruments; and

2.6.5  The certificates and other documents to be delivered pursuant to Chapter 6 hereof.

Article 2.7 Deliveries by Buyer. At the Closing, Buyer shall deliver to Seller the following:

2.7.1  That portion of the Purchase Price payable at Closing (as set forth in Article 2.3 above) to Seller, by (i) crediting the US$14,500,000 option fee previously paid to Seller, (ii) crediting the US$4,000,000 option fee paid pursuant to the Land America Agreement, (iii) wire transfer of US$8,500,000 to a bank account designated by Seller in writing not less than three Business Days prior to the Closing Date, (iv) delivery of US$4,000,000 by transfer of funds from the Option Exercise Deposit to an account designated by Seller in writing not less than three Business Days prior to the Closing Date, and (v) transfer of US$1,000,000 into escrow as described in Article 2.3(b) above; provided, that the delivery of such payments may be completed within three Business Days following the Closing Date and shall be completed on the same date as delivery of the Purchase Price under the Land America Agreement; and

2.7.2  The certificates and other documents to be delivered pursuant to Chapter 7 hereof.

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Article 2.8 Coordination of Closing Activities. The Parties hereby agree that Closing hereunder shall be conducted in conjunction with, and conditioned upon, completion of the transactions described in the Land America Purchase Agreement. As part of such Closing activities, in addition to the actions to be taken pursuant to the terms of this Agreement, the following actions shall be taken: (a) Nautilus shall cause Buyer to purchase certain inventory from Land America in accordance with that certain Post-Closing Audit Agreement, of even date herewith, by and among Nautilus, Land America, Bruno and Yang; (b) Nautilus WOFE and Land America shall enter into the Lease Agreement, as defined in the Land America Agreement; (c) Nautilus, Nautilus WOFE, Land America, Bruno and Yang shall enter into the Indemnification and Escrow Agreement, as defined in the Land America Agreement; (d) Land America shall execute and deliver the Seller’s Non-Competition Agreement, as defined in the Land America Agreement; (e) Bruno and Yang shall execute and deliver the Shareholders’ Non-Competition Agreement, as defined in the Land America Agreement; and (f) Bruno and Nautilus and/or Nautilus WOFE shall enter into the Bruno Consulting Agreement, as defined in the Land America Agreement.

CHAPTER 3

REPRESENTATIONS AND WARRANTIES OF

SELLER, BRUNO AND YANG

Seller, Bruno and Yang hereby represent and warrant, jointly and severally, to Nautilus as follows:

Article 3.1 Organization. Seller is a limited liability company duly organized under the Law of the British Virgin Islands.

Article 3.2 Power and Authority. The execution and performance by Seller of this Agreement and each other Transaction Document to which it is a party (i) are within its corporate power and business scope, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene its articles of association and (iv) do not contravene any law or contractual restriction binding on or affecting it. Bruno and Yang have the full legal right and authority to execute and perform his/her obligations under this Agreement and the other Transaction Documents to which he/she is a party and such execution and performance does not contravene any laws or contractual restrictions binding on or affecting him/her.

Article 3.3 Consents and Approvals. All authorizations, consents or approvals or other actions by, and all notices to or filings with, any Government Authority required for the due execution and performance by Seller, Bruno and Yang of this Agreement and the other Transaction Documents has been obtained.

Article 3.4 Binding Effect. This Agreement is, and the each other Transaction Document to which Seller, Bruno or Yang will be a party when executed by such Party will be, the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its respective terms.

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Article 3.5 Ownership of Assets. Seller owns leases or has the legal right to use all of the Assets. Seller has good and marketable title to, or, in the case of leases, valid and effective leasehold interests in, all of the Assets, free and clear of all Liens, except as noted in the Schedules hereto.

3.5.1  [Intentionally left blank]

3.5.2  Intellectual Property. Schedule 3.5.2 sets forth all domestic and foreign Intellectual Property used in or relating to the Business, registered in the name of Seller, or of which Seller is a licensor or licensee, used in, or which have been used in, or which are under development or have been conceived in, or which have or potentially have application to, the Business. Seller owns all of the Intellectual Property to be transferred hereunder free and clear of all Liens and pays no royalty to anyone under or with respect to any of them, except as set forth in such Schedule 3.5.2. All rights of Seller in and to each item of the Intellectual Property listed on Schedule 3.5.2 and to all processes, lab journals, toxicological and ecological data, trade secrets, technology including know-how and show-how, product formulae, manufacturing, engineering and other drawings, intellectual property rights, agency agreements, technical information, engineering data, design and engineering specifications and similar materials recording or evidencing Seller’s proprietary expertise used in or residing with the Business, whether purchased or developed internally, included in the Assets are transferable to Buyer as herein contemplated. There is no conflict with the rights of others known to Seller, or any claim or formal charge of infringement, with respect to any Intellectual Property of the Business, or with respect to any license relating to the Business under which Seller is licensor or licensee. Seller has no knowledge of the possible infringement by any third party of any Intellectual Property related to or used in the Business.

3.5.3  Contracts. Schedule 3.5.3 sets forth all of the following contracts of Seller relating to the Business: (a) all existing contracts for the purchase of raw materials, commodities, merchandise, supplies, other materials or personal property with any supplier under the terms of which Seller is likely to pay more than US$100,000 or the equivalent in RMB during the term of the contract, (b) all existing contracts for the sale of raw materials, commodities, merchandise, supplies, other materials or personal property or for the furnishing of services by or to the Business which involve more than the sum of US$100,000 or the equivalent thereof in RMB, (c) to the extent not included in the foregoing, all broker, distributor, dealer, manufacturer’s representative, sales, agency, sales promotion, market research, marketing consulting or advertising contracts used in or relating to the Business, (d) all contracts of, or relating to, employment of any officer or individual employee or contracts of independent contractors or consultants relating to the Business and not cancellable without penalty within 30 days of notice of such cancellation, (e) all mortgages, notes, loan or credit agreements or other contracts or obligations of Seller or to the direct or indirect guaranty or assumption by Seller of obligations of others with respect to the Business or the Assets, and (f) all other contracts, whether or not made in the ordinary course of business, which are material to the Business or the Assets. Except as noted in Schedule 3.5.3, each contract listed therein is in full force and effect

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and, subject to obtaining the consent of the other Party thereto is assignable to Buyer without penalty or other adverse consequence. Seller (in relation to the Business) is not in default under the terms of any such contract or in the payment of any principal of or interest on any indebtedness for borrowed money. There are no contracts granting any Person any preferential rights to purchase any of the Assets or any of the properties or assets of the Business other than in the ordinary course of the Business. All of the contracts listed in Schedule 3.5.3 are valid and binding.

Article 3.6 Sufficiency of Assets. Except as set forth in Schedule 3.6, the Assets (a) constitute all of the assets, tangible and intangible, of any nature whatsoever, necessary to operate the Business in the manner presently operated by Seller (it being understood that Seller is not responsible for any operational or management errors in the conduct of the Business after the Closing), and (b) except for the Excluded Assets, include all of the operating assets of Seller related to the Business.

Article 3.7 Compliance with Laws. Except as described in Schedule 3.7, Seller is in compliance, and there exists no alleged non-compliance, with all applicable statutes, orders, rules and regulations promulgated by any Government Authority relating in any material respect to the Assets or the operation and conduct of the Business, or the use of the properties of the Business and neither Seller nor any Shareholder has received any notice of alleged violation of any such statute, order, rule or regulation. Schedule 3.7 lists all material governmental licenses, permits, product registrations, filings, authorizations and approvals and any pending applications for any thereof relating to the conduct of the Business or the use of properties held by Seller and such licenses, permits, product registrations, filings, authorizations and approvals are all the governmental licenses, permits, filings, authorizations and approvals necessary to conduct the Business or to use the Assets as currently conducted or used.

Article 3.8 Litigation. Except as set forth in Schedule 3.8, there is no action, lawsuit, claim, proceeding, or investigation pending or, to the best knowledge of Seller, Bruno and Yang, threatened against or affecting Seller which, if decided adversely against Seller, could have a material adverse effect upon the Business or its financial condition, prospects or operations, or upon the Assets. Seller is not in default, and no condition exists that with notice or the lapse of time or both would constitute a default, with respect to any order, writ, injunction or decree of any court or Government Authority affecting or relating to the Business. No condemnation proceeding has been commenced or, to the knowledge of Seller, Bruno or Yang, is threatened to be commenced against any of the Assets.

Article 3.9 Brokers’ or Finders’ Fees. Except as set forth in Schedule 3.9, neither Seller, Bruno nor Yang has paid or will become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions provided for in this Agreement.

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Article 3.10 Subsidiaries. Except as set forth in Schedule 3.10, Seller has no subsidiaries or branches.

Article 3.11 Financial Statements. Seller has delivered to Nautilus: (a) a pro forma unaudited balance sheet of the Business as at December 31, 2006 (including the notes thereto, the “2006 Balance Sheet”), and the related pro forma unaudited statements of income, changes in shareholders’ equity and cash flows for the fiscal year then ended, including the notes thereto, certified by the CEO/President and chief financial officer of Seller; and (b) unaudited pro forma balance sheets of the Business as at each of March 31, 2007 and June 30, 2007 (the “Interim Balance Sheets”) and the related unaudited pro forma statements of income, changes in shareholders’ equity, and cash flows for the fiscal quarters then ended, including the notes thereto, certified by the CEO/President and chief financial officer of Seller. Such financial statements fairly present (and the financial statements delivered pursuant to Section 5.11 will fairly present) the financial condition and the results of operations, changes in shareholders’ equity and cash flows of the Business, as at the respective dates of and for the periods referred to in such financial statements, all in accordance with U.S. GAAP. The financial statements referred to in this Section 3.11 reflect the consistent application of such accounting principles throughout the periods involved. The financial statements have been prepared from and are in accordance with the accounting records of Seller. Seller has also delivered to Buyer copies of all letters from the Seller’s auditors to the Seller’s board of directors or the audit committee thereof dated during 2007, together with copies of all responses thereto.

Article 3.12 No Undisclosed Liabilities. The Business has no material liabilities except for liabilities reflected or reserved against in the 2006 Balance Sheet or the Interim Balance Sheets and current liabilities incurred in the ordinary course of business of the Business since June 30, 2007.

Article 3.13 Books and Records; Tax Returns. Seller’s books of account reflect all items of income and expense and all assets and liabilities of the Business required to be reflected therein in accordance with U.S. GAAP and neither Seller nor any Affiliate of Seller has failed to file any material report or return with respect to the Business which may be required by any law or regulation of the British Virgin Islands or political subdivision thereof to be filed, and, except as set forth in Schedule 3.13, Seller has duly paid or accrued on it’s books of account all taxes, duties and charges pursuant to such reports and returns or assessed against Seller. Seller has fully filed, on or before the due date therefor or the expiration of any extended period for filing, all returns or reports with respect to any Taxes required to be filed by Seller, which returns or reports disclose as having become due and payable all Taxes becoming due and payable for the periods covered therein. Except as set forth in Schedule 3.13, Seller has paid all Taxes reflected in such returns and reports and all other Taxes currently due or claimed to be due from Seller by any Government Authority.

Article 3.14 Absence of Certain Changes, Events and Conditions. Since December 31, 2006, there has not been any material adverse change in the condition (financial or otherwise) of the Assets, liabilities, business, results of operations

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or prospects of the Business, including, without limitation, any damage or destruction of property by fire or other casualty involving loss in excess of US$100,000 or the equivalent thereof in RMB in the aggregate, whether or not covered by insurance. Except as described in Schedule 3.14, there are no conditions known to the senior management of Seller or any Shareholder existing with respect to the products, facilities, personnel, raw materials, supplies or Assets of the Business which might reasonably be expected to have a material adverse effect on the Business or its prospects.

Article 3.15 Employees. Schedule 3.15 lists the name, current annual salary rates, bonuses, deferred compensation and other like benefits (in cash or otherwise) paid or payable through the date hereof for fiscal 2007, date of employment and description of position of each of the current employees, officers, directors and agents of Seller employed in the Business or operations of the Business. Except as set forth on Schedule 3.15, no employee of Seller has suffered any industrial injury resulting from employment with Seller or filed a claim for compensation related to any industrial injury or condition of employment resulting from employment with Seller.

Article 3.16 Employee Plans. Schedule 3.16 contains a complete and accurate list of all Employee Plans and Seller has no other obligations, contingent or otherwise, relating to any Employee Plans. Seller has delivered to Buyer true and complete copies of all Employee Plans, including trust agreements and insurance contracts embodying such plans, funds, programs or arrangements.

Article 3.17 Compliance with the Foreign Corrupt Practices Act and Export Control and Anti-Boycott Laws.

(a) Except as identified in Schedule 3.21, neither Seller nor any of its representatives or agents have, to obtain or retain business, directly or indirectly offered, paid or promised to pay, or authorized the payment of, any money or other thing of value (including any fee, gift, sample, travel expense or entertainment with a value in excess of one hundred dollars ($100.00) or the equivalent thereof in RMB in the aggregate to any one individual in any year) or any commission payment payable, to:

(i) any person who is an official, officer, agent, employee or representative of any Government Authority or of any existing or prospective customer (whether government owned or non-government owned);

(ii) any political party or official thereof;

(iii) any candidate for political or political party office; or

(iv) any other individual or entity;

while knowing or having reason to believe that all or any portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to any such official, officer, agent, employee, representative, political party, political party official, candidate, individual, or any entity affiliated with such customer, political party or official or political office.

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(b) Except as set forth in Schedule 3.17(b), Seller has made all payments to third parties by check mailed to such third parties’ principal place of business or by wire transfer to a bank located in the same jurisdiction as such party’s principal place of business.

(c) Each transaction is properly and accurately recorded on the books and records of Seller, and each document upon which entries in Seller’s books and records are based is complete and accurate in all respects. Seller maintains a system of internal accounting controls adequate to insure that Seller maintains no off-the-books accounts and that Seller’s assets are used only in accordance with Seller’s management directives.

(d) Seller has at all times been in compliance with all legal requirements relating to export control and trade embargoes. No product sold or service provided by Seller or any Affiliate of Seller during the last five (5) years has been, directly or indirectly, sold to or performed on behalf of Cuba, Iraq, Iran, Libya, North Korea or Sudan.

(e) Except as set forth in Schedule 3.17(e), neither Seller nor any Affiliate of Seller has violated the anti-boycott prohibitions contained in 50 U.S.C. sect. 2401 et seq. or taken any action that can be penalized under Section 999 of the U.S Internal Revenue Code of 1986, as amended. Except as set forth in Schedule 3.21(e), during the last five (5) years, neither Seller nor any Affiliate of Seller has been a party to, nor a beneficiary under and has not performed any service or sold any product under any contract under which a product has been sold to customers in Bahrain, Bangladesh, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Sudan, Syria, United Arab Emirates or the Republic of Yemen.

Article 3.18 Compliance with PRC Anti-Corruption Laws. Seller has not, nor to the best of its knowledge after reasonable inquiry has any Affiliate of Seller or any of their respective employees, representatives or agents has engaged in any conduct which would constitute a violation of PRC law prohibiting bribery, including, without limitation, any conduct or activity which would constitute a violation of Articles 163, 164 or 389 of the PRC Criminal Code, Article 8 of the Law Against Unfair Competition or the Interim Rules on Prohibition of Commercial Bribery.

Article 3.19 Pricing of Sales. Except as set forth in Schedule 3.19, since December 31, 2006, all of the products of the Business have been sold to persons who are not Affiliates or, if Affiliates have been sold at prices not exceeding prices at which such products are sold in substantial quantities in the marketplace in arms-length transactions.

Article 3.20 Pricing of Services. Except as set forth in Schedule 3.20, since December 31, 2006, all services provided to the Business have been provided by person who are not Affiliates or, if by Affiliates, have been provided at prices not exceeding prices at which such services are provided in the marketplace in arms-length transactions.

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Article 3.21 Completeness of Schedules. The Schedules attached hereto, where applicable to Seller, completely and correctly present the information required by this Agreement to be set forth therein, and do not contain any untrue statement of a material fact. Originals or true and complete copies of all documents or other written materials underlying items listed in such Schedules have heretofore been made available for examination by Buyer, including, without limitation, deeds, leases, mortgages, deeds of trust, security instruments, permits, trademarks, patents and other Intellectual Property, litigation files, contracts, employee agreements and licenses, and such documents have not been modified and will not be modified prior to the Closing Date without Nautilus’s prior written consent.

CHAPTER 4

REPRESENTATIONS AND WARRANTIES OF NAUTILUS

Nautilus hereby represents and warrants to Seller, Bruno and Yang as follows:

Article 4.1 Organization. Nautilus is a corporation duly organized and validly existing and in good standing under the laws of the State of Washington, U.S.A. When formed and in possession of all requisite governmental approvals and authorizations, Buyer will be a duly organized and validly existing legal entity and in good standing under the laws of the jurisdiction in which it is formed.

Article 4.2 Power and Authority. The execution and performance by Nautilus of this Agreement and the other Transaction Documents to which it is a party (i) are within its corporate power, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene its Articles of Incorporation or By-Laws and (iv) do not contravene any law or contractual restriction binding on or affecting it.

Article 4.3 Consents and Approvals. No authorization, consent or approval or other action by, and no notice to or filing with, any governmental authority is required for the due execution, delivery and performance by Nautilus of this Agreement. Nautilus has the financial capacity to satisfy its financial obligations as contemplated herein.

Article 4.4 Binding Effect. This Agreement and each other Transaction Document to which it is a party is the legal, valid and binding obligation of Nautilus, enforceable against Nautilus in accordance with its terms.

Article 4.5 Brokers’ or Finders’ Fees. Nautilus has not paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions provided for in this Agreement.

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Article 4.6 Acknowledgments. Subject to the representations, warranties and covenants of Seller, Bruno and Yang as set forth in this Agreement and the exhibits, schedules and attachments hereto, Nautilus is relying on its own investigation as to the condition of the Business and the Assets. Nautilus has been provided access to the books, records and personnel of Seller and has been afforded an opportunity to make inquires and to review such information as Nautilus has requested for the purpose of completing such investigation.

Article 4.7 Periodic Reports. The periodic reports on Form 10-K, Form 10-Q and Form 8-K filed by Nautilus with the U.S. Securities and Exchange Commission (“SEC”) since June 30, 2006 (i) complied as to form in all material respects with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

CHAPTER 5

ACTION PRIOR TO THE CLOSING DATE

The following actions have been or will be taken prior to the Closing Date:

Article 5.1 Preserve Accuracy of Representations and Warranties. Each Party shall refrain from taking any action which would render any representation and warranty contained in Chapters 3 and 4 of this Agreement inaccurate in any material respect on the Closing Date.

Article 5.2 Operation of Business. From the date hereof through the Closing Date, except with the prior written consent of Nautilus or as otherwise provided below, Seller and the Shareholders shall (i) conduct the business and operations of the Business only in the ordinary course, (ii) continue to meet the contractual obligations incurred by Seller in the ordinary course of business and to pay all obligations as they mature in the ordinary course of business, (iii) exercise best efforts to keep available the services of the present employees of the Business, and (iv) exercise best efforts to preserve the good relations of suppliers, customers and others with whom Seller has business relations relating to the Business.

Article 5.3 Sale or Pledge of Assets; Borrowing. Seller shall not sell or mortgage or pledge any of the Assets or, for the account of the Business, borrow any money or incur, assume or guarantee or otherwise become directly or indirectly responsible for the payment of any indebtedness or any other obligation of any other Person or agree to do any of the foregoing.

Article 5.4 Compliance with Laws, etc. Seller shall comply with all applicable laws and shall conduct the Business in such a manner that on the Closing Date the representations and warranties contained in this Agreement shall be true as though such representations and warranties were made on and as of such date.

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Article 5.5 Best Efforts. Each of the Parties hereto shall use its best efforts to fulfill all of the conditions set forth in this Agreement over which it has control or influence (including obtaining any authorizations, consents, approvals or waivers necessary to the performance of such Party’s obligations hereunder) and to consummate the transactions contemplated herein.

Article 5.6 Nautilus’s Access to Information and Records Before the Closing. Seller shall give Nautilus, its employees, counsel, accountants and other representatives full access throughout the period prior to the Closing Date, to all of the properties, books, contracts, commitments, customers, suppliers, distributors and records of the Business, and furnish to Nautilus during such period all such information concerning the Business as Nautilus may reasonably request. Representatives of Nautilus shall be allowed to have unrestricted contact with employees employed in the Business and with past and present customers, suppliers and distributors of the Business, for the purpose of accomplishing an orderly transfer of the Business to Buyer on the Closing Date.

Article 5.7 Interim Financial Statements. Until the Closing Date, Seller shall deliver to Nautilus within twenty (20) days after the end of each month a copy of the internally prepared income statement and balance sheet for such month prepared in a manner and containing information consistent with Seller’s current practices and certified by the CEO/President and chief financial officer of Seller as to compliance with Article 3.11.

Article 5.8 Hart-Scott-Rodino Compliance. Nautilus and Seller shall file as soon as reasonably practicable any Notification and Report Forms and related material that it may be required to file with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice under the Hart-Scott-Rodino Act and shall make any further filings pursuant thereto that may be necessary in connection therewith. Nautilus and Seller each further agree to respond as fully and promptly as practicable to any inquiries and/or requests for information or documents received from any governmental entity in connection with antitrust matters related to the transactions contemplated by this Agreement. Neither Nautilus nor Seller shall extend any waiting period under the Hart-Scott-Rodino Act or enter into any agreement with the Federal Trade Commission or the Antitrust Division not to consummate the transactions contemplated by this Agreement, except with the prior written consent of the other parties hereto, which consent shall not be unreasonably withheld or delayed.

CHAPTER 6

CONDITIONS PRECEDENT TO OBLIGATIONS OF NAUTILUS

Except for Seller’s retention of the US$18,500,000 option fee (which includes the US$4,000,000 option fee paid in connection with the Land America Agreement), in the event Closing does not occur, the obligations of Nautilus and Buyer under this Agreement shall be subject to the satisfaction, on or prior to the Closing Date, of all of the following conditions, any one or more of which may be waived by Nautilus:

Article 6.1 Representations and Warranties Accurate. All representations and warranties of Seller, Bruno and Yang contained in this Agreement shall have been true in all material respects when made and shall be true in all material respects at and

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as of the Closing Date as if such representations and warranties were made at and as of the Closing Date. Seller shall furnish Nautilus and Buyer with a certificate, dated the Closing Date and signed by the legal representative of Seller, Bruno and Yang, stating the above in such form as Nautilus may reasonably request.

Article 6.2 Absence of Certain Changes. Since the date hereof and prior to the Closing Date, there shall not have occurred or been discovered:

(a) any material adverse change in the business, financial condition, prospects or results of operations of the Business, other than a material adverse change resulting from a material reduction in the volume of purchases by Nautilus;

(b) any new law, rule or regulation or the amendment or interpretation of any existing law, rule or regulation, materially adversely affecting the operation of the Business or the ability of Seller to convey, assign and transfer to Buyer any of the Assets, the Business and other contractual rights pertaining to the Business with the effect of materially affecting the value of, or the ability of Buyer to operate as presently operated, the Business; or

(c) damage or destruction in the nature of a casualty loss or claim, whether covered by insurance or not, materially adversely affecting the operation of the Business or the ability of Seller to convey, assign and transfer to Buyer any of the Assets, the Business and other contractual rights pertaining to the Business with the effect of materially affecting the value of, or the ability of Buyer to operate as presently operated, the Business, and there shall have been delivered to Nautilus a certificate to that effect, dated the Closing Date and signed by the legal representative of Seller.

Article 6.3 Performance by Seller. Seller shall have performed and complied in all materials respects with all agreements and conditions required by this Agreement to be performed and complied with by it prior to or on the Closing Date, and there shall have been delivered to Nautilus and Buyer a certificate to that effect, dated the Closing Date and signed by the legal representative of Seller.

Article 6.4 Opinions of Counsel for Seller and the Shareholders. Nautilus shall have received from The Universal Legal Corp., PRC counsel to Seller, Bruno and Yang, and C. Reed Brown, U.S. counsel to Seller, Bruno and Yang, written opinions, dated the Closing Date, in form and substance satisfactory to Nautilus and Buyer, to the effect set forth in Exhibit C and Exhibit D, respectively. In giving such opinion, such counsel may rely, as to matters of fact, upon certificates of officers of Seller and certificates of Bruno and Yang, provided that such counsel shall state that they believe that they are justified in relying upon such certificates and deliver copies thereof to Nautilus and Buyer with such opinion.

Article 6.5 Authorizations, Approvals and Consents. Seller shall have received (at Seller’s cost and expense) all authorizations, consents, approvals and waivers or other action required to be obtained in connection with the execution, delivery and

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performance of this Agreement or the transfer pursuant to this Agreement of all of the Assets. There shall be delivered to Nautilus and Buyer a certificate, dated the Closing Date and signed by the legal representative of Seller, stating that Seller has received all authorizations, consents, approvals and waivers required by this Article 6.5.

Article 6.6 Legal Prohibition. No proceeding shall be pending or threatened before any Government Authority to restrain or prohibit or to obtain material damages or other relief in connection with the consummation of the transactions contemplated by this Agreement and no investigation that might eventuate in any such proceeding shall be pending or threatened. All applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated.

Article 6.7 Instruments of Sale, etc. On the Closing Date, Seller shall deliver to Nautilus and Buyer each of the documents set forth in Article 2.6, in form and substance satisfactory to Nautilus.

Article 6.8 Corporate Authorization. Seller shall have provided Nautilus and Buyer with a certificate of the legal representative of Seller certifying copies of the resolutions of the Board of Directors and shareholders of Seller approving this Agreement and the other Transaction Documents to which it is a party and the sale and transfer of the Assets to Buyer under this Agreement.

Article 6.9 Land America Agreement. Closing pursuant to the Land America Agreement shall have been completed simultaneously with the Closing hereunder.

Article 6.10 Continuance of Insurance. Seller shall have provided Nautilus with certificate(s) from its insurance brokers, certifying the continuation upon substantially the same terms and conditions of the insurance set forth in Schedule 3.16. Seller will make arrangements to insure the continued coverage after the Closing Date of Buyer under an insurance policy for any and all liabilities for injury to persons or property arising out of the sale by Seller of the products of the Business prior to the Closing Date.

Article 6.11 Seller’s Non-Competition Agreement. Land America shall have executed and delivered the Seller’s Non-Competition Agreement.

Article 6.12 Shareholders’ Non-Competition Agreement. Bruno and Yang shall have executed and delivered the Shareholders’ Non-Competition Agreement.

CHAPTER 7

CONDITIONS PRECEDENT TO OBLIGATIONS OF

SELLER, BRUNO AND YANG

The obligations of Seller, Bruno and Yang under this Agreement shall be subject to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by Seller:

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Article 7.1 Representations and Warranties Accurate. All representations and warranties of Nautilus contained in this Agreement shall have been true in all material respects when made and shall be true in all material respects at and as of the Closing Date as if such representations and warranties were made at and as of the Closing Date. Nautilus shall furnish Seller a certificate, dated the Closing Date and signed by a duly authorized officer stating the above in such form as Seller, Bruno or Yang may reasonably request.

Article 7.2 Performance by Nautilus. Nautilus shall have performed and complied with or caused Buyer to perform or comply with all agreements and conditions required by this Agreement to be performed and complied with by it prior to or on the Closing Date and there shall be delivered to Seller a certificate to such effect, dated the Closing Date and signed by a duly authorized officer of Nautilus.

Article 7.3 Legal Prohibition. On the Closing Date there shall exist no injunction or final judgment, law or regulation prohibiting the consummation of the transactions contemplated by this Agreement. All applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated.

Article 7.4 Land America Agreement. Closing pursuant to the Land America Agreement shall have been completed simultaneously with the Closing hereunder.

CHAPTER 8

INDEMNIFICATION

Article 8.1 Indemnification by Seller, Bruno and Yang. Seller, Bruno and Yang hereby jointly and severally agree to indemnify and hold each of Nautilus and Buyer harmless at all times as set forth below from and after the Closing Date against and in respect of all matters in connection with the following:

8.1.1  From and after the Closing Date, all the liabilities of Seller arising out of or in connection with the Business (including, without limitation, liabilities for taxes or in connection with the termination of employees of the Business), and all suits, proceedings, demands, assessments, judgments, costs, attorneys’ fees and expenses incident to any matters relating to the such liabilities of Seller and arising out of or in connection with the Business prior to the Closing Date, including those out-of-pocket costs, charges and expenses in respect of the participation of officers and employees of Nautilus or Buyer after the Closing Date in the defense thereof; and

8.1.2  From and after the Closing Date, any losses, liabilities, damages or deficiencies incurred by either Nautilus or Buyer resulting from any misrepresentation or breach of warranty under Chapter 3 of this Agreement or non-fulfillment of any agreement or covenant on the part of Seller or a Shareholder under this Agreement, or from any certificate or other instrument furnished or to be furnished by Seller or a Shareholder hereunder, and all suits, actions, proceedings, demands, assessments, judgments, costs, attorneys’ fees and expenses incident to any of the foregoing matters, including those out-of-pocket costs, charges and expenses in respect of the participation of officers and employees of Nautilus or Buyer after the Closing Date in defense thereof.

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Article 8.2 Payments to Nautilus and Buyer. Seller and the Shareholders shall promptly reimburse Nautilus and Buyer for all amounts owed under Article 8.1 from time to time, at their request, as such amounts are incurred. Notwithstanding the foregoing, (a) the maximum aggregate liability of Seller and the Shareholders for all claims made by Nautilus and/or Buyer under Article 8.1.2 shall not exceed the amount of US$1,000,000 (ONE MILLION U.S. DOLLARS) less any amount released to Nautilus or Buyer by the Escrow Agent pursuant to the Escrow and Indemnification Agreement entered into pursuant to the Land America Agreement (the “Land America Escrow Agreement”); (b) neither of Nautilus nor Buyer shall make any particular claim for an amount owed under Article 8.1.2 after the 15-month anniversary of the Closing Date (the “Indemnity Cut-Off Date”) (other than claims made in respect of Articles 3.2 and 3.13 which shall survive the Indemnity Cut-Off Date for an indefinite period); and (c) notwithstanding the submission of a claim pursuant to Article 8.1.2 prior to the Indemnity Cut-Off Date, Seller and the Shareholders may delay payment for such claims until after the fifteen-month anniversary of the Closing Date and the initial release of funds to the Representative pursuant to the Land America Escrow Agreement.

8.2.1  Subject to the limitations set forth in Article 8.2 above, Nautilus may from time to time give a notice (a “Notice”) to the Representative specifying in reasonable detail the nature and dollar amount of any claim (a “Claim”) it may have under Article 8.1.1 or 8.1.2 of this Agreement. Nautilus may make more than one claim with respect to any underlying state of facts. If the Representative gives notice to Nautilus disputing any Claim (a “Counter Notice”) within thirty (30) days following receipt by the Representative of the Notice regarding such Claim, such Claim shall be resolved as provided in Article 8.2.2 below. If no Counter Notice is received by Nautilus within such thirty-day (30-day) period, then the dollar amount of damages claimed by Nautilus as set forth in its Notice shall be deemed established for purposes of this Agreement and, at the end of such thirty-day (30-day) period the Representative shall pay to Nautilus the dollar amount claimed in the Notice, subject to the limitations set forth in Article 8.2 above.

8.2.2  If a Counter Notice is given with respect to a Claim, the Representative and Nautilus will seek to resolve the matter through friendly negotiations. If the matter has not been resolved within thirty days after delivery of the Counter Notice, either party may submit the matter to binding arbitration in accordance with Article 12.11 below.

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Article 8.3 Indemnification by Nautilus. Nautilus and Buyer hereby agree jointly and severally to indemnify and hold harmless Seller, Bruno and Yang at all times from and after the Closing Date against and in respect of all matters in connection with the following:

8.3.1  From and after the Closing Date, all the liabilities of Nautilus and Buyer arising out of or in connection with the Business (including, without limitation, liabilities for taxes or in connection with the termination of employees of the Business by Buyer after the Closing Date), and all suits, proceedings, demands, assessments, judgments, costs, attorneys’ fees and expenses incident to any matters relating to the such liabilities of Nautilus and Buyer and arising out of or in connection with the conduct of the Business from and after the Closing Date, including those out-of-pocket costs, charges and expenses in respect of the participation of Bruno, Yang or officers and employees of Seller after the Closing Date in the defense thereof.

8.3.2  From and after the Closing Date up through the Indemnity Cut-Off Date, any losses, liabilities, damages or deficiencies incurred by Seller, Bruno or Yang that result from any misrepresentation, breach of warranty, or non-fulfillment of any agreement or covenant on the part of Nautilus under this Agreement, or from any certificate or other instrument furnished or to be furnished by hereunder and all suits, actions, proceedings, demands, assessments, judgments, costs, attorneys’ fees and expenses incident to any of the foregoing matters, including those out-of-pocket costs, charges and expenses in respect of the participation of officers and employees of Seller or the Shareholders after the Closing Date in defense thereof. Notwithstanding the foregoing, the maximum aggregate liability of Nautilus and Buyer for all claims made by Seller or the Shareholders under Article 8.3.2 shall not exceed US$1,000,000 (ONE MILLION U.S. DOLLARS).

Article 8.4 Payments to Seller and the Shareholders. Nautilus shall promptly reimburse Seller, Bruno or Yang for all amounts owed under Article 8.3 from time to time, at their request, as such amounts are incurred. Notwithstanding the foregoing, Seller and the Shareholders shall not make any particular claim for an amount owed under Article 8.3.2 after the Indemnity Cut-Off Date.

Article 8.5 Third Party Claims. If a claim by a third party is made against an indemnified Party hereunder, and if a Party intends to seek indemnity with respect thereto under this Chapter 8 (such Party being the “Indemnified Party”), the Indemnified Party or Parties shall promptly (and in any case within thirty (30) days) notify the other Party or Parties (the “Indemnifying Party”) of such claim. The Indemnifying Party shall have thirty (30) days after receipt of the above-mentioned notice to undertake, conduct and control, through counsel of its own choosing (subject to the consent of the Indemnified Party, such consent not to be unreasonably withheld) and at its expense, the settlement or defense thereof, and the Indemnified Party shall cooperate with it in connection therewith; provided, that: (i) the Indemnifying Party shall not thereby permit to exist any Lien upon any asset of the Indemnified Party, (ii) the Indemnifying Party shall permit the Indemnified Party to participate in such settlement or defense through counsel chosen by the Indemnified Party, provided that the fees and expenses of such counsel shall be borne by the Indemnified Party, and (iii) the Indemnifying Party shall promptly reimburse the Indemnified Party for the full amount of any loss resulting from such claim and all related expenses incurred by the Indemnified Party within the limits of this Chapter 8. So long as the Indemnifying Party is reasonably contesting any such claim in good faith, the Indemnified Party shall not pay or settle any such claim. Notwithstanding the foregoing, the Indemnified Party shall have the

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right to pay or settle any such claim, provided that in such event it shall waive any right to indemnity therefore by the Indemnifying Party. If the Indemnifying Party does not notify the Indemnified Party within thirty days after receipt of the Indemnified Party’s notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the Indemnified Party shall have the right to contest, settle or compromise the claim in the exercise of its exclusive discretion at the expense of the Indemnifying Party.

CHAPTER 9

STAFF AND EMPLOYEE MATTERS

Article 9.1 Staff and Employees. Seller has delivered to Nautilus a list, dated within ten days of the Closing Date, naming by location all of the staff and employees of Seller actively employed in the Business, including each such staff and employee’s current compensation rate and date of employment. Nautilus and Buyer shall be permitted to interview all of Seller’s staff and employees employed in the Business during business hours, pursuant to schedules to be coordinated with Seller, and Seller shall give Nautilus and Buyer all information in Seller’s possession reasonably requested by Nautilus or Buyer in connection with such staff and employees. Nautilus will cause Buyer to offer employment commencing as of the Closing Date to those staff and employees as Nautilus deems, in its sole discretion, appropriate on such terms as Nautilus shall deem appropriate. Seller, Bruno and Yang will use their best efforts to cause such employees to become employees of Buyer as of the Closing Date.

Article 9.2 Salaries and Benefits. Seller shall be responsible for (i) the payment of all wages and other remuneration due to staff and employees of the Business with respect to their services as employees of Seller through close of business on the Closing Date; (ii) the payment of any termination or severance payments required by contract or law; and (iii) any amounts or benefits due to the staff and employees under welfare benefit, housing, retirement and health plans maintained Seller for such staff and employees pursuant to contract or as required by law.

Article 9.3 No Rights to Staff and Employees. Nothing herein expressed or implied shall confer upon any staff or employee hired by Nautilus or Buyer or any other employee or legal representatives of Seller or any trade union representative any rights or remedies, including, without limitation, any right to employment, or continued employment for any specified period, of any nature or kind whatsoever under or by reason of this Agreement.

CHAPTER 10

ACTIONS TO BE TAKEN

SUBSEQUENT TO THE CLOSING DATE

Article 10.1 Further Assurances. Following the Closing, Seller, Bruno and Yang will, upon request by Nautilus or Buyer, (a) do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney

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and assurances and (b) use its best efforts to obtain all authorizations, approvals, consents and waivers that may be reasonably required for the conveyance, transfer, assignment, delivery, assurance and confirmation to Buyer, or to its successors and assigns, or for aiding and assisting in collecting or reducing to possession, any or all of the Assets of Seller transferred hereunder.

Article 10.2 Customer and Other Business Relationships. After the Closing, Seller, Bruno and Yang will cooperate with Nautilus and Buyer in their efforts to continue and maintain for the benefit of Buyer those business relationships of Seller existing prior to the Closing and relating to the Business, including relationships with lessors, employees, regulatory authorities, licensors, customers, suppliers and others, and Seller will satisfy its liabilities in a manner that is not detrimental to any of such relationships. Seller, Bruno and Yang will refer to Buyer all inquiries relating to the Business. Neither Seller or Bruno or Yang or any of their respective officers, employees, agents or shareholders shall take any action that would tend to diminish the value of the Assets after the Closing or that would interfere with the Business, including disparaging the name or business of Nautilus or Buyer.

Article 10.3 Retention of and Access to Records. After the Closing Date, Nautilus will cause Buyer to retain for a period consistent with Nautilus’s record-retention policies and practices those records of Seller delivered to Buyer. Nautilus will ensure that Buyer also shall provide Seller and the Shareholders and their representatives reasonable access thereto, during normal business hours and on at least three days’ prior written notice, to enable them to prepare financial statements or tax returns or deal with tax audits. After the Closing Date, Seller shall provide Buyer and its representatives reasonable access to records that are Excluded Assets, during normal business hours and on at least three days’ prior written notice, for any reasonable business purpose specified by Buyer in such notice.

Article 10.4 Mutual Cooperation with Respect to Taxes. Each of Nautilus and Buyer, on the one hand, and Seller and the Shareholders, on the other, will provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any tax return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liability for any Taxes relating to the transactions contemplated by this Agreement. Each such Party will retain and provide the other with any records or information which may be relevant to such return, audit or examination, proceedings or determination. Such assistance shall include making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder and shall include providing copies of any relevant tax returns and supporting work schedules. The Party requesting assistance hereunder shall reimburse the other for reasonable out-of-pocket expenses incurred in providing such assistance.

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Article 10.5 Cooperation in Litigation. In the event that, after the Closing Date, Nautilus, Buyer, Seller, Bruno or Yang shall require the participation of officers and employees employed by each other to aid in the defense or prosecution of litigation or claims, and so long as there exists no conflict of interest between the Parties, each of Nautilus, Buyer and Seller shall use its best efforts to make such officers and employees available to participate in such defense or prosecution, provided that, except as required pursuant to the provisions of Chapter 8, the Party requiring the participation of such officers or employees shall pay all reasonable out-of-pocket costs, charges and expenses arising from such participation.

Article 10.6 Confidentiality. Except in circumstances where the prior consent of Nautilus has been obtained and for a period of five (5) years after the Closing Date, Seller and each Shareholder agrees that it shall not divulge to any Person any trade secret, or secret process, method or means, or any other confidential information concerning the Business, or confidential information concerning Nautilus or Buyer that comes to the knowledge of such Party by reason of its being a Party hereto, unless and to the extent that (i) the disclosure is required by law or (ii) such information is or becomes public knowledge otherwise than through the breach of this Article or (iii) such information was obtained from a third party having no obligation of confidentiality with respect to such information.

CHAPTER 11

TERMINATION

Article 11.1 Termination Events. This Agreement may, by notice given on or prior to the Closing Date, in the manner hereinafter provided, be terminated and abandoned:

11.1.1  By Nautilus, on the one hand, or Seller, Bruno and Yang, on the other, if material default or breach shall be made by the other with respect to the due and timely performance of any of its covenants and agreements contained herein, or with respect to due compliance with any of its representations and warranties contained herein, and such default cannot be cured, or shall have not been cured within forty-five (45) days after receipt of notice specifying particularly such default;

11.1.2  By Nautilus if all of the conditions set forth in Chapter 6 shall not have been satisfied (or are incapable of being satisfied) on or before January 4, 2008 (the “Termination Date”) or waived by it on or before such date; or by Seller and the Shareholders, if all of the conditions set forth in Chapter 8 shall not have been satisfied (or are incapable of being satisfied) by such date or waived by it on or before such date; provided, that the Termination Date shall be extended to January 20, 2008 in the event the Termination Date under the Land America Agreement is extended in accordance with the terms thereof.

11.1.3  By Nautilus, on the one hand, or Seller, Bruno and Yang, on the other, if in the case of Seller, Bruno and Yang, Nautilus, or in the case of Nautilus, Seller, Bruno or Yang, becomes bankrupt, or is the subject of proceedings for liquidation or dissolution, or ceases to carry on business or becomes unable to pay its or his debts as they become due;

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11.1.4  By written mutual consent of Nautilus and Seller; or

11.1.5  By either Nautilus or Seller if the Closing shall not have occurred, through no fault of any Party, on or before the Termination Date, or such later date as may be agreed upon by the Parties. provided, that the Termination Date shall be extended to January 20, 2008 in the event the Termination Date under the Land America Agreement is extended in accordance with the terms thereof.

Each Party’s right of termination hereunder is in addition to any other rights it may have hereunder or otherwise.

Article 11.2 Effect of Termination. In the event this Agreement is terminated pursuant to Article 11.1, all further obligations of the Parties hereunder shall terminate, the Option Exercise Deposit shall be disbursed to the Parties in accordance with the Escrow Agreement, and unless terminated as provided in Article 11.1.4, the Fourteen Million Five Hundred Thousand U.S. Dollar (U.S. $14,500,000) option fee delivered to Seller pursuant to the Option Agreement and the Four Million US Dollar (US$4,000,000) option fee paid in connection with the Land America Agreement shall be retained by Seller.

CHAPTER 12

OTHER PROVISIONS

Article 12.1 Survival of Representations and Warranties. The representations and warranties contained in this Agreement shall survive the Closing for a period of fifteen (15) months from the Closing Date, provided, however that in the event a claim for indemnification is made by Nautilus in respect of any representation and warranty (other than those in Articles 3.2 and 3.13 which shall continue for an indefinite period) made by Seller, Bruno or Yang prior to the expiration of such fifteen (15) month period, Nautilus shall be entitled to the benefits of the indemnification provisions hereunder as long as such claim is being prosecuted in good faith.

Article 12.2 [Intentionally left blank]

Article 12.3 Responsibility for Taxes. Each Party shall pay its own transaction-related Taxes arising out of the transactions contemplated by this Agreement.

Article 12.4 Complete Agreement. This Agreement, including the Schedules and Exhibits attached hereto and the documents referred to herein, together with the Escrow Agreement shall constitute the entire agreement between the Parties hereto with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter, including without limitation the Option Agreement.

Article 12.5 Passage of Title and Risk of Loss. Title and risk of loss with respect to the Assets and rights to be transferred hereunder shall not pass to Buyer until the Assets or right is transferred at the Closing hereunder.

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Article 12.6 Waiver, Discharge, etc. This Agreement may not be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the Parties hereto by their duly authorized representatives. The failure of any Party hereto to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part thereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.

Article 12.7 Notices. Any notice or other communication required or permitted hereunder shall be given in writing and shall be addressed to the relevant Party at the address set forth below or at such other address as such Party may designate by ten Business Days’ advance written notice to the other Parties. Any notice addressed to the relevant Party shall be deemed to have been delivered: (a) if delivered by hand when delivered, (b) if sent by pre-paid United States registered mail, on the fifth (5th) Business Day after the date of posting, (c) if given or made by facsimile, on the following Business Day after the transmission is sent (as long as the sender has a confirmation report specifying the facsimile number of the recipient, the number of pages sent and the date of the transmission) and, (d) if given or made by electronic mail, on the following Business Day after the electronic mail is sent (as long as the sender has confirmation records confirming delivery by the sender and receipt by the recipient of the electronic mail). Notice given to Nautilus shall constitute notice to Buyer.

Notices and communications shall be delivered as follows:

To Nautilus at:	Nautilus, Inc
	16400 SE Nautilus Drive
	Vancouver, Washington 98683 U.S.A.
	Attn: Wayne M. Bolio,
	Chief Administrative Officer and
	Senior Vice President, Law & Human Resources
	Facsimile: 1 (360) 859-5915
	E-mail:      wbolio@nautilus.com
with a copy to:	Garvey Schubert Barer
	1191 Second Avenue, 18th Floor
	Seattle, Washington 98101 U.S.A.
	Attn: Bruce A. Robertson, Esquire
	Facsimile: 1 (206) 464-0125
	E-mail:      brobertson@gsblaw.com

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To Seller at:	Treuriver Investments Limited
	25 North 2nd Road, Xiamen, Xinglin
	Jimei District
	Xiamen China 361022
	Attn: Michael C. Bruno
	Facsimile: 011 86 592-621-8275
	E-mail:      bruno@laxiamen.com
with a copy to:	Reed Brown
	2484 Willow Hills Drive
	Sandy, Utah 84093
	Facsimile: 1 (801) 943-1530
	E-mail:      reed.crb@gmail.com
To Bruno at:	Michael C. Bruno
	#7 South Guangxing Road
	Xinglin District
	Xiamen, PRC 361022
	Telephone: 011 86 1390 602-5490
	E-mail:      bruno@laxiamen.com
To Yang at:	Yang Lin Qing
	#7 South Guangxing Road
	Xinglin District
	Xiamen, PRC 361022
	Telephone: 011 86 1390 602-5490
	E-mail:      bruno@laxiamen.com

Article 12.8 Public Announcements. No Party shall issue any press release or public announcement in connection with this Agreement or the transactions contemplated hereby without the prior written approval of the other Parties hereto.

Article 12.9 Expenses. Whether the transactions contemplated by this Agreement are consummated or fail to be consummated for any reason whatsoever, each Party shall pay its own expenses and the fees and disbursements of its counsel, accountants and other experts.

Article 12.10  Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington, U.S.A., without regard to its conflict of laws principles.

Article 12.11  Arbitration.

(1) Except as provided in Article 12.2, all disputes arising in connection with or relating to this Agreement shall be finally settled by binding arbitration in accordance with the International Arbitration Rules of the American Arbitration Association. The tribunal shall be composed of a sole arbitrator. The arbitration shall be conducted in the English language at San Francisco under the U.S. Federal Arbitration Act.

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(2) Any arbitral award rendered shall be final, binding and non-appealable and may be entered and enforced as a judgment with any court having jurisdiction.

(3) To the extent this Article is deemed to be a separate agreement independent from this Agreement, Article 12.10 concerning governing law and Article 12.7 concerning notices are incorporated herein by reference.

(4) Any Party may, without inconsistency with this agreement to arbitrate, seek from a court any provisional remedy that may be necessary to preserve its rights, to protect intellectual property or to prevent the disposal of assets at any time before, during or after the arbitration proceedings.

Article 12.12  Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties and the successors or assigns of the Parties, provided that the rights of Seller herein may not be assigned and the rights of Nautilus and Buyer may only be assigned (without Seller’s and Shareholders’ consent) to an Affiliate of Nautilus (as long as Nautilus shall remain liable hereunder).

Article 12.13  Language; Schedules; Headings; Counterparts. This Agreement is written both in the Chinese and English languages. Both versions shall have equal validity, but in the event of a conflict between the two versions the English version shall prevail. All Schedules attached to this Agreement are an integral part hereof and are incorporated herein by reference as though set forth in full. The headings used in this Agreement are for convenience only and shall not be used in the interpretation of any provision of this Agreement or affect any right or obligation under this Agreement. This Agreement may be executed in any number of counterparts and by different Parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement.

Article 12.14  Joint and Several Obligations. The liability of Seller, Bruno and Yang hereunder shall be joint and several. Where in this Agreement provision is made for any action to be taken or not taken by Seller, Bruno and Yang jointly and severally undertake to cause Seller to take or not take such action, as the case may be. Without limiting the generality of the foregoing, Seller, Bruno and Yang shall be jointly and severally liable for the indemnities set forth in Article 8.

Article 12.15  Representative of Seller and the Shareholders.

(a) Seller and Yang hereby appoint Bruno as their representative (“Selling Parties Representative”) and their true and lawful attorney in fact, with full power and authority in each of their names and on behalf of each of them:

(i) to act on behalf of each of them in the absolute discretion of the Selling Parties Representative, but only with respect to the following provisions of this Agreement, with the power to: (A) designate the accounts for payment of the Purchase Price pursuant to Article 2.3; (B) act pursuant to Article 2.4 with respect to any Purchase Price

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adjustment; (C) act under the Escrow Agreement; (D) give and receive notices pursuant to Article12.7; (E) terminate this Agreement pursuant to Section 11.1 or waive any provision of this Agreement pursuant to Chapter 7, Article 11.1 and Article 12.6; and (F) act in connection with any matter as to which Seller, Bruno and Yang, jointly and severally, have obligations, or are Indemnified Persons, under Article 8; and

(ii) in general, to do all things and to perform all acts, including executing and delivering all agreements, certificates, receipts, instructions and other instruments contemplated by or deemed advisable to effectuate the provisions of this Article 12.15.

This appointment and grant of power and authority is coupled with an interest and is in consideration of the mutual covenants made herein and is irrevocable and shall not be terminated by any act of any of Bruno, Yang or Seller or by operation of law, or by the occurrence of any other event. Bruno, Yang and Seller hereby consent to the taking of any and all actions and the making of any decisions required or permitted to be taken or made by the Selling Parties Representative pursuant to this Article 12.15.

(b) Nautilus, Buyer and the Escrow Agent shall be entitled to rely upon any document or other paper delivered by the Selling Parties Representative as (i) genuine and correct and (ii) having been duly signed or sent by the Selling Parties Representative, and none of Nautilus, Buyer or the Escrow Agent shall be liable to any of the Shareholders or Seller for any action taken or omitted to be taken by Nautilus or the Escrow Agent in such reliance.

[Remainder of this page intentionally left blank.]

30

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed as of the date first above written.

	NAUTILUS
	NAUTILUS, INC.
By:
	Signature
	Print Name:
	Title:

	SELLER
	TREURIVER INVESTMENTS LIMITED
By:
	Signature
	Print Name:
	Title:

	BRUNO
By:
	Michael C. Bruno

	YANG
By:
	YANG LIN QING

ACCEPTANCE AND AGREEMENT OF SELLING PARTIES REPRESENTATIVE

The undersigned, being the Selling Parties Representative designated in Article 12.15 of the foregoing Asset Purchase Agreement, agrees to serve as the Selling Parties Representative and to be bound by the terms of such Asset Purchase Agreement pertaining thereto.

Dated: October 17, 2007.

MICHAEL C. BRUNO

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EXHIBIT A

(Seller’s Non-Competition Agreement)

Exhibit A

EXHIBIT B

(Shareholders Non-Competition Agreement)

Exhibit B

EXHIBIT C

(Form of Opinion of The Universal Legal Corp., PRC,

Counsel to Seller and Shareholders)

Exhibit C

EXHIBIT D

(Form of Opinion of C. Reed Brown, U.S.

Counsel to Seller and Shareholders)

Exhibit D

EX-10.5

Exhibit 10.5

Execution Original

FIRST AMENDMENT TO ESCROW AGREEMENT

THIS FIRST AMENDMENT TO ESCROW AGREEMENT is entered into as of October 17, 2007, in order to amend that certain Escrow Agreement, dated as of July 2, 2007 (the “Escrow Agreement”), by and among NAUTILUS, INC., a Washington corporation (“Nautilus”), TREURIVER INVESTMENTS LIMITED, a British Virgin Islands company (“Seller”), MICHAEL C. BRUNO, as representative of the Seller (the “Representative”) and U.S. BANK NATIONAL ASSOCIATION, as escrow agent (the “Escrow Agent”).

1. Exhibit A to the Escrow Agreement is hereby amended in its entirety to read as set forth in Exhibit A attached hereto.

2. The Escrow Agent hereby acknowledges receipt of an executed Joint Instruction Letter in the form attached hereto as Exhibit B and shall, in accordance with such Joint Instruction Letter, (i) distribute Twelve Million Five Hundred Thousand United States Dollars (US$12,500,000) to Seller, together with all interest accrued on the Escrow Property and held in Escrow, and (ii) distribute Twelve Million Five Hundred Thousand United States Dollars (US$12,500,000) to Nautilus.

3. The opening sentence of Section 3(a) of the Escrow Agreement is hereby amended to read in its entirely as follows: “On Closing, but no later than January 20, 2008, Nautilus and the Representative may deliver to the Escrow Agent signed instructions in substantially the form of Exhibit A hereto (the “Closing Release Instructions).”

4. The reference to January 2, 2008 in Section 3(b) of the Escrow Agreement is hereby changed to January 20, 2008.

5. Except as expressly set forth herein, the Escrow Agreement shall continue in full force and effect in accordance with its terms.

[remainder of page intentionally left blank]

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IN WITNESS WHEREOF, the parties have entered into this First Amendment as of the date first written above.

NAUTILUS, INC.
By:
	Print Name:
	Title:
TREURIVER INVESTMENTS LIMITED
By:	Print Name:
	Title:
MICHAEL C. BRUNO, as Representative
U.S. BANK NATIONAL ASSOCIATION,
as ESCROW AGENT
By:
	Print Name:
	Title:

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EXHIBIT A

To:  U.S. Bank National Association Attn: Olaleye Fadahunsi 60 Livingston Avenue St. Paul, Minnesota 55107 Facsimile: (651) 495-8087 E-mail: olaleye.fadahunsi@usbank.com                     , 200  .

CLOSING RELEASE INSTRUCTIONS

Dear Sirs:

We refer to the Escrow Agreement, dated as of July 2, 2007, as amended by First Amendment thereto dated as of October 17, 2007 (the “Agreement”), among the undersigned, Seller, the Representative and you, as Escrow Agent. Terms defined in the Agreement and not otherwise defined herein are used herein as therein defined.

We confirm that the Closing under the Purchase Agreement occurred on ·, 200            and hereby irrevocably authorize and direct you to deliver One Million United States Dollars (US$1,000,000) from the Escrow Property to [Escrow Agent named in Indemnification and Escrow Agreement], and thereafter to release all remaining Escrow Property funds from escrow and pay such funds to the Representative.

Very truly yours,
NAUTILUS, INC.
EXHIBIT PURPOSES ONLY, NO SIGNATURE REQUIRED
By:
	Print Name:
	Title:

EXHIBIT A

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EXHIBIT B

To:  U.S. Bank National Association Attn: Olaleye Fadahunsi 60 Livingston Avenue St. Paul, Minnesota 55107 Facsimile: (651) 495-8087 E-mail: olaleye.fadahunsi@usbank.com October 17, 2007.

JOINT INSTRUCTION LETTER

THIS JOINT INSTRUCTION LETTER is delivered pursuant to that certain Escrow Agreement, dated as of July 2, 2007 (the “Escrow Agreement”), by and among NAUTILUS, INC., a Washington corporation (“Nautilus”), TREURIVER INVESTMENTS LIMITED, a British Virgin Islands company (“Seller”), MICHAEL C. BRUNO, as representative of the Seller (“Representative”) and U.S. BANK NATIONAL ASSOCIATION, as escrow agent (the “Escrow Agent”).

Pursuant to Section 3(c) of the Escrow Agreement, Nautilus and the Representative hereby instruct the Escrow Agent to (i) immediately release Twelve Million Five Hundred Thousand United States Dollars (US$12,500,000) from the Escrow Property to Seller, together with all interest accrued on the Escrow Property and currently held in Escrow, and (ii) immediately release Twelve Million Five Hundred Thousand United States Dollars (US$12,500,000) from the Escrow Property to Nautilus. Nautilus hereby acknowledges and agrees that the US$12,500,000 released from the Escrow Property is delivered to Seller as a non-refundable deposit and Nautilus shall have no further claim to such funds.

NAUTILUS, INC.
EXHIBIT PURPOSES ONLY, NO SIGNATURE REQUIRED
By:
	Print Name:
	Title:
EXHIBIT PURPOSES ONLY, NO SIGNATURE REQUIRED
MICHAEL C. BRUNO, as Representative

EXHIBIT B

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EX-10.6

Exhibit 10.6

Execution Original

POST-CLOSING AUDIT AGREEMENT

BY AND AMONG

NAUTILUS, INC.

AND

LAND AMERICA HEALTH & FITNESS CO., LTD.

MICHAEL C. BRUNO

YANG LIN QING

Dated as of October 17, 2007

POST-CLOSING AUDIT AGREEMENT

THIS POST-CLOSING AUDIT AGREEMENT (hereinafter, “Agreement”), dated as of October 17, 2007, is entered into by and among the following parties (each a “Party” and collectively, the “Parties”):

1. NAUTILUS, INC., a Washington corporation (“Nautilus”);

2. LAND AMERICA HEALTH & FITNESS CO., LTD., a wholly foreign-owned limited liability company duly organized and existing under the laws of the PRC (“Seller”);

3. MICHAEL C. BRUNO (“Bruno” or a “Shareholder”), who together with his spouse, Yang Lin Qing, are the indirect sole shareholders of Seller; and

4. YANG LIN QING (“Yang” or a “Shareholder”), who together with her spouse, Michael C. Bruno, are the indirect sole shareholders of Seller.

PRELIMINARY STATEMENTS

1. The Parties have entered into that certain Asset Purchase Agreement, of even date herewith (the “Land America Asset Purchase Agreement”), pursuant to which Nautilus (Xiamen) Fitness Co., Ltd. (“Buyer”) an enterprise to be formed under the laws of the People’s Republic of China, will purchase the Assets from Seller.

2. This Agreement is the Post-Closing Audit Agreement referred to in the Land America Asset Purchase Agreement.

3. Capitalized terms not otherwise defined herein shall have the meanings given such terms in the Land America Asset Purchase Agreement.

NOW, THEREFORE, the Parties hereby agree as follows:

CHAPTER 1

GENERAL PROVISIONS

Article 1.1 Construction of Certain Terms and Phrases. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms “hereof,” “herein,” “hereby” and derivative or similar words refer to this entire Agreement; and (iv) the terms “Article” or “Clause” refer to the specified Article or Clause of this Agreement. Whenever this Agreement refers to a number of days, such number shall refer to calendar days unless Business Days are specified.

Article 1.2 Exchange Rate. In determining the U.S. Dollar equivalent of an amount in RMB or vice versa, the exchange rate used shall be the average of the buy and sell exchange rates (or mid-rate) announced by the People’s Bank of China for U.S. Dollars and RMB for the date on or as of which the determination is made.

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Article 1.3 Additional Party. Promptly following its formation, Buyer shall be made a party to this Agreement with the same rights and obligations as Nautilus.

CHAPTER 2

CLOSING AUDIT

Article 2.1 Closing Audit. Within sixty (60) calendar days after the Closing Date, Deloitte Touche Tomatsu (“Deloitte”), or other independent auditors approved by Nautilus, will complete an independent audit of Seller’s balance sheet of the Business, as at the Closing Date, and Seller’s statement of income of the Business for the period beginning January 1, 2007 and ending on the Closing Date, together with a determination of the net book value of the After Acquired Assets and the Disposed Assets (each as hereinafter defined) determined in accordance with the provisions of Article 4 and U.S. GAAP (the “Audited Closing Financial Statements”). The fees and expenses of such audit shall be paid by Seller; provided, that Nautilus will reimburse Seller or cause Buyer to reimburse Seller for the incremental audit fees as compared to the fees associated with Seller’s previous statutory audit. Promptly after completion of such audit Seller and Deloitte shall supply Nautilus with copies of the Audited Closing Financial Statements and Deloitte’s opinion thereon (together with the Audited Closing Financial Statements, the “Audit Report”) stating that the Audited Closing Financial Statements have been prepared in accordance with U.S. GAAP on a going concern basis consistently applied.

Article 2.2 Dispute Resolution. The Audited Closing Financial Statements shall be deemed to be and shall be final, binding and conclusive on the Parties; provided, that Nautilus may dispute any amount reflected on the Audited Closing Financial Statements if Nautilus shall notify Seller in writing of the amount of and describe each disputed item within twenty (20) calendar days of Nautilus’s receipt of the Audit Report. In the event of such a dispute, Seller and Nautilus shall attempt to reconcile their differences through friendly negotiations. If Nautilus and Seller are unable to reach such a resolution within twenty (20) calendar days of Seller’s receipt of written notice from Nautilus, Seller and Nautilus shall submit the items in dispute for resolution to an independent accounting firm of international reputation selected by Nautilus and not unreasonably objected to by Seller, which shall within thirty (30) calendar days after submission determine and report to the Parties upon such disputed items, and such report shall be final, binding and conclusive on the Parties; provided, that Seller may dispute any amount reflected on the said report by notifying Nautilus in writing of the amount of and describe each disputed item within twenty (20) calendar days of Seller’s receipt of the report. In such event, Seller and Nautilus shall attempt to reconcile their differences through friendly negotiations but, if the Parties are unable to resolve the dispute within 10 days, the dispute will be submitted to binding arbitration as provided in Section 6.7 herein. The fees and disbursements of the independent accounting firm shall be paid equally by Seller and Nautilus, but any arbitration related fees and expenses shall be paid by Seller. Payment of any amount payable by Seller, Buyer or Nautilus, as the case may be, pursuant any provision of this Agreement shall not be delayed as to undisputed amounts pending the resolution of any or all disputes as provided in this Article 2.2. Amounts in dispute shall be paid by Seller, Buyer or Nautilus, as the case may be, within five (5) calendar days following such resolution.

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CHAPTER 3

INVENTORY PURCHASE; INVENTORY PURCHASE PRICE ADJUSTMENT

Article 3.1 Inventory Purchase. Immediately following Closing under the Land America Asset Purchase Agreement, Nautilus shall cause Buyer to purchase from Seller that portion of Seller’s Inventory not otherwise purchased pursuant to the Land America Asset Purchase Agreement. The purchase price for such Inventory (the “Inventory Purchase Price”), subject to adjustment as provided in this Agreement, shall be the RMB equivalent of Four Million Five Hundred Thousand U.S. Dollars (US$4,500,000) and shall be paid by wire transfer of such amount to Seller no later than five (5) Business Days following Closing according to the payment instructions delivered pursuant to the Land America Asset Purchase Agreement. Seller acknowledges that the Purchase Price for the Assets under the Land America Asset Purchase Agreement includes Five Hundred Thousand U.S. Dollars (US$500,000) as the estimated value of the work in process inventory included in Seller’s Inventory as of the Closing Date.

Article 3.2 Adjustment of Inventory Purchase Price. The amount of the Inventory Purchase Price shall be adjusted upwards or downwards in respect of the value of the Inventory (including the work in process Inventory purchased pursuant to the Land America Asset Purchase Agreement) as reflected in the Audited Closing Financial Statements (the “Final Inventory Value”) as follows:

(a) If the Final Inventory Value is greater than US$5,000,000 (FIVE MILLION U.S. DOLLARS), the Purchase Price shall be increased by an amount equal to the difference between the Final Inventory Value and US$5,000,000; and

(b) If the Final Inventory Value is less than US$5,000,000 (FIVE MILLION U.S. DOLLARS), the Purchase Price shall be decreased by an amount equal to the difference between US$5,000,000 and the Final Inventory Value.

Article 3.3 Adjustment of Final Inventory Value. The Final Inventory Value shall be determined on a net basis by deducting the amount of any reserve for obsolete (but not slow moving) inventory, samples or nonsaleable inventory determined in accordance with GAAP and included in the Audited Closing Financial Statements; provided, that the Final Inventory Value shall include without reduction the value of (i) all finished goods manufactured by Seller pursuant to purchase orders submitted by Nautilus and not cancelled or modified in accordance with the terms thereof, (ii) all work-in-process, and (iii) all parts, components and raw materials purchased by Seller at the request of Nautilus in accordance with Article 3.4 below.

Article 3.4 Transitional Purchases of Parts, Components and Raw Materials. Commencing on the date of this Agreement, and subject to the obligation of Nautilus and/or Buyer to purchase such Inventory as set forth herein, Seller agrees to place orders for such parts, components and raw materials as are reasonably projected for use by Buyer in manufacturing products for the Business following the Closing Date; provided, that any purchase order of US$50,000 or greater for such parts, components or raw materials shall be approved in advance by Nautilus. Any such parts, components and raw materials shall be purchased by Buyer at Closing or, if later, upon arrival at Seller’s Xiamen manufacturing facility.

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Article 3.5 VAT Invoices and Payment of VAT. On the date of the sale of Inventory pursuant to Article 3.1 hereto, Seller shall deliver to Buyer duly executed VAT invoices for the Inventory purchased pursuant to this Agreement. Nautilus hereby acknowledges and agrees that Buyer shall be responsible for payment of all VAT on the Inventory purchased pursuant to this Agreement and the Land America Asset Purchase Agreement.

CHAPTER 4

FIXED ASSETS VALUE ADJUSTING PAYMENT

Article 4.1 Fixed Assets Value Adjusting Payment. An adjusting payment in respect of the net book value of fixed assets acquired by Seller after December 31, 2006 and included in the Assets acquired by Buyer at Closing as reflected in the Audited Closing Financial Statements (the “After Acquired Assets”) and the net book value of fixed assets disposed of by Seller after December 31, 2006 but prior to Closing (the “Disposed Assets”) shall be determined as follows:

(a) If the net book value of the After Acquired Assets is greater than the net book value of the Disposed Assets, Nautilus or Buyer shall pay Seller an amount equal to the difference between the net book value of the After Acquired Assets and the net book value of the Disposed Assets; and

(b) If the net book value of the After Acquired Assets is less than the net book value of the Disposed Assets, Seller shall pay Nautilus an amount equal to the difference between the net book value of the Disposed Assets and the net book value of the After Acquired Assets.

Article 4.2 Determination of Value of Fixed Assets. For purposes of Article 4.1, (1) the net book value of the After Acquired Assets and the net book value of the Disposed Assets shall be determined in accordance with U.S. GAAP and net of depreciation calculated in a manner consistent with Seller’s 2007 practices for similar assets; (2) fixed assets, for purposes of determining this adjusting payment, shall include only those assets with an original acquisition cost greater than US$12,500 (TWELVE THOUSAND FIVE HUNDRED U.S. DOLLARS); and (3) fixed assets acquired after December 31, 2006 with an original acquisition cost greater than US$30,000 (THIRTY THOUSAND U.S. DOLLARS) shall not be included in the calculation and shall be retained by Seller and not acquired by Buyer, unless Nautilus shall have given advance written approval of the acquisition of such assets or waived such prior approval at Closing.

CHAPTER 5

NET PAYMENT OF INVENTORY PRICE ADJUSTMENT AND FIXED ASSETS

VALUE ADJUSTING PAYMENT

Article 5.1 The payments to be delivered pursuant to Article 3.2 and Chapter 4 above shall be paid on a net basis and, except as provided in Article 2.2, shall be delivered to the Party to whom a net payment is due not later than twenty (20) calendar days after the Audit Report is delivered to Nautilus and Seller.

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CHAPTER 6

OTHER PROVISIONS

Article 6.1 Passage of Title and Risk of Loss. Title and risk of loss with respect to the Inventory to be transferred hereunder shall not pass to Buyer until payment is made to Seller in accordance with the terms of this Agreement.

Article 6.2 Waiver, Discharge, etc. This Agreement may not be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the Parties hereto by their duly authorized representatives. The failure of any Party hereto to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part thereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.

Article 6.3 Notices. Any notice or other communication required or permitted hereunder shall be given in writing and shall be addressed to the relevant Party at the address set forth below or at such other address as such Party may designate by ten Business Days’ advance written notice to the other Parties. Any notice addressed to the relevant Party shall be deemed to have been delivered: (a) if delivered by hand when delivered, (b) if sent by pre-paid United States registered mail, on the fifth (5th) Business Day after the date of posting, (c) if given or made by facsimile, on the following Business Day after the transmission is sent (as long as the sender has a confirmation report specifying the facsimile number of the recipient, the number of pages sent and the date of the transmission) and, (d) if given or made by electronic mail, on the following Business Day after the electronic mail is sent (as long as the sender has confirmation records confirming delivery by the sender and receipt by the recipient of the electronic mail).

Notices and communications shall be delivered as follows:

To    Nautilus at:	Nautilus, Inc 16400 SE Nautilus Drive Vancouver, Washington 98683 U.S.A.
	Attn: Wayne M. Bolio, Chief Administrative Officer and Senior Vice President, Law
	Facsimile: 1 (360) 859-5915
	E-mail: wbolio@nautilus.com
with a copy to:	Garvey Schubert Barer 1191 Second Avenue, 18th Floor Seattle, Washington 98101 U.S.A.
	Attn: Bruce A. Robertson, Esquire Facsimile: 1 (206) 464-0125 E-mail: brobertson@gsblaw.com

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To Seller at:	Land America Health & Fitness Co., Ltd.
	25 North 2nd Road, Xiamen, Xinglin
	Jimei District Xiamen, China 361022 Attn: Michael C. Bruno
	Facsimile: 011 86 592-621-8275
with a copy to:	Reed Brown 2484 Willow Hills Drive Sandy, Utah 84093
	Facsimile: 1 (801) 943-1530 E-mail: reed.crb@gmail.com
To Bruno at:	Michael C. Bruno #7 South Guangxing Road
	Xinglin District
	Xiamen, PRC 361022
	Telephone: 011 86 1390 602-5490
	E-mail: bruno@laxiamen.com
To Yang at:	Yang Lin Qing #7 South Guangxing Road
	Xinglin District
	Xiamen, PRC 361022
	Telephone: 011 86 1390 602-5490
	E-mail: bruno@laxiamen.com

Article 6.4 Public Announcements. No Party shall issue any press release or public announcement in connection with this Agreement or the transactions contemplated hereby without the prior written approval of the other Parties hereto.

Article 6.5 Expenses. Whether the transactions contemplated by this Agreement are consummated or fail to be consummated for any reason whatsoever, each Party shall pay its own expenses and the fees and disbursements of its counsel, accountants and other experts.

Article 6.6 Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington, U.S.A., without regard to its conflict of laws principles.

Article 6.7 Arbitration.

(a)Except as provided in Article 2.2, all disputes arising in connection with or relating to this Agreement shall be finally settled by binding arbitration administered by the American Arbitration Association in accordance with its International Arbitration Rules. The tribunal shall be composed of a sole arbitrator. The arbitration shall be conducted in the English language at San Francisco under the U.S. Federal Arbitration Act.

6

(b) Any arbitral award rendered shall be final, binding and non-appealable and may be entered and enforced as a judgment with any court having jurisdiction.

(c) To the extent this Article is deemed to be a separate agreement independent from this Agreement, Article 6.6 concerning governing law and Article 6.3 concerning notices are incorporated herein by reference.

(d) Any Party may, without inconsistency with this agreement to arbitrate, seek from a court any provisional remedy that may be necessary to preserve its rights, to protect intellectual property or to prevent the disposal of assets at any time before, during or after the arbitration proceedings.

Article 6.8 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Parties and the successors or assigns of the Parties, provided that the rights of Seller herein may not be assigned and the rights of Nautilus may only be assigned (without Seller’s and Shareholders’ consent) to an Affiliate of Nautilus (as long as Nautilus shall remain liable hereunder).

Article 6.9 Language; Schedules; Headings; Counterparts. This Agreement is written only in the English language. The headings used in this Agreement are for convenience only and shall not be used in the interpretation of any provision of this Agreement or affect any right or obligation under this Agreement. This Agreement may be executed in any number of counterparts and by different Parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement.

Article 6.10 Joint and Several Obligations. The liability of Seller and each Shareholder hereunder shall be joint and several with Seller and with the Shareholders. Where in this Agreement provision is made for any action to be taken or not taken by Seller, the Shareholders jointly and severally undertake to cause Seller to take or not take such action, as the case may be.

[remainder of this page intentionally left blank]

7

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed as of the date first above written.

NAUTILUS

NAUTILUS, INC.

By:

Signature

Print Name:

Title:

SELLER

LAND AMERICA HEALTH & FITNESS CO., LTD.

By:

Signature

Print Name:

Title:

BRUNO (a Shareholder)
By:
	Michael C. Bruno
YANG (a Shareholder)
By:
	YANG LIN QING

8

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Robert S. Falcone, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nautilus, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 9, 2007	By:	/s/ Robert S. Falcone
Date		Robert S. Falcone, Chairman, Chief Executive Officer, and President (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, William D. Meadowcroft, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nautilus, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 9, 2007	By:	/s/ William D. Meadowcroft
Date		William D. Meadowcroft, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Nautilus, Inc., a Washington corporation (the “Company”), does hereby certify that:

To my knowledge, the Quarterly Report on Form 10-Q for the three and nine month periods ended September 30, 2007 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2007	By:	/s/ Robert S. Falcone
Date		Robert S. Falcone, Chairman, Chief Executive Officer, and President (Principal Executive Officer)

To my knowledge, the Quarterly Report on Form 10-Q for the three and nine month periods ended September 30, 2007 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2007	By:	/s/ William D. Meadowcroft
Date		William D. Meadowcroft, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer)