UNITED STATESUnited States

SECURITIES AND EXCHANGE COMMISSIONSecurities and Exchange Commission

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant To Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.)

Filed by the Registrantx    Filed by a Party other than the Registrant¨

Check the appropriate box:

NAUTILUS, INC.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

NAUTILUS, INC.

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To the Shareholders of Nautilus, Inc.:

The annual meeting of shareholders of Nautilus, Inc. (the “Company”) will be held on Monday, May 7, 2007,Tuesday, June 3, 2008, at the Company’s World Headquarters, 16400 SE Nautilus Drive, Vancouver, Washington 98683, beginning at 10:11:00 a.m. Pacific Daylight Time, for the following purposes:

1. To elect a board of directors, consisting of six (6) members, to serve until the next annual meeting of shareholders or until their successors are duly elected and qualified;

2. To approve the reimbursement of expenses incurred by Sherborne Investors LP and its affiliates in connection with the December 18, 2007 special meeting of shareholders, such reimbursement not to exceed $560,000 and to be paid only following subsequent review and approval by the disinterested members of the Board of Directors. The Board of Directors currently expects that no reimbursement would be made until the Company returns to profitability;

3. To approve the Amended and Restated Articles of Incorporation in the form adopted by the Board of Directors;

4. To ratify the Audit Committee’s appointment of Deloitte & Touche LLP as the Company’s independent registered public accountant firm; and

5. To consider and act upon any other matter which may properly come before the annual meeting or any adjournment thereof.

Only shareholders who held their shares at the close of business on March 9, 2007,28, 2008, the record date, are entitled to notice of and to vote at the annual meeting or any adjournment or postponement thereof.

All shareholders are cordially invited to attend the annual meeting at which management will present a review of the Company’s operations for the year ended December 31, 2006.meeting.Whether or not you plan to attend the annual meeting, please sign and promptly return the enclosed proxy card, which you may revoke at any time prior to its use. A prepaid, self-addressed envelope is enclosed for your convenience. Your shares will be voted at the annual meeting in accordance with your proxy.

				By Order of the Board of Directors
			WILLIAM D. MEADOWCROFT
Chief Financial Officer, Secretary and Treasurer

Vancouver, Washington

April 4, 200730, 2008

20072008 ANNUAL MEETING OF SHAREHOLDERS

NOTICE OF ANNUAL MEETING AND PROXY STATEMENT

TABLE OF CONTENTS

NAUTILUS, INC.

16400 SE Nautilus Drive

Vancouver, Washington 98683

PROXY STATEMENT

General Information

Our Board of Directors is furnishing this proxy statement and the accompanying Annual Report to Shareholders, notice of annual meeting and proxy card in connection with its solicitation of proxies for use at our 20072008 annual meeting of shareholders or any adjournment thereof. The annual meeting will be held on Monday, May 7, 2007,Tuesday, June 3, 2008, beginning at 10:11:00 a.m., Pacific Daylight Time at the following location:

Nautilus World Headquarters

16400 SE Nautilus Drive

Vancouver, Washington 98683

Our Board of Directors has designated the two persons named on the enclosed proxy card, Greggory C. HammannEdward J. Bramson and William D. Meadowcroft,Wayne M. Bolio, to serve as proxies in connection with the annual meeting. These proxy materials and the accompanying Annual Report to Shareholders are being mailed on or about April 4, 200730, 2008 to our shareholders of record as of March 9, 2007.28, 2008.

Our principal executive offices are located at 16400 SE Nautilus Drive, Vancouver, Washington 98683. As used in this proxy statement, the terms “we,” “our,” “us,” “Nautilus,” and “Company” refer to Nautilus, Inc. and its subsidiaries.

Revocability of Proxies

You may revoke any proxy you execute at any time prior to its use at the annual meeting by:

Record Date

Our Board of Directors has fixed the close of business on March 9, 200728, 2008 as the record date for determining which of our shareholders are entitled to notice of and to vote at the annual meeting. At the close of business on the record date, 31,540,51131,557,136 shares of our common stock were outstanding.

Voting; Quorum

Each share of common stock outstanding on the record date is entitled to one vote per share at the annual meeting. Shareholders are not entitled to cumulate their votes. The presence, in person or by proxy, of the holders of a majority of our outstanding shares of common stock is necessary to constitute a quorum at the annual meeting.

Votes Required to Approve each Proposal

If a quorum is present at the annual meeting:

(i) the six nominees who receive the greatest number of votes cast for the election of directors by the shares present and voting in person or by proxy will be elected as directors;

(ii)

the ratification of Deloitte & Touche LLP as our registered independent public accounting firm will be approved if the number of votes cast in favor of the proposal exceeds the number of votes cast against it.

(ii) the expenses of Sherborne Investors LP and its affiliates (“Sherborne”) incurred in connection with the December 18, 2007 special meeting of shareholders will be reimbursed by the Company following subsequent review and approval by the disinterested members of the Board of Directors (which currently expects that no payment would be made until the Company returns to profitability), if the number of votes cast in favor of the proposal exceeds the number of votes cast against it;

(iii) the Amended and Restated Articles of Incorporation will be adopted as proposed upon the affirmative vote of a majority of the shares entitled to vote at the meeting; and

(iv) the ratification of Deloitte & Touche LLP as our independent registered public accounting firm will be approved if the number of votes cast in favor of the proposal exceeds the number of votes cast against it.

Effect of Abstentions

If you abstain from voting, your shares will be deemed present at the annual meeting for purposes of determining whether a quorum is present. Directors are elected by a plurality of the votes cast and only votes cast in favor of a nominee will have an effect on the outcome. Therefore, abstention from voting will not affect the outcome of the election. Abstentions will also not affect the outcome of the proposalproposals to reimburse Sherborne’s expenses or ratify Deloitte & Touche LLP as our independent registered independent public accounting firm. However, abstentions will have the effect of a vote “against” the proposal to amend and restate our Articles of Incorporation.

Effect of Broker Non-Votes

If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to the proposals to be voted upon at the annual meeting of shareholders. Thus, if you do not give your broker or nominee specific voting instructions, your shares may not be voted on these matters. Such “broker non-votes” will be counted for determining whether there is a quorum, but will not be counted as votes “for” or “against.” Thus broker non-votes will not have any effect on the electionproposals for reimbursement of directorsSherborne’s expenses or the ratification of Deloitte & Touche LLP as our registered independent public accounting firm.firm, and will have the effect of a vote “against” the proposal to amend and restate our Articles of Incorporation.

Proxy Procedure

When a proxy card is properly dated, executed and returned, the shares it represents will be voted at the annual meeting in accordance with the instructions specified in the proxy. If no specific instructions are given, the shares will be voted FOR the election of the director nominees described below, FOR the reimbursement of Sherborne’s expenses, FOR approval of the Amended and Restated Articles of Incorporation, and FOR the ratification of Deloitte & Touche LLP as our registered independent public accounting firm. If other matters come before the annual meeting, the persons named in the accompanying proxy will vote in accordance with their best judgment with respect to such matters.

Cost of Proxy Solicitation

The Company does not planplans to hire a proxy solicitor this year, but toin connection with the extent the Company chooses to use proxy solicitor services, theannual meeting. The Company will pay the related fees and expenses. Theexpenses of its proxy solicitor and the cost of solicitation of proxies by mail, on behalf of the Board of Directors, willwhich costs, in the aggregate, are expected to be borne by us.approximately $10,000.

Procedures for StockholderShareholder Proposals and Nominations

Under Nautilus’ Bylaws, nominations for directors at an annual meeting may be made only by (1) the Board of Directors or a committee of the Board, or (2) a stockholdershareholder entitled to vote who has delivered notice to the

Company within 90 to 120 days before the first anniversary of the date of the mailing of the notice for the preceding year’s annual meeting.

Our Bylaws also provide that business may not be brought before an annual meeting unless it is (1) specified in the notice of meeting (which includes stockholdershareholder proposals that the Company is required to include in its proxy statement under SEC Rule 14a-8), (2) brought before the meeting by or at the direction of the Board, or (3) brought by a stockholdershareholder entitled to vote who has delivered notice to the Company (containing certain information specified in the Bylaws) within 90 to 120 days before the first anniversary of the date of the mailing of the notice for the preceding year’s annual meeting. In addition, you must comply with SEC Rule 14a-8 to have your proposal included in the Company’s proxy statement.

A copy of the full text of the Company’s Bylaws may be obtained upon written request to the Corporate Secretary at the address provided on page 1 of this proxy statement.

Where You Can Find More Information

We file our proxy statements and other information with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). You can inspect and obtain a copy of our proxy statement and other information filed with the SEC at the offices of the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet site at http://www.sec.gov/ where you can obtain most of our SEC filings. We also make available, free of charge, on our website at www.nautilusinc.com our proxy statements filed with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC.

PROPOSAL 1:

ELECTION OF DIRECTORS

In accordance with our amended and restated bylaws, our Board of Directors shall be comprised of no less than five and no more than fifteenseven (7) directors, withprovided, however that the specific number may be decreased pursuant to be determined by resolution of our Board of Directors. At the time of this proxy statement, the Board has nine (9)six (6) directors.

Directors Paul F. Little and Frederick T. Hull have elected to retire from the Board of Directors effective May 7, 2007 and therefore will not stand for re-election.

At the annual meeting, our shareholders will elect a Board of seven (7)six (6) directors to serve until the 20082009 annual meeting or until their respective successors are elected and qualified. Our Board of Directors has nominated the individuals listed below to serve on our Board. All of the nominees currently are members of our Board of Directors. If any nominee is unable or unwilling to serve as a director at the time of the annual meeting, our Board of Directors may provide for a lesser number of directors or designate a substitute. If our Board of Directors designates a substitute, the proxy holders will have the discretionary authority to vote for the substitute. Proxies may not be voted for more than sevensix nominees.

The Board unanimously recommends that you vote FOR each of the following nominees for election as director.director:

Peter A. AllenEdward J. Bramson,57, 46, has served onChairman, was elected to our Board of Directors since 2002. Mr. Allen is a Partner & Managing Director, Market Development at Technology Partners International, a global consulting services firm. Technology Partners International advises major corporations in the evaluation, negotiation, implementationDecember 2007, and management of outsourcing services agreements. Mr. Allen has maintained this position since July 2001. From December 1998he became our Chief Executive Officer on March 26, 2008. In addition to June 2001, Mr. Allen servedhis duties as our Chairman President and Chief Executive Officer, Mr. Bramson serves as the managing member of Data Dimensions, Inc., an IT consulting firm. Prior to that,Sherborne Investors GP, LLC (“Sherborne Investors GP”) and Sherborne Investors Management GP, LLC (“Sherborne Management GP”) and, as such, manages the investment activities of certain funds controlled by Sherborne Investors GP and Sherborne Management GP. Mr. AllenBramson has held these positions since May of 2006. Since December 2006, Mr. Bramson has served as Vice President with Computer Sciences Corporation from 1990 to 1998. Mr. Allen received a B.S. in Computer Science from the University of Maryland.

Greggory C. Hammann, 44, has served on our Board of Directors and as President and Chief Executive Officer since joining Nautilus in July 2003. Mr. Hammann was appointed Chairman of the Board in March 2004. From 2001 to 2003, he served in a variety of executive positions with Levi Strauss and Company,Spirent Communications plc (“Spirent”), a global leader in the apparel industry. From 1996 to 2000, Mr. Hammann held a variety of executive marketing and strategic planning positions with The Coca-Cola Company. Prior to Coca-Cola, he held various positions in sales, marketing and general management with companies including McLeodUSA, Rayovac, Famous Footwear, and Procter and Gamble. Currently, Mr. Hammann servescommunications technology company listed on the boardLondon Stock Exchange (the “LSE”). Investment vehicles managed by affiliates of directorsMr. Bramson own approximately 17% of Plantronics, Inc., including service on both the audit and compensation committees.outstanding ordinary shares of Spirent. Previously, Mr. Hammann received a B.B.A. from the University of IowaBramson served as

Chairman and a M.B.A.director of (i) Ampex Corporation, a manufacturer of specialized data recording devices and a licensor of proprietary digital video technologies listed on the NASDAQ Stock Market, from 1992 until February 2007, (ii) Elementis plc, a global specialty chemicals company listed on the University of Wisconsin.

Robert S. Falcone,60, has servedLSE, from June 2005 to September 2006 and (iii) 4imprint Group PLC, a U.K. promotional products company listed on our Board of Directors since 2003. Mr. Falcone, who has over 33 years of management and board experience, is President and Chief Executive Officer of GCR Custom Research, a market research firm specializing in customer research and proprietary market tracking services primarily for the high tech industry. Mr. Falcone has maintained this position since July 2005. FromLSE, from October 2003 to 2004, Mr. Falcone was Executive Vice President and Chief Financial Officer of BearingPoint, Inc., oneJuly 2004. Ampex Corporation filed for bankruptcy reorganization under Chapter 11 of the world’s largest business consulting firms.United States Bankruptcy Code on March 31, 2008. Investment vehicles managed by affiliates of Mr. Falcone is the former Senior Vice PresidentBramson effected operational turnarounds with respect to, and Chief Financial Officer of 800.com, an Internet retailer of consumer electronics,invested in, Elementis and was the Chief Financial Officer of Nike, Inc. from 1992 to 1998. He also spent over 21 years with Price Waterhouse LLP, the last 8 years as a partner. Mr. Falcone is a board member and audit committee chairman of RadioShack Corporation and Broadcaster, Inc. and received his B.S. in Business Administration, Accounting from Villanova University.

Diane L. Neal, 50, has served on our Board of Directors since October 2004. Ms. Neal has over 24 years of consumer retail experience. She joined Bath & Body Works, a retail personal care products company as President and Chief Operating Officer in November 2006. Ms. Neal joined Gap, Inc, a global leader in retail apparel, as Senior Vice President Merchandising for Gap Outlet in 2004. She was promoted to President for Gap Outlet in April of 2005 and served in that position until November 2006. From 1985 to 2004, Ms. Neal held a variety of positions at Target Corporation, a large general merchandise retailer, including President of the Mervyn’s subsidiary. Ms. Neal has a degree in business from Michigan State University.

Donald W. Keeble, 58, has served on our Board of Directors since July 2004. Mr. Keeble previously worked for Kmart Corporation, a large consumer retail company, for 29 years, most recently as its President of Store Operations through 2000. Mr. Keeble is President of Global Executive Resources, an executive search firm. He also serves as President of AKK Consulting, which provides management and organizational consulting to a broad range of businesses. Mr. Keeble has an Executive MBA from the University of Michigan and completed executive programs in business management and retailing with Harvard Business School and Babson College, and has an undergraduate degree in Business Administration from Columbus State University.

Ronald P. Badie, 64, 65, joined theour Board of Directors in August 2005. Mr. Badie spent over 35 years with Deutsche Bank and its predecessor, Bankers Trust Company, retiring in 2002 as Vice Chairman of Deutsche Bank Alex Brown (now Deutsche Bank Securities), the firm’s investment banking subsidiary. Over the years, Mr. Badie held a variety of senior level positions with the firm and its predecessor, Bankers Trust Company, in both New York and Los Angeles. Mr. Badie currently serves as a director and audit committee member of Obagi Medical Products, Inc., Amphenol Corporation, and Merisel Inc. In addition, Mr. Badie serves on the compensation committee and is the chairman of the compensation committee for Obagi Medical Products. Mr. Badie is a graduate of Bucknell University and received an MBA from New York University’s Stern School of Business.

Gerard L. Eastman, 50, was elected to the Board of Directors in December 2007. Mr. Eastman is a managing director of Sherborne Investors GP and Sherborne Management GP, positions he has held with Sherborne or its affiliates since March 2006. Since December 2006, Mr. Eastman has also served as a non-executive director of Spirent. From 1997 to February 2006, Mr. Eastman served as a managing director and in other senior executive positions at Citigroup Global Markets Inc., focusing on corporate finance and mergers and acquisitions. Previously, Mr. Eastman held senior positions in investment banking at S.G. Warburg & Co. Inc. and its successor firm from 1993 to 1997. Mr. Eastman received a B.S. in electrical engineering from the Massachusetts Institute of Technology and a M.B.A. from Harvard University.

Richard A. Horn, 60, was elected to our Board in December 2007. Mr. Horn has been a private investor since February 2002. Mr. Horn was General Manager of the PetsHotel Division of PETsMART, Inc. from April 2001 through February 2002. From January 1999 through March 2001, he was Senior Vice President and General Merchandise Manager of PETsMART.com, Inc. and from July 1994 through December 1998, he was Vice President and General Merchandise Manager of PETsMART, Inc. From 1992 to 1994, Mr. Horn was the chief financial officer of Weisheimer Companies, Inc., and, from 1980 to 1992, Mr. Horn was a partner at Coopers & Lybrand. Mr. Horn currently serves on the Board of Directors of Lucky Litter L.L.C., a privately financed manufacturer and marketer of pet products as well as the Treasurer of the Board of Trustees of The Saint Joseph’s Hospital Foundation.

Marvin G. Siegert, 58,59, joined our Board of Directors in August 2005. Mr. Siegert has beenis currently a private investor. Mr. Siegert was President and Chief Operating Officer of The Pyle Group LLC, a private equity investment group, since 1996.from 1996 through July 2007. Prior to The Pyle Group, Mr. Siegert spent 26 years with Rayovac Corporation, a manufacturer of batteries and lighting products, where he held various positions, with his most recent position as Senior Vice President and Chief Financial Officer. Mr. Siegert graduated from the University of Wisconsin, Whitewater and has a master’s degree in management from the University of Wisconsin, Madison.

Michael A. Stein, 58, was elected to our Board in December 2007. From January 2001 until its acquisition by Eli Lilly in January 2007, Mr. Stein served as Chief Financial Officer of ICOS Corporation, a biotechnology company based in Bothell, Washington. From October 1998 to September 2000, Mr. Stein was Chief Financial Officer of Nordstrom, Inc. From 1989 to September 1998, Mr. Stein served in various capacities with Marriott International, Inc., including Chief Financial Officer from 1993 to 1998. Mr. Stein serves on the Boards of Directors of Getty Images, Inc. and Apartment Investment and Management Company, which are both publicly held companies, and the Board of Directors of Providence Health & Services, a not-for-profit health system operating 26 hospitals and more than 35 other health care facilities across Alaska, Washington, Montana, Oregon

and California. He is a Certified Public Accountant and received his B.S. in business administration from the University of Maryland at College Park, MD.

No family relationship exists among any of the directors or executive officers. No arrangement or understanding exists between any director or executive officer and any other person pursuant to which any director was selected as a director or executive officer of the Company.

INFORMATION CONCERNING THE BOARD OF DIRECTORS

The Board of Directors oversees the overall performance of the Company on your behalf. Members of the Board stay informed of the Company’s business through discussion with the Chief Executive Officer and other members of the executive team and the Company, by reviewing materials provided them, and by participating in regularly scheduled Board and committee meetings.

Corporate Governance

Nautilus’

The Nautilus Board of Directors is elected by the stockholdersshareholders to govern the business and affairs of the Company. The Board selects the senior management team, which is charged with conducting the Company’s business. Having selected the senior management team, the Board acts as an advisor to senior management and monitors its performance. The Board reviews the Company’s strategies, financial objectives and operating plans. It also plans for management succession of the Chief Executive Officer, as well as other senior management positions, and oversees the Company’s compliance efforts.

The Board of Directors has determined that the director nominees standing for election, with the exceptioneach of Greggory C. Hammann, our Chief Executive Officer, are eachRonald P. Badie, Richard A. Horn, Marvin G. Siegert, and Michael A. Stein qualify as an “independent director” for purposes of the Company’s Corporate Governance Guidelines and Section 303A.02 of the Listed Company Manual of the New York Stock Exchange, and that each such person is free of any relationship that would interfere with the individual exercise of independent judgment. The Board of Directors has further determined that each member of the three committees of the Board of Directors meets the independence requirements applicable to those committees prescribed by the Listed Company Manual and the Securities and Exchange Commission, including Rule 10A-3(b)(1) under the Securities Exchange Act of 1934 (the “Exchange Act”) related to audit committee member independence.

Peter A. Allen

Ronald P. Badie has served as the Lead Independent Director pursuant to the Company’s Corporate Governance Policies since March 2004.August, 2007. Prior to that, Robert S. Falcone held this position. The Lead Independent Director presides at the executive sessions of the Board of Directors and reviews and consults with the Chairman and Chief Executive Officer concerning the agenda for each regular meeting of the Board. The Lead Independent Director may also periodically help schedule or conduct separate meetings of the independent directors and perform such other duties as may be determined by the Board of Directors.

The Board met five23 times last year. In 2006,2007, all of the directors attended 75% or more of the total number of meetings of the Board and the committee(s) on which he or she serves.served. In addition, Nautilus’ directors have a practicemembers of attending the Company’s Board of Directors typically attend the annual meeting of stockholders each year.shareholders if the Company has scheduled a Board meeting coincident with the annual meeting of shareholders. All of the directors who had been electedwere in office at the time of the meeting attended the Company’s 20062007 annual meeting of stockholders.shareholders. There is no formal policy regarding director attendance at the annual meeting of stockholders.shareholders.

Transactions with Related Persons

The Company’s Board of Directors recognizes that related person transactions present a heightened risk of conflicts of interest and/or improper valuation (or the perception thereof) and therefore has adopted a related person transaction policy, which shall be followed in connection with all related person transactions. Specifically, this policy addresses our procedures for the review, approval and ratification of all related person transactions.

The Board of Directors has determined that the Audit Committee of the Board is best suited to review and approve related person transactions. Accordingly, any related person transactions recommended by management shall be presented to the Audit Committee for approval at a regularly scheduled meeting of the Audit Committee. Any “transaction” with a “related person” (as such terms are defined in Item 404 of Regulation S-K) shall be consummated or shall continue only if the Audit Committee approves the transaction, the disinterested members of the Board of Directors approve the transaction, or the transaction involves compensation approved by the Company’s Compensation Committee.

Pearl Izumi GmbH purchased the assets of SHORE Sportworks GmbH, a company owned by Juergen Eckmann and Juergen Sprich in January 2004. Pearl Izumi GmbH later became a wholly-owned subsidiary of the Company as the result of the 2005 acquisition of Pearl Izumi. Juergen Sprich is now the managing director for Pearl Izumi GmbH. Juergen Eckmann is now the President of the Fitness Apparel Business.

The purchase price for SHORE Sportsworks GmbH included a contingent consideration clause, along with stock in Pearl Izumi that was later purchased by the Company in the Pearl Izumi acquisition. The contingent consideration is a payment equal to 3% of the total year-over-year increase in net revenues from Pearl Izumi Europe, which also became a wholly-owned subsidiary of the Company through the Pearl Izumi acquisition, for each calendar year ending December 31, 2006, 2005, and 2004. The estimated contingent payments were accounted for as a reduction of the purchase price.

Committees of the Board

Nautilus’

The Nautilus Board of Directors currently has three committees: an Audit Committee, a Compensation/Stock Option Plan Administrative Committee,Compensation, and a Nominating and Corporate Governance Committee. The full text of each committee charter and our Corporate Governance Guidelines are available on the Company’s website located at www.nautilusinc.com or in print to all interested parties who request it. Requests should be sent to the Corporate Secretary at the address provided on page 1 of this proxy statement.1.

The Audit Committee

Under the terms of its charter, the Audit Committee represents and assists the Board in fulfilling its oversight responsibility relating to (i) the integrity of the Company’s financial statements and other financial information furnished by the Company, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the Company’s systems of internal accounting and financial controls, (iv) the registered independent public accounting firm’s qualifications and independence, and (v) the performance of the Company’s internal audit function as well as its registered independent public accounting firm.

In fulfilling its duties, the Audit Committee, among other things, shall:

Directors

Marvin G. Siegert (Chairman), Ronald P. Badie, Robert S. Falcone, (Chairman),Evelyn V. Follit, Richard A. Horn, Paul F. Little Ronald P. Badie and Marvin G. Siegert serveMichael A. Stein served on the Audit Committee during 2007. Mr. Little retired from the Board of Directors at the end of his term in May 2007. Mr. Siegert replaced Mr. Falcone as Chairman of the committee in May 2007. Mr. Falcone stepped down from the Audit Committee after being named Interim Chief Executive Officer and President in August 2007. Ms. Follit was appointed to the Audit Committee in September of 2007

concurrent with her appointment as a member of the Board of Directors. Ms. Follit left the Board of Directors in December 2007 after she was not re-elected to the Board of Directors at the special meeting of shareholders held on December 18, 2007. Mr. Badie stepped down from the Audit Committee in December 2007 when he was appointed Lead Independent Director and a member of the Compensation Committee. Mr. Horn and Mr. Stein were appointed to the Committee on December 31, 2007. The Board of Directors has determined that Mr. FalconeSiegert is an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission. Each member of the Audit Committee is financially literate, knowledgeable and able to review and understand financial statements. In 2006,2007, the Audit Committee met sevensix times. From December 2006 until March 2007, Mr. Badie served on the audit committee of three other publicly traded companies. The Company’s Board of Directors determined that such simultaneous service did not impair the ability of Mr. Badie to effectively serve on the Company’s Audit Committee. Mr. Badie is currently serving on the audit committee of two other publicly traded companies.

The Compensation Committee

Under the terms of its charter, the Compensation Committee has overall responsibility for evaluating and approving the officer compensation plans, policies and programs of the Company. The Compensation Committee also acts as the administrator of the Company’s 2005 Long Term Incentive Plan.

In fulfilling its duties, the Compensation Committee, among other things shall:

Compensation Committee Interlocks and Insider Participation

The

Michael A. Stein (Chairman), Ronald P. Badie, Peter A. Allen, Richard A. Horn, Frederick T. Hull, Donald W. Keeble and Diane L. Neal served on the Compensation Committee of the Board of Directors is composedduring 2007. Mr. Hull retired from the Board of Peter A.Directors upon the expiration of his term in May 2007. Mr. Keeble replaced Mr. Allen (Chairman), Donald W.as Chairman of the committee in May 2007. Mr. Allen, Mr. Keeble Frederick T. Hull, and Diane L. Neal.Ms. Neal left the Board of Directors in December 2007 after they were not re-elected to the Board of Directors at the special meeting of shareholders held on December 18. Messrs Stein and Horn were appointed to the committee on December 31, 2007 and Mr. Stein was named the committee’s Chairman. All members of the Compensation Committee are non-employee, outsideindependent directors. Although Mr.Messrs. Hammann current President,and Falcone, our former Chief Executive OfficerOfficers and Chairmanmembers of the Board of Directors, participated in compensation discussions during 2006, he did not participate2007, neither participated in any deliberations or decisions regarding histheir own compensation. In 2006,2007, the Compensation Committee met four times and took action by unanimous written consent threesix times.

The Nominating and Corporate Governance Committee

Under the terms of its charter, the Nominating and Corporate Governance Committee is responsible for considering and making recommendations concerning the membership and function of the Board, and the review and development of corporate governance guidelines.

In fulfilling its duties, the Nominating and Corporate Governance Committee, among other things, shall:

The Nominating and Corporate Governance Committee will consider recommendations for directorships submitted by shareholders. Shareholders who wish the Nominating and Corporate Governance Committee to consider their recommendations for nominees for the position of Director should submit their recommendations in writing to the Nominating and Corporate Governance Committee, Attention: Chairman, Nautilus, Inc., 16400 SE Nautilus Drive, Vancouver, WA 98683. Recommendations by shareholders that are made in accordance with these procedures will receive the same consideration given to nominations made by the Nominating and Corporate Governance Committee.

Nominees may be suggested by directors, members of management, shareholders or, in some cases, by a third party firm. In identifying and considering candidates for nomination to the Board of Directors, the Nominating and Corporate Governance Committee considers a candidate’s quality of experience, the needs of the Company and the range of talent and experience represented on the Board. In evaluating particular candidates, the Committee will review the nominee’s personal and professional integrity, judgment, experience, and ability to serve the long-term interest of the shareholders. The Committee will also take into account the ability of a Director to devote the time and effort necessary to fulfill his or her responsibilities.

The

Richard A. Horn (Chairman), Peter A. Allen, Ronald P. Badie, Frederick T. Hull, Donald W. Keeble, Diane L. Neal and Michael A. Stein served on the Nominating and Corporate Governance Committee is composedduring 2007. Mr. Hull retired from the Board of Peter A.Directors upon the expiration of his term in May 2007. Mr. Allen, (Chairman), Donald W.Mr. Keeble Frederick T. Hull and Diane L. Neal.Ms. Neal left the Board of Directors in December 2007 after they were not re-elected to the Board of Directors at the special meeting of shareholders held December 18, 2007. Messrs. Horn and Stein were then appointed to the committee on December 31, 2007 and Mr. Horn replaced Mr. Keeble as the committee’s Chairman. All members of the Nominating and Corporate Governance Committee are non-employee, outside directors. In 2006,2007, The Nominating and Corporate Governance Committee met four times.

Communications with Directors

All interested parties may send correspondence to our Board of Directors or to any individual director at the following address: Nautilus, Inc., 16400 SE Nautilus Drive, Vancouver, Washington 98683.

Your communications should indicate that you are a shareholder of Nautilus. Depending on the subject matter, we will either forward the communication to the director or directors to whom it is addressed, attempt to handle the inquiry directly, or not forward the communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic. Correspondence marked confidential will not be opened prior to forwarding to the Board or any individual director.

Code of Business Conduct and Ethics

We have adopted the Nautilus, Inc. Code of Business Conduct and Ethics (the “Code of Ethics”), which is a code of conduct and ethics that applies to all of our directors, officers and employees. You can view the Code of Ethics on our website at www.nautilus.com. A copy of the Code of Ethics will be provided in print without charge to all interested parties who submit a request in writing to Corporate Communications, Nautilus, Inc., 16400 SE Nautilus Drive, Vancouver, Washington 98683.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons who own more than 10% of our outstanding common stock, to file with the Securities and Exchange Commission initial reports of beneficial ownership and reports of changes in beneficial ownership of shares of our common stock. Based solely on a review of copies of such forms furnished to us and written representations from executive officers, directors and 10% shareholders, we believe that all Section 16(a) filing requirements during 20062007 were met, except for director Paul Little who was late filing one Form 4 with respect to two transactions.

STOCK OWNERSHIP

Beneficial Owners of Nautilus Stock

The following table summarizes certain information regarding the beneficial ownership of our outstanding common stock as of February 28, 2007March 22, 2008 by: (1) each director and director nominee; (2) each executive officer whose name appears in the summary compensation table; (3) all persons that we know are beneficial owners of more than 5% of our common stock; and (4) all directors and executive officers as a group. Except as otherwise indicated below and subject to applicable community property laws, each owner has sole voting and sole investment powers with respect to the common stock listed.

		Total Shares Beneficially Owned			Shares Covered by Options(2)		Percentage Beneficially Owned(1)
Current Non-Employee Directors
Peter A. Allen, Director		23,800			22,500			*
Ronald P. Badie, Director		7,500			5,000			*
Robert S. Falcone, Director		23,000			20,000			*
Frederick T. Hull, Director		24,800			22,500			*
Donald W. Keeble, Director		15,000			15,000			*
Paul F. Little, Director		1,186,135	(8)		22,500		3.80	%
Diane L. Neal, Director		15,000			15,000			*
Marvin G. Siegert, Director		6,500			5,000			*
Current Named Executive Officers
Greggory C. Hammann, Director and Officer		494,100			463,100		1.60	%
Juergen Eckmann, Officer		7,625			7,625			*
Timothy E. Hawkins, Officer		53,000			50,000			*
William D. Meadowcroft, Officer		55,800			37,750			*
Darryl K. Thomas, Officer		23,000			23,000			*
Current Directors and Executive Officers as a Group (17 persons)		2,058,735					6.50	%

1)(1)

All percentages have been calculated based on 31,521,61131,557,136 shares of our common stock issued and outstanding at February 28, 2007.March 22, 2008. Shares which the person or group has the right to acquire within 60 days after February 28, 2007March 22, 2008 are deemed to be outstanding in calculating the percentage ownership of the person or group but are not deemed to be outstanding as to any other person or group.

2)(2)

Includes currently exercisable options and options exercisable within 60 days after February 28, 2007.March 22, 2008.

3)(3)

Information based on a Schedule 13GScheduled 13D/A jointly filed on March 3, 2008 by Snyder CapitalSherborne Investors LP, Sherborne Investors GP, Sherborne Investors Management L.P. on February 14, 2007. Synder CapitalLP, Sherborne Management L.P.GP, Sherborne Strategic Fund A, LLC, Sherborne Strategic Fund B, LLC, Nottingham Investors LLC and Edward J. Bramson. All such entities disclosed shared voting power as to 2,801,4008,438,426 shares and shared dispositive power as to 3,114,6308,438,426 shares, other than Sherborne Strategic Fund A, LLC, which disclosed sole voting and dispositive power with respect to 721,232.270 shares and no shared voting or dispositive power, over any shares, Sherborne Strategic Fund B, LLC, which disclosed sole voting and dispositive power with respect to 1,081,848.405 shares and no shared voting or dispositive power over any shares, and Nottingham Investors LLC, which disclosed sole voting and dispositive power with respect to 6,635,345.320 shares and no shared voting or dispositive power over any shares.

4)	Information based on a Schedule 13G/A filed by Snow Capital Management, L.P. on February 5, 2007.

5)	Information based on a Schedule 13G filed by ICM Asset Management, Inc. on February 14, 2007. ICM Asset Management, Inc. disclosed shared voting power as to 1,097,946 shares and shared dispositive power as to 2,073,089 shares.

6)

Information based on a Schedule 13G filed by U.S. Bancorp and its investment advisor, FAF Advisors, Inc., on January 31, 2007. U.S. Bancorp disclosed shared power to vote or to direct vote as to 1,954,168 shares and shared power to dispose or to direct the disposition as to 1,931,168 shares. U.S. Bancorp’s financial advisor, FAF Advisors, Inc. disclosed shared power to vote or to direct vote as to 1,922,519 shares and shared power to dispose or to direct the disposition as to 1,922,519 shares.

7)(4)

Information based on a Schedule 13D filed by SCSF Equities, LLC on November 6, 2006.June 28, 2007. SCSF Equities, LLC disclosed shared power to vote or to direct vote as to 1,714,4003,122,853 shares and shared power dispose or to direct the disposition as to 1,714,4003,122,853 shares.

8)(5)

Includes 352,009Information based on a Schedule 13G jointly filed by Putnam, LLC d/b/a/ Putnam Investments, Putnam Investment Management, LLC and The Putnam Advisory Company, LLC on January 17, 2008. Putnam, LLC d/b/a/ Putnam Investments disclosed shared power to vote or to direct vote as to 527,910 shares held by Westover Investments, Inc.,and shared power to dispose or to direct the disposition as to 1,624,130 shares. Putnam Investment Management, LLC disclosed shared power to vote or to direct vote as to 73,500 shares and shared power to dispose or to direct the disposition as to 761,697 shares. The Putnam Advisory Company, LLC disclosed shared power to vote or to direct vote as to 454,410 shares and shared power to dispose or to direct the disposition as to 862,433 shares.

(6)

Mr. Bramson, as the managing member of which Mr. Littleeach of Sherborne Investors GP and Sherborne Management GP, is the indirect beneficial owner of and has the sole shareholderindirect power to vote or dispose of 8,438,426 Shares owned by Sherborne Investors LP, Sherborne Investors GP, Sherborne Investors Management LP, Sherborne Management GP, Sherborne Strategic Fund A, LLC and director.Sherborne Strategic Fund B, LLC. Mr. Bramson disclaims beneficial ownership of such shares.

(7)	Information based on Form 4/A filed by Greggory C. Hammann on March 2, 2007.

EXECUTIVE OFFICERS

The following table identifies our current executive officers, the positions they hold and the year in which they began serving in their respective capacities.as officers of the Company. The Board of Directors elects all officers, who hold office until their respective successors are elected and qualified.

For information on Greggory C. Hammann’sEdward J. Bramson’s business background, see “Nominees” under “Election of Directors” above.

Timothy E. HawkinsJ. Joyce joined Nautilus in February 2004 as Chief Customer Officer and assumedwas appointed to the dutiesnewly formed position of Chief Marketing Officer in October 2004. Mr. Hawkins was promoted to President of the Fitness Equipment Business in January of 2006. Prior to joining Nautilus, Mr. Hawkins wasSenior Vice President of Global Sales in September 2007. In April 2008 he was named Senior Vice President/General Manager Nautilus. Mr. Joyce most recently was President and Chief Operating Officer of HO Sports, a water sports company based in Redmond, Washington. Mr. Joyce was with Nike, Inc. for Levi Strauss and Company, a global leader in the apparel industry,19 years from 1980 to 1999, where he began his service in November 2001. From April 1997progressed to Novemberserve as director of European sales, and as vice president of global sales. He was president of Internet sporting goods retailer fogdog.com from 1999 to 2000, and served as executive vice president of retail and wholesale sales for Adidas America from 2001 to 2004. Mr. Hawkins led various National Account sales groups for the Fountain Division of Coca-Cola. Prior to Coca-Cola, Mr. Hawkins held executive marketing positions with Famous Footwear and sales management positions with Rayovac Corp. Mr. Hawkins receivedJoyce completed has a B.A. in Business Administration from the University of Wisconsin-Whitewater.Ohio University.

William D. Meadowcroft joined Nautilus in 2000 as the Corporate Controller. Mr. Meadowcroft was appointed as Principal Accounting Officer in July 2004 and Chief Financial Officer, Secretary and Treasurer in March 2005. Mr. Meadowcroft has over 20 years of accounting and finance experience, including eight years with Deloitte & Touche LLP in Portland, Oregon and Ernst & Young LLP in Providence, Rhode Island. From 1997 to 2000, he worked as Controller for the American Automobile Association of Oregon/Idaho, which represents and protects motorists’ interests. Mr. Meadowcroft has been a Certified Public Accountant in Oregon, has a B.S. in Accounting from Pennsylvania State University, and has a M. Div. degree from Western Seminary in Portland, Oregon.

Stephen L. Eichen has been with Nautilus since September 2002, serving first as the Vice President of Information Technology for the Direct Division. Mr. Eichen was promoted to Chief Information Officer in March 2004. Prior to joining Nautilus, Mr. Eichen was a Senior Manager for Deloitte & Touche LLP, providing information systems and project management consulting services, from 1999 to 2002. From 1985 to 1999, Mr. Eichen held operations management and senior information systems management positions for The Boeing Company. Prior to The Boeing Company, Mr. Eichen served as Senior Associate for the Institute of Management Resources from 1982 to 1985, an operations and systems consulting company serving Fortune 500 manufacturing clients. He has been certified C.P.I.M. by the American Production and Inventory Control Society, and is a member of the Project Management Institute. Mr. Eichen received his B.S. in Biology and his M.S. in Management and Policy Sciences from the State University of New York at Stony Brook.

Darryl K. Thomas joined Nautilus in January 2004 as Senior Vice President, Strategic Planning and assumed the Senior Vice President, International Operations responsibilities in May 2004. Mr. Thomas was promoted to the President of the International Equipment Business in January of 2006. From February 2002 to January 2004, Mr. Thomas served in a variety of executive marketing and strategic planning positions with Levi Strauss and Company, a global leader in the apparel industry. From 1988 to 2002, Mr. Thomas held a variety of positions in global sales management, sales training and planning with The Coca-Cola Company. Prior to Coca-Cola, he held sales related positions at Xerox Corporation and AT&T. Mr. Thomas received a B.B.A. from the University of North Texas and an M.B.A. from the University of Texas at Austin.

Wayne M. Bolio was promoted to Chief Administrative OfficerSenior Vice President, Law in January of 2006.2006 and was named General Counsel in April 2008. Mr. Bolio joined Nautilus in June 2003 as Vice President, Human Resources. He was appointed Senior Vice President, Human Resources in March 2004 and Senior Vice President, Law and General Counsel in May 2004. From 1997 to 2002 he served as the chief human resources officer for Consolidated Freightways, a major transportation company, and most recently held the position of Vice President of Human Resources and Assistant General Counsel. Prior to that, he was employed by Southern Pacific Transportation Company as Assistant General Counsel with responsibility for labor relations, human resources, and employment law matters. Mr. Bolio received a B.A. from the University of California at Berkeley and a J.D. from UCLA.

Juergen EckmannKenneth Fishwas promoted to the newly formed position of Senior Vice President/General Manager Strength Business in December 2007 after joining Nautilus in 2005 and serving as Vice President, Financial Analysis, Vice President and Corporate Controller and most recently Vice President, Global Finance. In April 2008 he was named Chief Administrative Officer and Vice President/General Manager Commercial Business. He brings more than 25 years of senior level finance and operations experience, including Vice President, Finance for wind generation company Vestas Wind Systems from 2003 to 2005, and Asia-Pacific Finance Director for NACCO Materials Handling Group from 1977 to 2002. Mr. Fish has a business administration degree from Oregon State University, and was certified as a management accountant.

Deborah Marsh joined Nautilus in March 2007 as Senior Vice President, Human Resources, where she is responsible for personnel management, human resources systems, compensation and benefits. Ms. Marsh has 20 years of human resources experience from high tech, forest products, manufacturing and the public sector. Previously, she was the senior Human Resources Executive for TriQuint Semiconductor from 2002 to 2007, and senior consultant for Arthur Andersen Human Capital Services and KPMG Compensation and Benefits practice from 1998 to 2002. She serves as faculty for WorldatWork and was on the University of Washington faculty for three years. Ms. Marsh is a Certified Employee Benefits Specialist, Certified Compensation Professional and Certified Benefits Professional. She has a masters degree in Community/Clinical Psychology from Pepperdine University, and a bachelor of arts from California State University Los Angeles.

Mark Meussnerjoined Nautilus in JulyOctober 2005 as President, Fitness Apparel Business as partthe Plant Manager of our acquisitionthe Tulsa manufacturing facility, and was promoted to his current position in 2007 where he now oversees all manufacturing and operations for Nautilus, Inc. He brings 30 years of Pearl Izumiexperience from Ford Motor Company and its component company Visteon, where he served as Vice President, Chief of Staffin engineering and Managing Director of Europemanufacturing leadership roles from 20011985 to 2005. Prior to Pearl Izumi, Mr. Eckmann co-foundedHis experience there included serving as plant manager for Visteon’s Chassis plant in Indianapolis (2 million sq. ft., 2,500 employees) and servedthe Tulsa glass facility (1.5 million sq. ft., 900 employees), along with managing and sourcing for two plants in Mexico and for a joint venture company in Shanghai, China. He has guided implementation and achievement of OSHA SHARP and ISO-9000 certifications and pursuit of the ISO-14000 environmental standard, which have become the foundation for safety, quality and environmental systems at Nautilus, Inc. Mark received his Bachelors Degree in Systems Engineering and Organizational Sciences, as General Manager for Shore Sportswork, a German company focused on providing sales, operation,well as Organizational and marketing support to foreign clients seeking to grow their active outdoor brandsBehavioral Sciences, from the University of Michigan in Europe. Prior to Shore Sportswork, Mr. Eckmann was with Scott Sports Group, a fitness equipment sales company, where he had worldwide marketing responsibility. Mr. Eckmann has 14 years of experience in the active outdoor and sporting goods industry.1987.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee of the Board of Directors (the Committee) manages the Company’s compensation programs on behalf of the Board of Directors. The Committee reviewed and discussed with the Company’s management theCompensation Discussion and Analysis included in this Proxy Statement. In reliance on the review and discussions referred to above, the Committee recommended to the Board of Directors that theCompensation Discussion and Analysisbe included in the Company’s Proxy Statement to be filed in connection with the Company’s 20072008 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission.

Dated March 15, 200726, 2008

Respectfully Submitted,

Peter

Michael A. AllenStein, Chairman

Donald W. KeebleRonald P. Badie

Frederick T. Hull

Diane L. NealRichard A. Horn

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION and ANALYSIS

The following Compensation Discussion and Analysis provides an overview and analysis of the material elements of compensation for the Nautilus, Inc. executive officers identified in the Summary Compensation Table (“Named Executive Officers”). The Compensation Committee of the Board of Directors makes all decisions regarding the total direct compensation of the Company’s executive officers. Direct compensation includes base salary, incentive compensation, stock options and performance units.

The day-to-day design and administration of indirect compensation such as employee welfare benefits, including medical and life insurance as well as a 401(K) plan, is managed by the Company’s Human Resource and Legal departmentsdepartment and are generally applicable to all U.S. based employees.

Compensation Philosophy and Objectives

The Company’s overall goal in compensating executive officers is to attract, retain and motivate key executives of superior ability who are critical to our future success. The overall compensation program is designed to reward executives for meeting financial goals and increasing shareholder value. The total executive compensation awarded under each component is based on the Board’s estimation of each executive officer’s contribution to long-term growth and profitability for the Company, relying on input from management and direct interaction relating to business performance.

The Company’s executive compensation program is designed to encourage, compensate and reward employees on the basis of individual and corporate performance, both in the short and long term. Each executive compensation package is comprised of a base salary and an annual incentive bonus tied to corporate and individual performance and is supplemented by long-term equity incentives in the form of stock options, restricted stock, and performance units. The Company believes this compensation structure increases the mutuality of interest between our executive officers and shareholders. The Company’s compensation decisions with respect to executive officer salaries, incentive compensation, stock options, restricted stock, and performance units are influenced by (a) the executive’s individual performance and level of responsibility and function within the Company, (b) the overall performance and profitability of the Company and (c) our assessment of the competitive marketplace, including other peer companies. Our philosophy is to focus on total direct compensation opportunities through a mix of base salary, incentive compensation and long-term incentives including stock options and performance units. We do not target any particular weight for base salary, incentive compensation or long-term incentives as a percent of total direct compensation.

All of Nautilus’the Company’s compensation and benefits for its Named Executive Officers described below have as a primary purpose the Company’s need to attract, retain and motivate the highly talented individuals who engage in behavior necessary to enable the Company to succeed in its mission while upholding our values in a highly competitive marketplace.

General Compensation Levels

The Chief Executive Officer and the entire Compensation Committee of the Company were changed in the second half of 2007. As a result of this change there have been modifications to the compensation practices of the Company between 2007 and 2008 which are described herein.

Each year, the Company reviews the base salaries and annual and long-term incentive opportunities offered to our executives, including the Named Executive Officers, to ensure that they are competitive with market practices, support our executive recruitment and retention objectives, and are internally equitable among executives. While(While we do not set specific total compensation targets, our process essentially results in ade facto target – target—that is, a total amount of compensation that we will pay an executive if all corporate and individual performance objectives are fully met.) Each of our key program components is generally set with market median as a guideline, except that long-term incentives are generally based upon a combination of affordability, market practices and retention objectives. The Compensation Committee approves the salaries and option grants made to the named executive officers. The full Board of Directors approves the annual incentive compensation plan earnings target after receiving the recommendation of the Compensation Committee.

As part of this process, for 2007, the Committee considersconsidered market data and input provided by its compensation consultant, HayGroup,Hay Group, and our management. We use thisThis data was used to match our specific executive positions to those with similar functional descriptions at companies with similar business characteristics.

In most cases, each Named Executive Officer iswas matched to comparable positions within the compensation surveys to ascertain the appropriate placement relative to market. Where it iswas not possible to match a Named Executive Officer’s role, he or she will bewas compared with several other senior executive positions based on functional responsibilities, revenue size of the business unit, and individual experience. We also take into consideration market trends to determine how base salary and annual cash incentives are changing from year to year and how each component relates as a percentage of total compensation. We generally start by setting base salary at the relevant market median and build on that, factoring in performance and the experience and skills of the Named Executive Officer. However, we use the market data as context only, and any cash compensation decisions also factor individual experience, performance and internal equitability. Accordingly, base salary will – will—and does – does—vary among the Named Executive Officers. Annual cash incentive award target levels are set as a percentage of base salary. Through this process, we believe that the cash compensation package for our Named Executive Officers has been balanced for both internal and external fairness.

For each of the elements of compensation identified below, the Company’s Chief Executive Officer Mr. Hammann, reviews the components for each Named Executive Officer, except himself, and makes a recommendation to the Compensation Committee as to the level of each component. This recommendation is prepared based on each executive’s performance against established objectives and overall contribution to the success of the Company. TheIn 2007, the recommendations arewere reviewed by the Compensation Committee along with a market analysis completed by the HayGroup.Hay Group. After discussion and review, the Compensation Committee may propose changes in Named Executive Officer compensation to the Company’s Board of Directors. Separately, the Compensation Committee proposes adjustments to the Chief Executive Officer compensation components to the Board of Directors for approval. Recommended changes are impacted by individual performance as well as company performance against the established plan and analysis of market compensation data.

In 2007 the Company’s results of operations were significantly below our expectations and we experienced our first operating loss since our initial public offering in 1998. As a result, the Compensation Committee of the Board of Directors determined not to increase 2008 base compensation for the Named Executive Officers from 2007.

The Elements of Nautilus’ compensation program

As described above, we used several compensation elements in our executive compensation program in 2006,2007, including:

Cash Compensation

In 2006,2007, we provided cash compensation to our Named Executive Officers through base salary and annual incentive opportunities. This is consistent with both general market practice and the practices of our peer group of leading, comparably sized public consumer product companies, which typically provide base salary and annual incentives in the form of cash.

Base Salary—We set base salary to be competitive with the general market and our peer group. In addition to base salary, we rely on other forms of compensation (both cash and equity) to motivate and reward the Named Executive Officers.

Base salaries are based on job responsibilities and individual contribution, as well as the executive’s experience, taking into consideration competitive pay levels relative to other companies in our peer group. The base salary component of compensation is designed to retain employees in a competitive market situation.

Generally, the median of the relevant market data as described above is used as a guideline for determining base salary. In January of each year,Annually, the base salary of each of our Named Executive Officers is reviewed and approved by our Compensation Committee. Adjustments to base salary levels on a year-over-year basis depend largely on the Committee’s assessment of market data and Company, business unit, and individual performance. The Named Executive Officers’ experience, expertise, and internal positioning are also factored into the annual review, and the CEO provides recommendations as to pay actions with respect to the Named Executive Officers other than himself. Base salaries are typically reviewed and adjusted, as described above, for the Company’s Named Executive Officers during the first Compensation Committee meeting of the calendar year.

The base salaries paid to the Named Executive Officers during 20062007 are reported in the Summary Compensation Table on page 23.22.

Annual Incentive Compensation—We believe it is important to provide annual cash incentives to motivate our executive officers to attain specific performance objectives that, in turn, further our long-term objectives. The Company’s annual bonus plans seek to ensure that a significant portion of each executive officer’s cash compensation is “at risk” and payable only when our stockholdersshareholders have also benefited from his or her efforts.

Each year, Mr. Hammannthe Chief Executive Officer recommends to the Compensation Committee targets for overall corporate performance for the fiscal year. The Compensation Committee in turn reviews these targets and applies any

adjustments as deemed prudent, and recommends them to the full Board of Directors.prudent. For 2006,2007, the targets were based on actual earnings per share (“EPS”) and other significant factors, such as cash management, strategic business development, operating efficiency, revenue generation, and other specific objectives. In October of 2006 the Compensation Committee recommended and the Board of Directors approved an adjustment to the targets for the 2006 incentive compensation plan based on consideration of a number of factors, including the impact of the adoption of FAS 123R, the continued impact of certain factors that negatively affected performance in the fourth quarter of 2005, significant accomplishments during 2006, and the potential impact on employee morale of failing to reward employees for these significant accomplishments. At the end of each year, the Compensation Committee evaluates

corporate performance in light of these goals. If the Company meets or surpasses the pre-established performance goals, the Compensation Committee generally will award a bonus to each executive officer equal to between 40% and 100% of his or her base salary, as stipulated during the goal-setting period. The percentage of annual base salary that is paid as incentive compensation is based on both Company performance and executive officer performance. The Company performance component increases or decreases in the event the Company achieves greater than, or less than, 100% of the earnings target as approved by the Board of Directors. The individual performance component is based on achieving individual performance goals approved at the beginning of the fiscal year. AchievingIn 2007, achieving three, four or five out of five individual goals leads to incentive compensation payouts of 50%, 75% and 100%, respectively. AchievingNo incentive compensation is paid to the individuals achieving less than three individual goals results in nogoals.

For 2008, the Company will determine executive incentive compensation being paid tobased on the individual. However, the Compensation Committee has absolute discretion in awarding annual bonuses and may award greater or lesser annual bonuses to one or more executive officers, whether or not the Company achieves its performance goals.following process:

The incentive compensation target for each company executive isof the Company’s executives was determined by the Compensation Committee in early 2007 based on competitive market factors and is established at the discretion of the Compensation Committee.factors. Incentive compensation rates for each Named Executive Officer are reviewed annually by the Compensation Committee. These rates are based on job responsibilities and the estimation of each executive officer’s contribution to long-term growth and profitability for the Company taking into consideration competitive pay levels relative to other leading, comparably sized public consumer product companies. In addition, theThe incentive compensation rates arefor 2007 were reviewed by the HayGroupHay Group for market competitiveness. For 2006,2007, baseline award targets for our named executive officers as a percentage of base salary were as follows:

The total

There were no annual cash incentive awards earned by eachthe Named Executive OfficerOfficers for 2006 are reported in the Summary Compensation Table on page 23.2007.

Long-Term Equity Incentives

A substantial portion of our executives’ total compensation is delivered in the form of equity compensation awarded under our 2005 Long Term Incentive Plan (the “2005 Plan”). In 2006, thisThis portion has varied with each executive’s role and degree of responsibility in the Company. In recent years,2007, we have used two different equity vehicles—stock options, performance units, and performance units—restricted stock to provide long-term incentives to our Named Executive Officers.

We also consider affordability to the Company as a factor in determining the size and mix of each equity award we grant. The accounting expense recognized by the Company in 2006 with respect to long-term incentive awards earned by the Named Executive Officers during 2006 and earlier years is reported in the Summary Compensation Table on page 23.22. Additional information on these awards, including the number of shares subject to each award, is reported in the Grants of Plan-Based Awards Table on page 24 and the Outstanding Equity Awards at Fiscal Year-End Table on page 25.

In 2006,2007, the Named Executive Officers each received an equity award that was divided betweenawards including stock options, performance units and performance units. This reflected a change from 2005 in which equity awards consisted of only stock options. We believe that the mix used in 2006 provided the most appropriate alignment with both stockholder and economic interests.restricted stock. While a stock option provides a direct link to financial performance as measured by growth in the market price of our common stock and emphasizes our overall performance in the market, the performance unit awards drive results since their payout is directly tied to the achievement of specific pre-established financial performance goals that have been crafted to help us reach our long-term strategic objectives. The restricted stock grants were intended to enhance retention of certain key employees in the Company.

Stock Options——The Compensation Committee views stock options as a key long-term element in its performance-based executive compensation program. Stock options provide for financial gain derived from the potential appreciation in stock price from the date the option is granted until the date the option is exercised. The exercise price of stock options is set at fair market value of the Company’s common stock on the date of the grant. The 2005 Plan, as approved by the Company’s shareholders, provides that fair market value is equal to the closing price of our common stock on the New York Stock Exchange on the date preceding the grant date. The Compensation Committee awards options at meetings that are generally held on Sundays in conjunction with regularly scheduled two-day quarterly board meetings that are held on Sundays and Mondays. Therefore, there is no opportunity for a change in market price between the dateHistorically, the Compensation Committee approves an award and the date of the grant.has awarded options at regularly scheduled meetings. The Company does not backdate options or grant options retroactively. In addition, the Company does not plan to coordinate grants of options so that they are made before announcement of favorable information, or after announcement of unfavorable information. Stock options become exercisable in equal installments over time periods designated by the Compensation Committee, generally ranging from one to five years for Named Executive Officers. The

Company’s long-term performance ultimately determines the value of stock options, because gains from stock option exercises are dependent on the long-term appreciation of the Company’s stock price.

The Compensation Committee grants stock options to executive officers based on the Board’s estimation of each executive officer’s contribution to our long-term growth and profitability. TheFor 2007, the Company, with the assistance of an independent consultant, HayGroup, collectsHay Group, collected and analyzesanalyzed competitive market data annually to assess the adequacy of compensation paid to the Named Executive Officers. The analysis comparescompared the Company’s Named Executive Officers to positions in similar companies and includesincluded an evaluation of the value of stock options granted for comparable positions.

Performance Unit Awards——The Compensation Committee views performance units as an additional key long-term element in its performance-based executive compensation program. Performance units are designed toalso enhance the Company’s ability to attract and retain highly qualified personnel. In addition, performance unitspersonnel and align the long-term interests of executives with those of the shareholders.

A performance unit entitles the Named Executive Officer to receive a share of the Company’s common stock for each performance unit, for any completed fiscal year in which certain EPS targets are met. The awards vest annually over three years with a rolling provision that allows for an unvested award from year 1 or year 2 to vest if a subsequent period’s targets are met. If none of the targets are met within the three year period, the performance unit award is cancelled.

For the awards made in 2006, we set2007, the target level for our performance units was set at oura projected long-term business growth objective over the next three years. In making determinations of the desired threshold, target, and maximum performance levels, wemanagement and the committee, at the time, also considered the general economic climate and the specific market conditions that we were likelyexpected to face in the upcoming years. We set the target performance levels for performance unit awards such that the levels arewere believed to be challenging but achievable, in that the target levels represent projected long-term meaningful growth of the Company. We setActual results of operations in 2007 were significantly below our thresholdexpectations and maximum performance levels approximately 10% below and above, respectively, the target performance level. Althoughwe experienced our assessment is subject to change overfirst operating loss since our initial public offering in 1998. At this time our performance was generally off target for 2006 and therefore we are currentlydo not expensing our outstanding performance units for financial statement purposes based upon an assumptionexpect that we will not achieve the target performance levels. Targetlevels necessary for the performance units to become vested. Those target levels for the 20062007 performance unit award were annual earnings per share of $1.15, $1.40$1.00, $1.25 and $1.70$1.55 for 2006, 2007, 2008 and 2008,2009, respectively. Additional information on all outstanding performance unit awards, including the number of shares subject to each award, is reported in the Outstanding Equity Awards at Fiscal Year-End Table on page 25.

Heath & WelfareRestricted Stock—The Compensation Committee granted restricted stock in August 2007 to certain key employees including the Named Executive Officers in order to facilitate retention of these officers during a period of uncertainty resulting from the termination of Mr. Hammann, the Company’s former CEO, in August 2007. The grant amounts were set by the Compensation Committee based in part on an analysis provided by the Hay Group. Awards varied by Executive and were based on a percentage of annual compensation. Restricted stock awards will vest in full two years from grant date, provided that the employee remains with the Company during such time.

Other Benefits and Other BenefitsIndirect Compensation

Executive officers participate in various broad-based employee benefit plans on substantially the same terms as eligible, non-executive employees, subject to any legal limits on the amounts that may be contributed or paid to executive officers under these plans. We offer a 401(k) plan which allows employees to invest in an array of funds on a pre-tax basis and which provides for employer matching contributions of up to three percent of eligible compensation, capped bysubject to IRS regulations.

The Named Executive Officers are eligible to participate in our Company-wide medical, dental, life, and disability insurance plans. Any participant, including a Named Executive Officer, may purchase higher levels of coverage for particular benefits. Some of the Named Executive Officers have taken advantage of this option. The Company’s CEO also has a long-term disability and a life insurance policy.

The Company also providesreimburses the cost of income tax return preparation services tofor Named Executive Officers. The primary purpose isOfficers subject to assist the executive officer in addressing tax and financial planning considerations when conducting stock option or performance unit transactions.certain dollar limits. Tax fees paid or reimbursed by the Company during 20062007 ranged from $700$0 to $3,000$5,000 for each Named Executive Officer.

Additional information about these awards is reported in the Summary Compensation Table on page 23.22.

Severance Agreements

To ensure that we are offering a competitive executive compensation program, we believe it is important to provide reasonable severance benefits to our executive officers, including the Named Executive Officers.

We have a separate severance arrangement with each Named Executive Officer under their respective employment agreement that we entered into with them when they either began employment with the Company or through promotion into their current role. The agreement provides that, in the event we terminate their employment (other than for cause) or in some cases, if they were to voluntarily terminate employment for good reason, then, in lieu of any further salary, bonus, or other payments for periods

subsequent to the Date of Termination, the Company shall pay to the employee severance ranging from six months to twenty-four months of the employee’s average monthly annual base salary. Severance payments are made according to the Company’s normal payroll process spread out equally over the severance period.

Under the employment agreement with our CFO, William Meadowcroft, Mr. Meadowcroft’s stock options shall continue to vest during the period Mr. Meadowcroft is entitled to severance payments.

Under the employment agreement with our former Chief Executive Officer, Robert S. Falcone, and as the result of his termination without cause thereunder, the Company is providing Mr. Falcone with salary continuation for a period of twenty-four months, as well as health benefits for Mr. Falcone and his covered dependents, at active-employee premium rates, during such period. Mr. Falcone will also be entitled under his employment agreement to receive a pro-rated bonus payment for the portion of fiscal year 2008 completed prior to his termination if the applicable bonus targets are achieved. In addition, as the result of Mr. Falcone’s termination without cause, the vesting of stock options granted to Mr. Falcone was fully accelerated. Such stock options will remain exercisable for three months following the date of his termination. In connection with the termination of his employment on March 26, 2008, the Company is currently providing, or will also continueprovide, Mr. Falcone with severance benefits in accordance with the terms of the employment agreement.

Under the employment agreement with our former Chief Executive Officer, Greggory C. Hammann, and as the result of his termination without cause thereunder, the Company is providing Mr. Hammann with salary continuation for a period of twenty-four months, as well as health benefits for Mr. Hammann and his covered dependents, at active-employee premium rates, during the period in which he is entitled to severance payments. Furthermore,such period. Mr. Hammann willis also entitled under his employment agreement to receive a pro-rated bonus payment for the portion of the fiscal year completed prior to thehis termination, calculated on the basis of the average bonus paid to Mr. Hammann in the three preceding fiscal years. In addition, the stock option exercisable for up to 850,000 shares of common stock that was granted to Mr. Hammann when he joined the Company in 2003 (the “Initial Option Award”) will continue to vest as if Mr. Hammann had remained employed during the twenty four-month period in which he is entitled to receive severance pay. The Initial Option Award will also be exercisable for fifteen months after the date of termination of employment as to the shares vested on or before such date of termination and for fifteen months after the date of vesting as to shares vesting after the date of termination. In connection with the termination of his employment on August 13, 2007, the Company has provided, or is currently providing, Mr. Hammann with severance benefits in accordance with the terms of the employment agreement.

The actual payments made or being made to Named Executive Officers who are no longer with the Company, and estimated payments and benefits payable to the Named Executive Officers assuming an

event triggering payment under these plans and arrangements as of the last day of 20062007 are reported in the discussion of Other Potential Post-Employment Payments on page 27.26.

Deductibility of Compensation

Section 162(m) of the Internal Revenue Code of 1986 limits to $1,000,000 per person the amount that we can deduct for compensation paid to any of our most highly paid officers in any year. With the exception of our President and Chief Executive Officer, we generally do not expect any of our employee’s salary and bonus levels to exceed that limit. However, depending on individual and corporate performance, total compensation for certain executives may be greater than $1,000,000. The limit on deductibility, however, does not apply to performance-based compensation that meets certain requirements. Our current policy is generally to grant long-term incentive awards that meet those requirements so that we may properly deduct compensation related to these awards when recognized by an executive.

Summary Compensation Table

The table that follows this discussion summarizes the total compensation paid to or earned by each of our Named Executive Officers for the fiscal year ended December 31, 2006.2007. The narrative below describes current employment agreements and material employment terms with each of our Named Executive Officers, as applicable.

Summary Compensation Table

option agreementagreement; (ii) $1,200,000 of severance which became payable upon his termination, $207,692 of which was paid in 2007, and a Company matching contribution of $4,752 to the Nautilus, Inc. 401(k) Savings Plan. The amendments were made in response to the adoption of Section 409A of the Internal Revenue Code of 1988, as amended. Mr. Hammann’s 2006 All Other Compensation also consists(iii) $16,839 of Company paid premiums for disability and life insurance, continued health benefits for himself and his covered dependents and tax service fees which became payable by the Company as the result of his termination, $6,843 of which was paid in 2007. Mr. Hammann’s employment with the Company was terminated effective August 13, 2007.

(3)	Mr. Meadowcroft’s 2007 All Other Compensation consists of a Company matching contribution to the Nautilus, Inc. 401(k) Savings Plan of $4,400 and tax service fees paid by the Company.

2)(4)

Mr. Meadowcroft’s 2006Thomas’ 2007 All Other Compensation consists of $147,826 for ex-patriot tax equalization, $46,933 for quarterly payment adjustments for variances in exchange rates, $108,000 for payments received for corporate housing, a Company matching contribution of $4,752$6,750 to the Nautilus, Inc. 401(k) Savings Plan and tax service fees paid by the Company. Mr. Thomas’ employment with the Company will terminate effective April 18, 2008.

3)	Mr. Hawkins’ 2006 All Other Compensation consists of a Company matching contribution of $4,752 to the Nautilus, Inc. 401(k) Savings Plan and tax service fees paid by the Company.

4)	Mr. Thomas’ 2006 All Other Compensation consists of $54,000 for payments received for corporate housing, $52,178 received for one-time relocation costs, and a Company matching contribution of $4,752 to the Nautilus, Inc. 401(k) Savings Plan and tax service fees paid by the Company.

5)(5)

Mr. Eckmann’s 20062007 All Other Compensation consists of Company paid premiums for life insurance, personal travel costs and a contribution to a pension fund, of which the Company is not a sponsor.

6)(6)

Mr. Eichen’s 2007 All Other Compensation consists of a Company matching contribution to the Nautilus, Inc. 401(k) Savings Plan and tax service fees paid by the Company.

(7)

The amounts reported in this column are equal to the dollar amount recognized for financial statement reporting purposes in 20062007 in connection with performance units granted under the Company’s 2005 Long Term Incentive Plan. With respect to performance units granted in 2006 and 2005, respectively, see Note 910 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20062007 for a discussion of the relevant assumptions used in calculating the dollar amount recognized for financial statement reporting purposes with respect to the applicable fiscal year in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards no. 123 (revised 2004),Share Based Payment (“FAS 123R”). For further information about awards made in 2006,2007, see the Grants of Plan-Based Awards table beginning on page 24 of this Proxy Statement.

7)(8)

The amounts reported in this column are equal to the dollar amount recognized for financial statement reporting purposes in 20062007 in connection with options granted under the Company’s 2005 Long Term Incentive Plan, which was approved by the Company’s stockholdersshareholders and became effective on June 6, 2005. With respect to options granted in 2007, 2006, 2005 and 2004,2005, respectively, see Note 910 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20062007 for a discussion of the relevant assumptions used in calculating the dollar amount recognized for financial statement reporting purposes with respect to the applicable fiscal year in accordance with FAS 123R. For further information about awards made in 2006,2007, see the Grants of Plan-Based Awards table beginning on page 24.24 of this Proxy Statement.

Grants of Plan-Based Awards

Outstanding Equity Awards at Fiscal Year-End

The following table provides detailed information about all outstanding equity awards of the Named Executive Officers at December 31, 2007.

Outstanding Equity Awards at Fiscal Year-End

The following table provides detailed information about all outstanding equity awards of the Named Executive Officers at December 31, 2006.

The shares become vested and issuable in equal installments commencing on the first anniversary of the grant date. Unvested shares at December 31, 2006 will vest equally over the remaining vesting period.

Option Exercises and Stock Vested

None

Robert Falcone received 4,000 restricted shares for each of the Named Executive Officers listed above exercised stock options or had any performance units vest duringthree months he served as interim CEO of the year ended 12/31/06.

Other Potential Post-Employment Payments

months after the date of vesting as to shares vesting after the date of termination. The value of options assumes full vesting and is based on the closing market price of the Company’s common stock as quoted on the New York Stock Exchange on the date of Mr. Hammann’s termination. The actual expense wasof the options, based on assumptions made as of December 31, 2006 in accordance with FAS 123R.123R, was $537,848.

5)(6)

Assuming that Mr. Hammann’s employment was terminatedMeadowcroft’s options will continue to vest for twelve months after termination. The value of options assumes full vesting and is based on the closing market price of the Company’s common stock as quoted on the New York Stock Exchange on December 31, 2006, continued2007. The actual expense of the options, based on assumptions made as of December 31, 2007 in accordance with FAS 123R, was $80,321.

(7)	Continued vesting of the nonstatutory stock option granted to Mr. Hammann when he joined the Company in 2003 would resultresults in fourtwo equal payments of $170,000 during 2008.

(8)	Mr. Thomas will receive reimbursement of his moving expenses to relocate back to the twenty four-month periodUnited States from his current station in which he is entitledLondon. Such expenses are expected to receive severance pay.total approximately $20,000.

DIRECTOR COMPENSATION

The Director Compensation Program provides for the payment of annual retainers, annual equity grants and initial equity grants to non-employee members of Nautilus’ Board of Directors.

Annual RetainerUnder the Director Compensation Program, adopted, as approved followingby the 2006 annual meeting to the Company’s shareholders,Board on May 7, 2007, each non-employee member of Nautilus’the Nautilus Board receives an annual retainer of $35,000. In addition, each member receives a fee of $1,000$1,500 for attendance at each meeting. Each director serving on a Committee receives an additional meeting fee of $1,000.$1,500. The ChairChairs of the Audit Committee receives an additional retainer of $10,000, while the Chair of the Compensation Committee and the Nominating & Corporate Governance Committee each receive an additional retainer of $5,000.

Initial Equity GrantThe Director Compensation Program provides that upon initial election to the Board, each non-employee director will be granted an option to purchase 10,000 shares of our common stock.stock priced on the date prior to grant. Such stock options vest ratably over four years.

Annual Equity GrantThe Director Compensation Program also provides that upon reelection to the Board, each non-employee director receives a stock option to purchase 10,000 shares of our common stock.stock priced on the date prior to grant. Such stock options vest ratably over four years.

On May 8, 2006,7, 2007, our Board of Directors granted to each non-employee director an option to purchase 10,000 shares of our common stock at an exercise price equal to the market price of our common stock at close of trading on the New York Stock Exchange on the date prior to the grant date ($18.2913.75 per share). The options vest over a four-year period. On December 31, 2007, our Board of Directors granted options to purchase 10,000 shares of our common stock to each of Richard A. Horn and Michael A. Stein. Messrs. Bramson and Eastman, who were also elected to our Board of Directors in December 2007 declined to receive director compensation. Directors who are Company employees receive no additional or special remuneration for serving as directors.

20062007 Directors Compensation Table

The following table sets forth specific information regarding the compensation earned for our non-employee directors.

REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORSREPORT TO SHAREHOLDERS *

The Audit Committee oversees Nautilus, Inc.’s financial reporting process on behalf of the Board of Directors of the Company (the “Audit Committee”) is comprised of four non-employee, independent directors: Robert S. Falcone, Paul F. Little, Ronald P. Badie and Marvin G. Siegert.Board. Management has the primary responsibility for the financial statements and the reporting process, including internal control over financial reporting and disclosure controls and procedures. In fulfilling its oversight responsibilities, the systemAudit Committee reviewed the audited financial statements in the Annual Report on Form 10-K with management including a discussion of internal controls. the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements. A written charter approved by the Audit Committee and ratified by the Board governs the Audit Committee.

The Audit Committee reviewed with the independent registered independent public accounting firm, which is responsible for performingexpressing an independent auditopinion on the conformity of the Company’s consolidatedthose audited financial statements in accordance with auditing standardsaccounting principles generally accepted in the United States, of America and issuing a report thereon. The Committee is responsible fortheir judgments as to the oversightquality, not just the acceptability, of the Company’s internal accounting and financial reporting process and the review of the audited financial statements of the Company, together with a discussion of pertinent matters with management and the Company’s registered independent public accounting firm.

principles. The Audit Committee acts under a written charter adopted and approved by our Board of Directors as described under “The Audit Committee” above. The members of the Audit Committee are “independent,” as such term is defined under applicable New York Stock Exchange listing standards. The Audit Committee has reviewed and discussed the audited financial statements for the year ended December 31, 2006 with management and Deloitte & Touche LLP, the Company’s registered independent public accounting firm. In addition, the Audit Committeealso has discussed and reviewed with the independent registered independent public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, and, with and without management present, discussed and reviewedas amended, as adopted by the results of the registered independent public accounting firm’s audit of the financial statements. Additionally,Public Company Accounting Oversight Board in Rule 3200T. In addition, the Audit Committee has received from the independent registered public accounting firm the written disclosures and a letter from Deloitte & Touche LLP required by Independence Standards Board Standard No. 1 “Independence Discussion with Audit Committees,”as adopted by the Public Company Accounting Oversight Board in Rule 3600T, and has discussed with Deloitte & Touche LLP the auditor’sindependent registered public accounting firm their independence from the Company and its management, and has considered whether the independent registered public accounting firm’s provision of non-audit services to the Company is compatible with maintaining such firm’s independence.

Based

The Audit Committee discussed with the Company’s independent registered public accounting firm the overall scope and plans for their audit. The Audit Committee meets with the independent registered public accounting firm, with and without management present, to discuss the results of their examination, their evaluation of the Company’s internal control over financial reporting, and the overall quality of the Company’s financial reporting. The Audit Committee held seven meetings during fiscal year 2007.

None of the Audit Committee members have a relationship with the Company that might interfere with exercise of his independence from the Company and its management.

In reliance on the foregoing reviews and discussions referred to above, the Audit Committee has recommended to the Board, of Directorsand the Board has approved, that the audited financial statements and management’s report on internal control over financial reporting be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20062007, for filing with the Securities and Exchange Commission. The Audit Committee has also determined that provision by Deloitte & Touche LLP of other non-audit services is compatible with maintaining Deloitte & Touche LLP’s independence. The Audit Committee and the Board have also recommended, subject to shareholder ratification, the selection of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2008.

Respectfully Submitted,

Marvin G. Siegert, Chairman

Richard A. Horn

Michael A. Stein

* The information contained in the Report of the Audit Committee shall not be deemed “soliciting material” or be incorporated by reference by any general statement incorporating this Proxy Statement into any filings under either the Securities Act of 1933, as amended, or the Exchange Act of 1934 (together the “Acts”), except to the extent the Company specifically incorporates such report by reference, and further, such Report shall not otherwise be deemed filed under the Acts.

PROPOSAL NO. 22:

REIMBURSEMENT OF PROXY EXPENSES OF SHERBORNE INVESTORS

During 2007, Sherborne Investors LP and certain of its affiliates (“Sherborne”) undertook a successful proxy contest to replace four of the Company’s directors with its nominees, Edward J. Bramson, Gerard L. Eastman, Richard A. Horn and Michael A. Stein. Although Sherborne stated in its proxy statement that it intended to seek reimbursement from the Company for its expenses incurred in connection with the proxy contest without submitting the question of reimbursement to the Company’s shareholders for approval, the Board of Directors of the Company now believes that such submission is appropriate.

Sherborne has submitted to the Company an invoice detailing reimbursable expenses of approximately $560,000 incurred in connection with the proxy contest. Accordingly, should this proposal be approved by the shareholders, any reimbursement of Sherborne would not exceed such amount. Moreover, the Board of Directors does not intend to make any payments to Sherborne unless and until the independent members of the Company’s Board of Directors who are not affiliates of Sherborne review such proposed payment and determine that such payment is appropriate in light of the Company’s financial condition at such time. The Board of Directors currently expects that no payment with respect to reimbursement of Sherborne’s proxy expenses would be made prior to when the Company returns to profitability.

The Board of Directors recommends that the shareholders approve the proposal to reimburse Sherborne’s expenses incurred in connection with the proxy contest, in an amount not to exceed $560,000, subject, prior to any payment to Sherborne, to further review and approval by the independent members of the Board of Directors who are not affiliates of Sherborne.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF REIMBURSEMENT OF SHERBORNE’S PROXY SOLICITATION EXPENSES.