Nautilus/Inc · 10-K405 · For 12/31/99

Filed On 3/29/00   ·   SEC File 0-25867   ·   Accession Number 912057-0-14492

Annual Report — [X] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [X] Reg. S-K Item 405                48    219K 
 2: EX-10.12    Material Contract                                     39±   142K 
 3: EX-23       Consent of Experts or Counsel                          1      6K 
 4: EX-24.1     Power of Attorney                                      1      6K 
 5: EX-24.2     Power of Attorney                                      1      6K 
 6: EX-24.3     Power of Attorney                                      1      6K 
 7: EX-24.4     Power of Attorney                                      1      6K 
 8: EX-24.5     Power of Attorney                                      1      6K 
 9: EX-24.6     Power of Attorney                                      1      6K 
10: EX-27       Financial Data Schedule                                2      8K 

10-K405   —   Annual Report — [X] Reg. S-K Item 405
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=============================================================================== 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-K
--------------------
  /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934

 Commission File Number: 000-25867

DIRECT FOCUS, INC.
(Exact name of registrant as specified in its charter)

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

2200 NE 65TH AVENUE, VANCOUVER, WA                              98661   
(Address of principal executive offices)                         (Zip Code)   

Registrant's telephone number, including area code: 360-694-7722

Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,     
WITHOUT PAR VALUE                                                             
--------------------
         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of   
1934 during the preceding 12 months (or for such shorter period that the        
Registrant was required to file such reports), and (2) has been subject to such 
filing requirements for the past 90 days: Yes /x/ No / /                        

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,  
to the best of Registrant's knowledge, in definitive proxy or information       
statements incorporated by reference in Part III of this Form 10-K, or any      
amendment to this Form 10-K. /x/                                                

       The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $247,324,553 as of February 29, 2000 based upon the last   
sales price as reported by the Nasdaq National Market System.                   

         The number of shares outstanding of the Registrant's Common Stock as of
February 29, 2000 was 10,519,565 shares.                                        

 ---------------------------------------
 DOCUMENTS INCORPORATED BY REFERENCE

         The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for its 2000 Annual Meeting of             
Stockholders.                                                                   

=============================================================================== 

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                                  DIRECT FOCUS, INC.
                                  1999 FORM 10-K ANNUAL REPORT
                                 TABLE OF CONTENTS

                                                        [Enlarge/Download Table]

                                                                                         PAGE 
                                                                                        ------
                                                  PART I                                      
                                                                                              
Item 1.     Business                                                                      3   

Item 2.     Properties                                                                    15  

Item 3.     Legal Proceedings                                                             16  

Item 4.     Submission of Matters to a Vote of Security Holders                           16  

                                                 PART II                                      

Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters         16  

Item 6.     Selected Consolidated Financial Data                                          18  

Item 7.     Management's Discussion and Analysis of Financial Condition and Results of    19  
            Operations                                                                        

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk                    26  

Item 8.     Consolidated Financial Statements and Supplementary Data                      26  

Item 9.     Changes in and Disagreements With Accountants on Accounting and Financial         
            Disclosure                                                                    43  

                                                 PART III                                     

Item 10.    Directors and Executive Officers of the Registrant                            43  

Item 11.    Executive Compensation                                                        43  

Item 12.    Security Ownership of Certain Beneficial Owners and Management                44  

Item 13.    Certain Relationships and Related Transactions                                44  

                                                 PART IV                                      

Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K               44  

Signatures                                                                                47  


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                                  PART I

ITEM 1.  BUSINESS                                                               

FORWARD LOOKING STATEMENTS                                                      

      Statements in this Form 10-K that Direct Focus, Inc. considers to be
forward-looking are denoted with an asterisk ("*"), and the following cautionary
language applies to all such statements, as well as any other statements in this
Form 10-K that the reader may consider to be forward-looking. Investors are     
cautioned that all forward-looking statements involve risks and uncertainties   
and various factors could cause actual results to differ materially from those  
in the forward-looking statements. From time to time and in this Form 10-K, we  
may make forward-looking statements relating to our financial performance,      
including the following:                                                        

-      Anticipated revenues, expenses and gross margins;          
-      Anticipated earnings;                                      
-      New product introductions; and                             
-      Future capital expenditures.                               

 Numerous factors could affect our actual results, including the
following:                                                                      

-      Our reliance on a limited product line;                    
-      Market acceptance of our existing and future products;     
-      Growth management challenges;                              
-      Our limited experience in marketing Nautilus Sleep Systems;
-      A decline in consumer spending due to unfavorable economic 
conditions;                                         
-      Government regulatory action;                              
 -      Our ability to effectively identify and negotiate any future
        strategic acquisitions, as well as to integrate any acquired
businesses into our operations; and                 
     -      Unpredictable events and circumstances relating to international
   operations, including our use of foreign manufacturers.

      We describe certain of these and other key risk factors elsewhere in
this Form 10-K. Readers are further cautioned not to place undue reliance on    
forward-looking statements, which speak only as of the date of this Form 10-K.  
We undertake no obligation to update publicly any forward-looking statements to 
reflect new information, events or circumstances after the date of this Form    
10-K or to reflect the occurrence of unanticipated events.                      

INTRODUCTION                                                                    

    Direct Focus, Inc. is a direct marketing company that develops and
markets premium quality, premium priced, branded consumer products. We market   
consumer products within our direct marketing segment directly to consumers     
through a variety of direct marketing channels, including spot television       
commercials, infomercials, print media, response mailings and the Internet.     

         Our principal and most successful directly marketed product to date has
been our Bowflex line of home fitness equipment, which generated $100.9 million,
or 83.3%, of our net sales in 1999. We also offer a line of premium quality     
airbed mattresses under the name "Nautilus Sleep Systems," which we test        
marketed throughout 1999 and began directly marketing on a nationwide basis late
in the fourth quarter of 1999.                                                  

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 Another significant component of our operations is our Nautilus
segment, which encompasses products and operations outside of our direct        
marketing segment. Products within our Nautilus segment include Nautilus        
commercial fitness equipment and Nautilus consumer fitness equipment and        
accessories, both of which we added in January 1999 as part of our acquisition  
of Nautilus International, Inc. We anticipate further leveraging our Nautilus   
brand name through expanded marketing of new Nautilus home gyms and a new line  
of Nautilus free weight home gym equipment which we recently introduced, as well
as any other Nautilus-branded home exercise products we may introduce in 2000.* 
We market and sell our Nautilus commercial fitness equipment domestically       
through a direct sales force and internationally through independent sales      
representatives. We market our other Nautilus consumer products domestically    
through non-exclusive independent sales representatives. We believe we have     
effectively integrated the Nautilus commercial business into our operations and 
stabilized its financial performance, as evidenced by its profitability during  
the second half of 1999.*                                                       

  For a discussion of financial information about our two business
segments, direct marketing and Nautilus, see Note 14 of the Notes to            
Consolidated Financial Statements.                                              

  Direct Focus was incorporated in California in 1986 and became a
Washington corporation in 1993. Our principal executive offices are located at  
2200 NE 65th Avenue, Vancouver, Washington 98661, and our telephone number is   
(360) 694-7722. We maintain our corporate web site at www.directfocusinc.com.   
None of the information on this web site or our other web sites is part of this 
Form 10-K.                                                                      

 As used in this Form 10-K, the terms "we," "our," "us," "Direct
Focus" and "the Company" refer to Direct Focus, Inc. and its subsidiaries.      
The names Bowflex-Registered Trademark-, Nautilus-Registered Trademark-,        
Bowflex Power-Pro-Registered Trademark-, Motivator-Registered Trademark-,       
Versatrainer-Registered Trademark-, Power Rod-Registered Trademark-, Direct     
Focus-Registered Trademark-, Instant Comfort-Registered Trademark- and          
Nautilus Sleep Systems-Registered Trademark- are registered trademarks of       
Direct Focus, Inc.                                                              

DIRECT MARKETING                                                                

    We directly market our Bowflex home fitness equipment and Nautilus
Sleep Systems principally through 30- and 60-second, or "spot," television      
commercials, television infomercials, the Internet, response mailings and print 
media. To date, we have been highly successful with what we refer to as a       
"two-step" marketing approach. In general, our two-step approach focuses first  
on spot commercials, which we air to generate consumer interest in our products 
and requests for product information. The second step focuses on converting     
inquiries into sales, which we accomplish through a combination of response     
mailings and outbound telemarketing. We supplement our two-step approach with   
infomercials, which generally are designed to provide potential customers with  
sufficient product information to stimulate an immediate purchase.              

ADVERTISING                                                   

      SPOT COMMERCIALS AND INFOMERCIALS. Spot television commercials are a
key element of the marketing strategy for all of our directly marketed consumer 
products. For directly marketed products that may require further explanation   
and demonstration, television infomercials are an important additional marketing
tool. We have developed a variety of spot commercials and infomercials for our  
Bowflex product line and several commercials and marketing videos for our       
Nautilus Sleep Systems product line. We expect to use spot commercials and,     
where appropriate, infomercials to market any Nautilus consumer products that we
determine are appropriate for direct marketing.                                 

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         When we begin marketing a new product, we typically test and refine our
marketing concepts and selling practices while advertising the product in spot  
television commercials. Production costs for these commercials can range from   
$50,000 to $150,000. Based on market research and viewer response to our spot   
commercials, we may produce additional spot commercials and, if appropriate for 
the product, an infomercial. Production costs for infomercials can range from   
$150,000 to $500,000, depending on the scope of the project. Generally, we      
attempt to film several infomercial and commercial concepts at the same time in 
order to maximize production efficiencies. From this footage we can then develop
several varieties of spot commercials and infomercials and introduce and refine 
them over time. We typically generate our own scripts for spot commercials and  
hire outside writers to assist with infomercial scripts. We also typically      
contract with outside production companies to produce spot commercials and      
infomercials.                                                                   

       Once produced, we test spot commercials and infomercials on a variety
of cable television networks that have a history of generating favorable        
responses for our existing products. Our initial objective is to determine the  
product's marketing appeal and what, if any, creative or product modifications  
may be appropriate. If these initial tests are successful, we then air the spot 
commercials and infomercials on an accelerating schedule on additional cable    
networks.                                                                       

         MEDIA BUYING. An important component of our direct marketing success is
our ability to purchase quality media time at an affordable price. The cost of  
airing spot commercials and infomercials varies significantly, depending on the 
network, time slot and, for spot commercials, programming. Each spot commercial 
typically costs between $50 and $5,000 to air, and each infomercial typically   
costs between $2,500 and $40,000 to air. We currently purchase the majority of  
our media time on cable networks, through which we reach more than 70 million   
homes.                                                                          

       We track the success of each of our spot commercials and infomercials
by determining how many viewers respond to each airing of a spot commercial or  
infomercial. We accumulate this information in a database that we use to        
evaluate the cost-effectiveness of available media time. In addition, we believe
the database enables us to predict with reasonable accuracy how many product    
sales and inquiries will result from each spot commercial and infomercial that  
we air.* We also believe we can effectively track changing viewer patterns and  
adjust our advertising accordingly.*                                            

    We do not currently purchase media time under long-term contracts.
Instead, we book most of our spot commercial time on a quarterly basis and most 
of our infomercial time on a monthly or quarterly basis, as networks make time  
available. Networks typically allow us to cancel booked time with two weeks'    
advance notice, which enables us to adjust our advertising schedule if our      
statistical tracking indicates that a particular network or time slot is no     
longer cost effective. Generally, we can increase or decrease the frequency of  
our spot commercial and infomercial airings at almost any time.                 

         INTERNET. Our e-commerce sales have grown from 0% in the fourth quarter
of 1998 to 12.3% of direct sales in the fourth quarter of 1999, and we expect   
the Internet to become an increasingly important part of our direct marketing   
strategy.* For example, we are now promoting our web sites in spot commercials  
and infomercials in an effort to further stimulate electronic product inquiries 
and e-commerce transactions. We do not presently advertise our products on      
third-party web sites, but may do so in the future.*                            

        Our experience indicates that Internet-based inquiries are more likely
to be converted into sales than inquiries generated by other media forms, such  
as television or print media. Consequently, we believe that consumers who visit 
our web sites are more inclined to purchase our products than are the consumers 
we target through other media.*                                                 

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   We currently operate two direct marketing-oriented web sites. The
first, www.bowflex.com, focuses on our Bowflex line of home exercise equipment. 
The second, www.nautilussleepsystems.com, focuses on our Nautilus Sleep Systems.
In an effort to expand and enhance our web presence, we added dedicated web site
development and management personnel. Our immediate Internet-related goals      
include improving the capabilities at our Bowflex web site and Nautilus Sleep   
Systems web site. In 1998, we used our web sites to generate interest in our    
products, but limited the information we provided to potential customers in an  
effort to induce them to initiate a telephone inquiry. In 1999, we believe we   
achieved a balance between our goals of finalizing sales and capturing consumer 
information by strategically designing our web pages and carefully analyzing web
page hits, conversion rates, average sales prices and inquiry counts.*          

      PRINT MEDIA. We have advertised directly marketed products in health
and fitness-related consumer magazines and, to a limited extent, in             
entertainment, leisure and specialty magazines. We recently determined that     
television advertising and the Internet generate more immediate consumer        
responses at a lower cost per inquiry and therefore have reduced the print media
advertising expenditures for our directly marketed products. We will evaluate   
print media advertising expenditures for other directly marketed products on a  
case-by-case basis.                                                             

CONVERSION OF INQUIRIES INTO SALES                            

       CUSTOMER SERVICE CALL CENTER AND ORDER PROCESSING. We operate our own
customer service call center in Vancouver, Washington, which operates 16 hours  
per day and receives and processes all infomercial-generated and customer       
service-related inquiries regarding our Bowflex products and Nautilus Sleep     
Systems. We have developed a skill-based call routing system that automatically 
routes each incoming call to the most highly qualified inside sales agent or    
customer service representative available. The appropriate representative then  
answers product questions, pro-actively educates the potential customer about   
the benefits of our product line, promotes financing through our private label  
credit card, and typically upsells the benefits of higher priced models in our  
product line. This sophisticated system allows us to better utilize our agents, 
prioritize call types and improve customer service.                             

    We employ two large telemarketing companies to receive and process
information requests generated by our spot television advertising 24 hours per  
day. These companies also serve as overflow agents for our call center during   
peak times. The telemarketing agents for these companies collect only names,    
addresses and other basic information from callers and do not sell or promote   
our products. Consequently, we do not need to train these telemarketing agents. 

       RESPONSE MAILINGS. We forward a "fulfillment kit" in response to each
inquiry regarding our directly marketed products. Each kit contains detailed    
literature that describes the product line and available accessories, a         
marketing video that demonstrates and highlights the key features of our premium
product in the line, and additional information about how to purchase the       
product. If a potential customer does not respond within a certain time period, 
we proceed with additional follow-up mailings that convey a different marketing 
message and typically offer certain inducements to encourage a sale. The        
specific marketing message and offer at each stage will vary on a case-by-case  
basis, based on what our statistical tracking indicates is most likely to       
trigger a sale.                                                                 

CONSUMER FINANCE PROGRAMS. We believe that convenient consumer
financing is an important tool in our direct marketing sales efforts and induces
many of our customers to make purchases when they otherwise would not.          
Currently, we offer "zero-down" financing to approved customers on all sales of 

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our Bowflex Products and Nautilus Sleep Systems. We arrange this financing      
through a consumer credit company pursuant to a non-recourse consumer financing 
agreement. Under this arrangement, our customer service agents can obtain       
financing approval in a few minutes over the telephone and, if a customer is    
approved, immediately ship product without the need for cumbersome paperwork.   
The consumer finance company pays us promptly after submission of the required  
documentation and subsequently sends to each approved customer a Direct Focus   
private label credit card that can be used for future purchases of our products.
During 1999, approximately 34.4% of our net sales were financed in this manner, 
and we believe this program will continue to be an effective marketing tool.*   

NAUTILUS SALES AND MARKETING                                                    

We market and sell our Nautilus commercial fitness equipment  
domestically through a direct sales force and internationally through           
independent sales representatives. We market and sell our Nautilus fitness      
accessories and consumer fitness equipment through non-exclusive independent    
sales representatives.                                                          

DIRECT SALES FORCE                                            

   We have hired a new management team to oversee and revitalize the
sales and marketing operations of our Nautilus business. Each member of the     
management team has significant industry experience and a history of sales      
and marketing success. Our commercial direct sales force will focus on          
strengthening the market position of our existing Nautilus product line,        
which we sell principally to health clubs, large hotels, assisted living        
facilities and the government. Additionally as we broaden our product line,     
our direct sales force will target new market segments and, if successful,      
broaden our customer base.* Internationally, we market and sell our Nautilus    
commercial fitness products through a worldwide network of independent          
distributors.                                                                   

OTHER SELLING AND MARKETING CHANNELS                          

       We have implemented additional sales and marketing strategies for our
Nautilus commercial equipment. These strategies include the following:          

      -      We offer innovative financing, such as private label leasing that
     allows pre-approved commercial customers to lease fitness
equipment;                                          
-      We implemented a targeted mailing program directed at our  
commercial customers; and                           
 -      We expanded the Nautilus trade-in program to induce existing
commercial customers to upgrade their equipment.    

PRODUCTS                                                                        

BOWFLEX HOME FITNESS EQUIPMENT                                

    We introduced the first Bowflex home exercise machine in 1986, and
since then have implemented several improvements to its design and              
functionality. We now offer three different Bowflex machines and eight different
models. The key feature of each Bowflex machine is our patented "Power Rod"     
resistance technology. Each Power Rod is made of a solid polymer material that  
provides lineal progressive resistance in both the concentric and eccentric     
movements of an exercise. When combined with a bilateral cable pulley system,   
the machines provide excellent range and direction of motion for a              

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large variety of strength-building exercises.                                   

We currently offer the following Bowflex machines:            

      -    The Power Pro, introduced in 1993, is our best selling product,
      accounting for 95.8% of our Bowflex net sales in 1999. The
      Power Pro is available in four different models: the basic
      Power Pro, the XT, the XTL and the XTLU. Each model offers
         over 60 different strength building exercises in one compact,
              foldable and portable design and comes with a 210-pound resistance
              pack that can be upgraded to 410 pounds. We have also incorporated
         an aerobic rowing exercise feature into the Power Pro. Prices
           currently range from $999 to $1,597, depending on the model and
add-on features.                                    

     -    The Motivator, introduced in 1996, is our entry-level strength
         training line. It is available in three different models: the
          basic Motivator, the XT and the XTL. Each model offers over 40
          different strength building exercises in one compact, foldable
           design and comes standard with a 210-pound resistance pack that
              can be upgraded to 410 pounds. Prices currently range from $699 to
$1,049, depending on the model and add-on features. 

      -     The Versatrainer by Bowflex, introduced in 1988, is specifically
              designed to accommodate wheelchair-bound users. The Versatrainer's
              key advantage is that it permits users to exercise while remaining
       in their wheelchair, which offers enhanced independence and
              esteem. The Versatrainer can be found in many major rehabilitation
         hospitals, universities and institutions. The Versatrainer is
currently priced at $1,699.                         

     NAUTILUS COMMERCIAL FITNESS EQUIPMENT AND NAUTILUS FITNESS PRODUCTS

       We currently offer the following Nautilus strength training equipment
for the commercial market:                                                      

-     The Nautilus 2ST line of commercial strength equipment    
     offers 27 high quality, technologically advanced strength
     building machines, each of which is specially designed to
     focus on a particular strength building exercise, such as
      leg presses, bench presses, super pullovers, hip abductors
  and adductors and leg curls. The key component of each
  Nautilus 2ST machine is either its "cam" or a four-bar
   linkage mechanism, which builds and releases resistance
  as a user moves through an exercise. The resistance is
    at its minimum during the initial and final stages of an
      exercise, and at its maximum in the middle of an exercise.
    Each Nautilus machine includes a cam or four-bar linkage
  mechanism that is designed to accommodate and maximize
     the benefits associated with the motion required for that
machine.                                            

-    In 1999, we introduced a line of Nautilus free weight    
    equipment with new innovations in design and engineering
      intended to help club owners better serve their customers.
      The product line offers a sleeker look, tougher components
       and increased versatility. This new free weight gear can be
  coupled with the Nautilus 2ST circuit to give facility
         managers a complete strength gym to serve all fitness tastes.

   Our Nautilus business also distributes a line of quality consumer
fitness accessories. For example, we offer a full line of fitness               
accessories, such as weight belts, jump ropes and                               

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ankle weights, which we market to specialty fitness retailers and the           
sporting goods industry. The current line includes over 50 products, which we   
selected after conducting a rigorous evaluation of sales potential, fitness     
trends and functionality. We began offering two new Nautilus home gyms, the     
Strength Station and an adjustable bench with chrome dumbbells, in late 1999.   
In addition, we introduced a twelve piece line of quality strength equipment,   
which included Nautilus free weight home gyms and Nautilus selectorized         
weight stack home gyms at the 2000 Super Show(R), a fitness industry trade      
show. We intend to continue building and developing our Nautilus consumer       
fitness business and expand our offering of Nautilus brand consumer fitness     
products, as appropriate, in 2000.*                                             

NAUTILUS SLEEP SYSTEMS                                        

   In late 1998, we began test marketing a line of premium air sleep
systems under the brand name "Instant Comfort," which we have since renamed the 
"Nautilus Sleep Systems." The key feature of each Nautilus Sleep System is its  
variable firmness support chamber, an air chamber within each airbed that can be
electronically adjusted to regulate firmness. All queen and larger airbeds in   
our Signature, Premier and Ultimate Premier Series are equipped with dual air   
chambers that enable users to maintain different firmness settings on each side 
of the bed. We believe that variable firmness and other comfort-oriented        
features of our Nautilus Sleep Systems favorably differentiate them from        
conventional innerspring mattresses.                                            

We currently offer four models of our Nautilus Sleep System:  

              -      The Ultimate Premier Series is our top-of-the-line Nautilus
                    Sleep System. It features dual patent pending interlocking
                 variable support chambers that permit users to maintain
                    separate firmness settings on each side of the airbed. The
                     interlocking chambers regulate airflow and pressure to more
                    effectively maintain support when a user changes position.
                 The Ultimate Premier Series comes with a removable wool
                 blend and silk blend pillow top sleeping surface, which
                  permits users to easily convert to a "tight top" surface
               when they desire extra firmness. The Ultimate Premier
                    Series also has an upgraded comfort layer of visco-elastic
                   foam that conforms to a user's body. The Ultimate Premier
                    Series is available in seven sizes and currently ranges in
            price from $1,199.99 for a twin to $1,799.99 for a
California king, excluding foundation.

  -      The Premier Series features dual patent pending
                     interlocking variable support chambers that permit users to
                 maintain separate firmness settings on each side of the
                airbed. The interlocking chambers regulate airflow and
                   pressure to more effectively maintain support when a user
                     changes position. The Premier Series comes with a removable
                     wool blend pillow top sleeping surface, which permits users
                     to easily convert to a "tight top" surface when they desire
                  extra firmness. The Premier Series is available in seven
                     sizes and currently ranges in price from $699.99 for a twin
                   to $1,299.99 for a California king, excluding foundation.

              -      The Signature Series is designed to appeal to consumers who
                  desire the flexibility of dual variable firmness support
                     chambers, but at a more affordable price. Our customers can
              choose between a tight top and a pillow top sleeping
              surface over a one and one-half inch convoluted foam
                   comfort layer. The Signature Series is available in seven
                     sizes and currently ranges in price from $399.99 for a twin
                 to $999.99 for a California king, excluding foundation.

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             -      The Basic Series is our entry-level Nautilus Sleep System,
                which features a single, head-to-toe variable firmness
              support chamber and a traditional tight top sleeping
                    surface over a one and one-half inch thick convoluted foam
                    comfort layer. The Basic Series is available in five sizes
                  and currently ranges in price from $249.99 for a twin to
              $699.99 for a California king, excluding foundation.

    We offer foundations that are specifically designed to support and
enhance the performance of our Nautilus Sleep Systems. We advise consumers to   
use our foundations because conventional box springs tend to sag and wear over  
time, causing an airbed to eventually mirror the worn box spring. We believe the
majority of our Nautilus Sleep System customers will order a complete sleep     
system, which includes both a mattress and a foundation.* Our foundations       
currently range in price from $199 for a twin to $399 for a California king.    

NEW PRODUCT DEVELOPMENT AND INNOVATION                                          

DIRECT MARKETING PRODUCTS                                     

       We develop direct marketing products either from internally generated
ideas or, as with its Bowflex technology, by acquiring or licensing patented    
technology from outside inventors and then enhancing the technology. During the 
evaluation phase of product development, we evaluate the suitability of the     
product for direct marketing, whether the product can be developed and          
manufactured in acceptable quantities and at an acceptable cost, and whether it 
can be sold at a price that satisfies our profitability goals. More             
specifically, we look for high-quality consumer products that:                  

-      Have patented or patentable features*;       
     -      Will have a retail price between $500 and $2,500*;
        -      Can be marketed as a line of products with materially
            different features that facilitate upselling*; and
            -      Have the potential for mass consumer appeal, particularly
              among members of the "baby-boom" generation, who are
                    accustomed to watching television and now have significant
disposable income.*                   

     In addition, because of our relatively high retail price target, we
typically require that a product have a potential television advertising life   
cycle of at least five years and the possibility of an extended life cycle in   
retail stores.*                                                                 

Once we determine that a product may satisfy our criteria, we 
further assess the product's direct marketing potential by continuing to        
research the product and its probable market and by conducting blind product    
and focus group studies. If we develop the product internally, or if we         
acquire or license the rights to the product, we will then proceed to develop   
and test a direct marketing campaign for the product. In most cases, our        
direct marketing campaigns will emphasize the use of spot commercials and       
television infomercials, which we supplement with print media advertisements,   
written materials, marketing videos and our web sites.*                         

     Our growth strategy and financial performance depend in part on our
ability to develop or acquire the rights to, and then directly market, new      
consumer products. Our net sales and profitability would be harmed if we are    
unable to develop or acquire the rights to premium quality, premium priced      
consumer products that satisfy our direct marketing criteria. In addition, any  
new products that we directly market                                            

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may not generate sufficient net sales or profits to justify their development   
or acquisition costs.                                                           

NAUTILUS COMMERCIAL FITNESS PRODUCTS                          

Our Nautilus commercial product development group develops and
refines our commercial fitness products. The group's members gather and         
evaluate ideas from various areas, including existing and potential             
customers, sales and marketing, manufacturing, engineering and finance, and     
then determine which ideas will be incorporated into existing products or       
will serve as the basis for new products. Based on these ideas, the group       
designs new or enhanced products, develops prototypes, tests and modifies       
products, develops a manufacturing plan, and finally brings products to         
market. The group evaluates, designs and develops each new or enhanced          
product, taking into consideration our marketing requirements, target price     
points, target gross margin requirements and manufacturing constraints. In      
addition, each new or enhanced product must maintain the Nautilus standard of   
quality and reputation for excellence. We incorporate principles of             
physiology, anatomy and biomechanics into all of our Nautilus machines in       
order to match the movements of the human body throughout an exercise. Our      
key objective is to produce products that minimize the stress on users'         
skeletal systems and connective tissues and maximize the safety and             
efficiency of each workout.                                                     

NAUTILUS CONSUMER FITNESS PRODUCTS                            

         We have developed a line of Nautilus consumer strength training fitness
equipment and hand-held fitness accessories. Current products include free      
weight home gym equipment, selectorized weight stack home gyms and a variety of 
hand held fitness accessories, such as jump ropes, hand weights and other       
similar devices. We are currently evaluating design and feature concepts for a  
new line of aerobic Nautilus consumer products, such as stationary bicycles,    
treadmills, and stair machines. If we elect to proceed with one or more of these
products, we intend to assess price points, develop a prototype and determine   
the most appropriate manufacturing plan.* We do not anticipate introducing any  
such aerobic products before 2001.*                                             

MANUFACTURING AND DISTRIBUTION                                                  

BOWFLEX PRODUCTS AND NAUTILUS SLEEP SYSTEMS                   

Our primary manufacturing and distribution objectives for our 
Bowflex products and Nautilus Sleep Systems are to maintain product quality,    
reduce and control costs, maximize production flexibility and improve           
delivery speed. We use a computerized inventory management system to forecast   
our manufacturing requirements. In general, we attempt to use outside           
suppliers to manufacture a majority of our raw materials and finished parts.    
We select these suppliers based upon their production quality, cost and         
flexibility. Whenever possible and in order to improve flexibility, we will     
attempt to use at least two suppliers to manufacture each product component.    
We currently use overseas suppliers to manufacture approximately 65% of our     
Bowflex components, although we produce the main component of our Bowflex       
products, the Power Rods, exclusively in the United States. We intend to        
continue to use outside suppliers that meet our manufacturing criteria. All     
components of our Nautilus Sleep Systems are currently manufactured             
domestically, but in the second half of fiscal year 2000, we plan on            
manufacturing some components overseas.                                         

We inspect, package and ship our products from our Washington,
Virginia and Nevada facilities. We rely primarily on UPS to deliver our         
Bowflex and our Nautilus Sleep Systems products.                                

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   NAUTILUS COMMERCIAL FITNESS EQUIPMENT, CONSUMER FITNESS EQUIPMENT
AND ACCESSORIES                                               

     Our Nautilus manufacturing operations are vertically integrated and
include such functions as metal fabrication, powder coating, upholstery and     
vacuum-formed plastics processes. By managing our own manufacturing             
operations, we can control the quality of our Nautilus products and offer our   
commercial customers the opportunity to order certain color variations. We      
currently distribute Nautilus commercial fitness equipment from our Virginia    
warehouse facilities directly to customers primarily through our own truck      
fleet. This method of distribution allows us to effectively control the         
set-up and inspection of equipment at the end-user's facilities. We outsource   
the manufacturing of Nautilus consumer fitness equipment and fitness            
accessories to outside foreign manufacturers. We currently distribute our       
Nautilus fitness accessories from our Nevada facilities.                        

INDUSTRY OVERVIEW                                                               

FITNESS EQUIPMENT                                             

        We market our Bowflex home fitness equipment principally in the United
States, which we believe is a large and growing market. According to the        
Sporting Goods Manufacturers' Association, United States consumers spent roughly
$5.5 billion on home exercise equipment in 1998, which represented an 5.8%      
increase from roughly $5.2 billion in 1997.                                     

    We market our Nautilus commercial fitness equipment throughout the
world, including the United States, Europe, the United Kingdom, Asia, the       
Middle-East, Latin America and Africa. Within these markets, we target the      
following commercial customers, among others:                                   

-        Health clubs and gyms             -         Corporate fitness centers  
-        Rehabilitation clinics            -         Colleges and universities  
-        The military                      -         Governmental agencies      
-        Hospitals                         -         YMCA's and YWCA's          
-        Hotels and motels                 -         Professional sports teams  

       According to the Sporting Goods Manufacturers' Association, which has
only tracked the commercial market since 1996, aggregate sales of fitness       
equipment to commercial purchasers in the United States rose from $450 million  
in 1996 to $500 million in 1997 and $575 million in 1998, a 15% increase from   
1997 to 1998.                                                                   

MATTRESSES                                                    

        The United States mattress market is large and dominated by four major
manufacturers whose primary focus is the conventional innerspring mattress.     
According to the International Sleep Products Association, United States        
consumers purchased approximately 36.3 million mattress and foundation units in 
1998, generating approximately $3.9 billion in wholesale sales. We believe this 
equates to over $7.0 billion in retail sales. The International Sleep Products  
Association (ISPA) estimates that innerspring mattresses accounted for          
approximately 90% of total domestic mattress sales in 1998. The ISPA also       
believes that less than 7% of all mattress sales are made through direct        
marketing channels. According to the ISPA, the bedding industry has enjoyed     
years of uninterrupted growth. In 1998, queen-sized mattresses became the       
largest selling segment while king-sized mattresses picked up market share as   
well.                                                                           

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COMPETITION                                                                     

BOWFLEX HOME FITNESS EQUIPMENT                                

The market for our Bowflex products is highly competitive. Our
competitors frequently introduce new and/or improved products, often accompanied
by major advertising and promotional programs. We believe the principal         
competitive factors affecting this portion of our business are price, quality,  
brand name recognition, product innovation and customer service.                

        We compete directly with a large number of companies that manufacture,
market and distribute home fitness equipment, and with the many health clubs    
that offer exercise and recreational facilities. We also compete indirectly with
outdoor fitness, sporting goods and other recreational products. Our principal  
direct competitors include ICON Health & Fitness, Inc. (through its Health      
Rider, NordicTrak, Image, Proform, Weider and Weslo brands), Schwinn Fitness,   
Precor and Total Gym.                                                           

       We believe our Bowflex line of home exercise equipment is competitive
within the market for home fitness equipment and that our direct marketing      
activities are effective in distinguishing our products from the competition. In
addition, we believe we can capitalize on the well-known Nautilus brand name by 
directly marketing existing Nautilus consumer products and developing and       
introducing new products.* However, some of our competitors have significantly  
greater financial and marketing resources, which may give them and their        
products an advantage in the marketplace.                                       

NAUTILUS COMMERCIAL FITNESS EQUIPMENT                         

        The market for commercial fitness equipment is highly competitive. Our
Nautilus products compete against the products of numerous other commercial     
fitness equipment companies, including Life Fitness, Cybex and Precor. Many of  
our competitors have greater financial and marketing resources, significantly   
more experience in the commercial fitness equipment industry, and more extensive
experience manufacturing their products. We believe the key competitive factors 
in this industry include price, product quality and durability, diversity of    
features, financing options and warranties. Many commercial customers are also  
interested in product-specific training programs that educate them regarding how
to safely maximize the benefits of a workout and achieve specific fitness       
objectives. In addition, certain commercial customers, such as hotels and       
corporate fitness centers, have limited floor space to devote to fitness        
equipment. These customers tend to favor multi-function machines that require   
less floor space.                                                               

         Our Nautilus commercial fitness products carry a premium price, however
we believe their reputation for quality and durability appeals to a significant 
portion of the market that strives for long-term product value. In addition, our
principal line of Nautilus commercial fitness equipment, the Nautilus 2ST,      
possesses unique features that appeal to the commercial market, such as low     
friction working parts, one-pound incremental weight stacks and hydraulic seat  
adjustments. We also offer training programs that are responsive to marketplace 
demands.                                                                        

NAUTILUS SLEEP SYSTEMS                                        

       The mattress industry is also highly competitive, as evidenced by the
wide range of products available to consumers, such as innerspring mattresses,  
waterbeds, futons and other air-supported mattresses. According to the          
International Sleep Products Association, conventional innerspring mattresses   
presently account for at least 90% of all domestic mattress sales, with         
waterbeds, futons and other types of mattresses making up the remainder of the  
market. We believe market participants                                          

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compete primarily on the basis of price, product quality and durability,        
brand name recognition, innovative features, warranties and return policies.    

 We believe our most significant competition is the conventional
mattress industry, which is dominated by four large, well-recognized            
manufacturers: Sealy (which also owns the Stearns & Foster brand name), Serta,  
Simmons and Spring Air. Although we believe our Nautilus Sleep Systems offer    
consumers an appealing alternative to conventional mattresses, many of these    
conventional manufacturers, including Sealy, Serta, Simmons and Spring Air,     
possess significantly greater financial, marketing and manufacturing resources  
and better brand name recognition.                                              

    Moreover, several manufacturers currently offer beds with firmness
technology similar to our Nautilus Sleep Systems. We believe the largest        
manufacturer in this niche market is Select Comfort, Inc. Select Comfort offers 
its airbeds at company-owned retail stores throughout the United States and     
engages in a significant amount of direct marketing, including infomercials,    
targeted mailings, print, radio and television advertising. Select Comfort has  
an established brand name and has greater financial, marketing and manufacturing
resources. Select Comfort also has significantly greater experience in marketing
and distributing airbeds. Despite these advantages, we believe the market for   
airbeds is large enough for both companies to be successful.* In addition, we   
believe our Nautilus Sleep Systems possess features that will enable us to      
effectively compete against Select Comfort and other airbed companies.*         

    We believe our success in the mattress business depends in part on
convincing consumers that variable firmness control and other features of our   
sleep system favorably differentiate our products from those of our             
competitors.* We also believe our experience with direct marketing will enable  
us to successfully convey this message.* However, the intense competition in the
mattress industry, both from conventional mattress manufacturers and Select     
Comfort, may adversely affect our efforts to market and sell our airbeds and,   
consequently, may adversely affect our financial performance.                   

INTELLECTUAL PROPERTY                                                           

Protecting our intellectual property is an important factor in
maintaining our competitive position in the fitness and mattress industries. If 
we do not, or are unable to, adequately protect our intellectual property, our  
sales and profitability could be adversely affected. Accordingly, we have taken 
the following protective measures:                                              

              -      We hold 17 United States patents and have applied for three
              additional United States patents with respect to our
Nautilus products;                    
            -      We hold four patents relating to our Bowflex home fitness
equipment;                            
          -      We have applied for one patent relating to our Nautilus
Sleep Systems;                        
          -      We have obtained United States trademark protection for
               various names associated with our products, including
                  "Bowflex," "Nautilus," "Power Rod," "Bowflex Power Pro,"
"Motivator" and "Versatrainer";       
             -      We have applied for United States trademark protection for
                 the names "Direct Focus," "Instant Comfort" and various
               other names and slogans associated with our products;
          -      We have registered the name "Bowflex" in Canada and the
               European Community, and have registered or applied to
               register the "Nautilus" trademark in approximately 30
foreign countries;                    
          -      We have obtained trademark protection for the "look" of
our Bowflex Power Rods; and           
      -      We hold eight United States copyright registrations
relating to our Nautilus products.    

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Notwithstanding these measures, our efforts to protect our    
proprietary rights may be inadequate, and applicable laws provide only          
limited protection. For example, of our four Bowflex patents, the most          
important covers our Power Rods, and this patent expires on April 27, 2004.     
The other three patents expire on February 16, 2005, April 14, 2007, and        
January 4, 2010. In addition, we may not be able to successfully prevent        
others from claiming that we have violated their proprietary rights. We could   
incur substantial costs in defending against such claims, even if they are      
invalid, and we could become subject to judgments requiring us to pay           
substantial damages.                                                            

      Each federally registered trademark is renewable indefinitely if the
mark is still in use at the time of renewal. We are not aware of any material   
claims of infringement or other challenges to our right to use our marks.       

ENVIRONMENTAL REGULATION                                                        

  Environmental regulations most significantly affect our Nautilus
facilities in Independence, Virginia. The Virginia Department of Environmental  
Quality has issued an air permit for several point sources at this facility. The
sources include boilers, flash ovens and high solids paint booths. The permit   
imposes operation limits based on the length of time each piece of equipment is 
operated each day, and we operate the plant within these limits. The town of    
Independence, Virginia has issued an industrial user's wastewater permit that   
governs our discharge of on-site generated wastewater and storm water. In       
addition to the foregoing, in early 1999, we completed a Phase I Environmental  
Site Assessment and a limited Phase II Soil Analysis Assessment at our Nautilus 
facilities in Independence, Virginia. No significant deficiencies or violations 
were noted. We do not believe that continued compliance with federal, state and 
local environmental laws will have a material effect upon our capital           
expenditures, earnings or competitive position.*                                

EMPLOYEES                                                                       

         As of December 31, 1999, we employed 378 full-time employees, including
3 executive officers and 58 part-time employees. None of our employees is       
subject to any collective bargaining agreement.                                 

ITEM 2.  PROPERTIES                                                             

   Our corporate headquarters and our principal warehouse facilities
occupy approximately 74,000 square feet in Vancouver, Washington. We also use   
these facilities to house our customer call center and to assemble and          
distribute our Bowflex products for the Northwestern part of the United States. 
We lease these properties pursuant to operating leases that expire at various   
times, from May 30, 2000, to April 30, 2002. The aggregate base rent is         
approximately $28,379 per month and some of the leases are subject to annual    
adjustments based upon changes in the consumer price index, but no adjustment   
may exceed 6.0% in any calendar year.                                           

We house our Nautilus commercial operations and our East Coast
distribution center for our Bowflex products in Independence, Virginia. The 54  
acres of commercial real property include the following facilities:             

         -      A 124,000 square foot building devoted to fabrication,
                    finishing, assembly, plastics, upholstery, warehousing and
shipping;                             
            -      A 100,000 square foot building devoted to fabrication and
warehousing;                          
         -      A 27,105 square foot building that houses our Nautilus
engineering, prototyping and          

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customer service operations; and      
        -      A 9,187 square foot building that houses our Nautilus
administrative operations.            

  We recently added a distribution center in Las Vegas, Nevada. We
distribute Bowflex equipment, Nautilus Sleep Systems and Nautilus fitness       
products from this 53,657 square foot facility. The term of the lease is from   
December 1, 1999, to November 30, 2002. The aggregate base rent is              
approximately $12,878 per month for the first twelve months, and is subject     
to an annual cost of living increase of 3.5%.                                   

       In general, our properties are well maintained, adequate and suitable
for their purposes, and we believe these properties will meet our operational   
needs for the foreseeable future.* If we require additional warehouse or office 
space, we believe we will be able to obtain such space on commercially          
reasonable terms.*                                                              

ITEM 3.  LEGAL PROCEEDINGS                                                      

         As of March 22, 2000, there were no material, pending legal proceedings
to which we or our subsidiaries were a party. From time to time, we become      
involved in ordinary, routine or regulatory legal proceedings incidental to our 
business.                                                                       

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                    

    No matters were submitted to a vote of our shareholders during the
quarter ended December 31, 1999.                                                

 PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET PRICE OF OUR COMMON STOCK                                                

 Since May 4, 1999, our common stock has been listed for trading
exclusively on The Nasdaq National Market System under the symbol DFXI. Prior to
such date, our common stock was listed for trading exclusively on the Toronto   
Stock Exchange in the Province of Ontario, Canada, under the symbol DFX. The    
following table summarizes the high and low sales prices for our common stock as
reported on the Toronto Stock Exchange and The Nasdaq National Market System, as
applicable, for the two years in the period ended December 31, 1999. The prices 
below in Canadian dollars are listed in the currency they were quoted in until  
May 4, 1999 and are translated into United States dollars based on the currency 
exchange rate in effect on the date of each high and low quarterly price:       

                                                        [Enlarge/Download Table]

                                               CANADIAN DOLLARS       UNITED STATES DOLLARS 
                                           ------------------------  -----------------------
                                              HIGH           LOW        HIGH          LOW   
                                           ----------     ---------  ---------     ---------
                                                                                            
1998                                                                                        
Quarter 1.................................  $  10.05       $   3.50   $   7.07      $   2.45
Quarter 2.................................     15.00          10.00      10.48          7.05
Quarter 3.................................     18.00          11.80      12.09          7.67
Quarter 4.................................  $  23.00       $  10.50   $  14.95      $   6.80

1999                                                                                        
Quarter 1.................................  $  28.00       $  18.55   $  18.39      $  12.09

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Quarter 2.................................      N/A           N/A        26.00         16.25
Quarter 3.................................      N/A           N/A        21.00         15.00
Quarter 4.................................      N/A           N/A     $  29.00      $  18.25


     As of February 29, 2000, 10,519,565 shares of our common stock were
issued and outstanding and held of record by 81 shareholders.                   

      Payment of any future dividends is at the discretion of our board of
directors, which considers various factors, such as our financial condition,    
operating results, current and anticipated cash needs and expansion plans. Our  
credit lines do not restrict the payment of dividends. To date, we have never   
declared or paid any cash dividends on our common stock and do not presently    
intend to declare any cash dividends in the near future.* Instead, we intend to 
retain and direct any future earnings to fund our anticipated expansion and     
growth.*                                                                        

USE OF PROCEEDS                                                                 

        We received approximately $17,938,000 in net proceeds from the sale of
975,000 shares of common stock in our May 1999 initial U.S. public offering,    
which includes proceeds from the overallotment option exercised by the managing 
underwriters. During 1999, we applied $3.7 million of the net proceeds toward   
stock repurchases and $1.3 million toward computer and related technology       
upgrades. We also used approximately $5.0 million of the net proceeds for       
working capital purposes, including increased direct marketing expenditures and 
increases in inventory and accounts receivable balances due to the growth of our
business. We have invested all unexpended net proceeds in an interest bearing   
depository account with Bank of America, pending anticipated application of     
proceeds in fiscal 2000 toward such purposes as further stock repurchases, the  
purchase of a distribution center in Las Vegas, Nevada, the purchase of a       
building in Vancouver, Washington to consolidate our Washington operations, and 
any of the other purposes described in our registration statement on Form S-1.* 

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ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA                                   

        The selected consolidated financial data presented below for each year
in the five-year period ended December 31, 1999 have been derived from our      
audited financial statements. The data presented below should be read in        
conjunction with our financial statements and notes thereto and Item 7,         
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations."                                                                    

                                                        [Enlarge/Download Table]


IN THOUSANDS                                                                                               
(EXCEPT PER SHARE AMOUNTS)                   1995         1996         1997         1998          1999     
---------------------------------------   ----------   ----------  -----------   ----------    ----------  
STATEMENT OF OPERATIONS DATA                                                                               
                                                                                                           
Net Sales                                    $4,772       $8,517       $19,886       $57,297       $121,019
Cost of sales                                 1,616        2,603         5,114        12,442         34,423
                                         ----------   ----------    ----------    ----------     ----------
   Gross profit                               3,156        5,914        14,772        44,855         86,596
Operating expenses:                                                                                        
   Selling and marketing                      2,644        4,712         9,600        22,643         44,630
   General and administrative                   370          473           975         1,701          4,237
   Royalties                                    201          269           581         1,623          2,897
   Litigation settlement                          -            -             -             -          4,000
     Total operating expenses            ----------   ----------    ----------    ----------     ----------
                                              3,215        5,454        11,156        25,967         55,764
                                         ----------   ----------    ----------    ----------     ----------
Operating income (loss)                         (59)         460         3,616        18,888         30,832
Other income (expense)                                                                                     
   Interest income                               26           37           119           527          1,003
   Other-net                                    (20)         (53)          (88)         (222)             3
                                         ----------   ----------    ----------    ----------     ----------
     Total other income (expense)                 6          (16)           31           305          1,006
                                         ----------   ----------    ----------    ----------     ----------
Income (loss) before income taxes               (53)         444         3,647        19,193         31,838
Income tax expense (benefit)                    (68)        (249)        1,226         6,708         11,495
                                         ----------   ----------    ----------    ----------     ----------
Net income                                   $   15       $  693        $2,421       $12,485        $20,343
                                         ==========   ==========    ==========    ==========     ==========
Basic earnings per share(1)                  $ 0.00       $ 0.08        $ 0.27       $  1.34        $  2.00
Diluted earnings per share(1)                $ 0.00       $ 0.08        $ 0.25       $  1.28        $  1.95

Basic shares outstanding                      8,132        8,558         8,987         9,337         10,166
Diluted shares outstanding                    8,132        8,943         9,511         9,726         10,425

BALANCE SHEET DATA                                                                                         
Cash and cash equivalents                      $756       $1,154        $4,790       $18,911        $35,703
Working Capital                               1,063        1,973         4,100        15,682         38,209
Total assets                                  2,150        3,515         7,922        24,373         67,310
Current liabilities                             858        1,281         3,330         6,655         14,091
Total stockholders' equity                   $1,274       $2,220        $4,592       $17,651        $53,031


(1) Basic earnings per share have been computed by dividing net income by the   
weighted average number of shares of common stock outstanding during each       
period. Diluted earnings per share have been computed by dividing net income by 
the weighted average number of shares of common stock and common stock          
equivalents, such as stock options, outstanding during each period.             

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS                                                 

RESULTS OF OPERATIONS                                                           

       We believe that period-to-period comparisons of our operating results
are not necessarily indicative of future performance. You should consider our   
prospects in light of the risks, expenses and difficulties frequently           
encountered by companies experiencing rapid growth and, in particular, rapidly  
growing companies that operate in evolving markets. We may not be able to       
successfully address these risks and difficulties. Although we have experienced 
net sales growth in recent years, our net sales growth may not continue, and we 
cannot assure you of any future growth or profitability.                        

        The following table presents certain financial data as a percentage of
total revenues:                                                                 

                                                        [Enlarge/Download Table]

                                                               Year Ended December 31,                  
                                              --------------------------------------------------------- 
                                                   1997                 1998                 1999       
                                              ----------------      --------------      --------------- 
STATEMENT OF OPERATIONS DATA                                                                            

                                                                                                        
Net sales....................................      100.0%              100.0%                100.0%     
Cost of sales................................       25.7                21.7                  28.4      
                                               ----------------      --------------      ---------------
Gross profit.................................       74.3                78.3                  71.6      

Operating expenses                                                                                      
    Selling and marketing....................       48.3                39.5                  36.9      
    General and administrative...............        4.9                 3.0                   3.5      
    Royalties................................        2.9                 2.8                   2.4      
    Litigation settlement....................          -                   -                   3.3      
                                              ----------------      --------------      --------------- 
Total operating expenses.....................       56.1                45.3                  46.1      
Operating income.............................       18.2                33.0                  25.5      
Other income.................................        0.2                 0.5                   0.8      
                                              ----------------      --------------      --------------- 
Income before income taxes...................       18.4                33.5                  26.3      
Income tax expense...........................        6.2                11.7                   9.5      
                                              ----------------      --------------      --------------- 
Net income...................................       12.2%               21.8%                 16.8%     
                                              ================      ==============      =============== 


COMPARISON OF THE YEARS ENDING DECEMBER 31, 1999, AND DECEMBER 31, 1998         

NET SALES                                                                       

       Net sales grew by 111.2% to $121.0 million in 1999 from $57.3 million
in 1998. Sales within our direct marketing business increased by 77.8% over     
prior year levels and accounted for $101.9 million, or 84.2%, of our aggregate  
net sales in 1999. One product, our Bowflex Power Pro, generated 79.9% of our   
aggregate net sales in 1999, compared to 93.3% in 1998. The principal reason for
this decrease was the addition of our Nautilus business. Net sales within our   
Nautilus business generated $19.1 million of our aggregate net sales and        
accounted for 33.4% of the aggregate increase.                                  

        Sales growth in 1999 primarily resulted from expanded direct marketing
of our Bowflex products and the addition of our Nautilus business. Within our   
direct marketing business, with respect to both our Bowflex products and our    
Nautilus Sleep Systems, we intend to further expand our use of spot television  
commercials and infomercials during 2000 by increasing our presence in existing 
television markets and                                                          

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entering new television markets.* We intend to increase Nautilus sales by       
developing new products and expanding our direct sales efforts both             
domestically and internationally.*                                              

         Notwithstanding our product diversification efforts, we anticipate that
sales of our Bowflex Power Pro will continue to account for a substantial       
portion of our net sales for the foreseeable future.* Any significant diminished
consumer interest in this product line would sharply reduce our net sales and   
profitability. In addition, the success of each of our products depends         
substantially on how consumers decide to spend their money. Unfavorable economic
conditions may depress consumer spending, especially for premium priced products
like ours.                                                                      

 Except for the fourth quarter, fiscal 1999 sales of our Bowflex
products appear to have been consistent with historic trends. As in prior years,
first and third quarter sales of our Bowflex products were strong, while the    
second quarter reflected seasonal weakness. Our direct marketing business is    
largely dependent upon national cable television advertising, and we are finding
that second quarter influences on television viewership, such as the broadcast  
of national network season finales and seasonal weather factors, are causing our
spot television commercials on national cable television to be marginally less  
effective than in other periods of the year.* During the fourth quarter of 1999,
we experienced unusually strong consumer demand compared to the third quarter   
for our Bowflex products, which we believe is a trend that will not continue for
the fourth quarter in future periods.*                                          

Sales within our Nautilus business were, and we believe will  
continue to be, strongest in the third and fourth quarters.* We believe the     
principal reason for this trend is the commercial fitness industry's            
preparation for the impact of New Year fitness resolutions and seasonal         
weather factors in the fourth quarter, and retail fitness store purchases of    
fitness equipment in preparation for the Christmas buying season and New Year   
fitness resolutions in the third and fourth quarters.*                          

GROSS PROFIT                                                                    

         Gross profit grew 92.9% to $86.6 million in 1999, from $44.9 million in
1998. Our gross profit margin decreased 6.7% to 71.6% in 1999, from 78.3% in    
1998. The decrease in gross profit margin was mainly attributable to our        
Nautilus operations, which had a gross profit margin in 1999 of 38.5%.          

        We expect a lower percentage gross profit margin contribution from our
Nautilus Sleep Systems as we continue our direct marketing campaign for this    
product.* At least initially, we expect the domestic production and relatively  
lower sales volume of our Nautilus Sleep Systems will result in lower gross     
profit margins than our Bowflex products.* Similar to our Bowflex products, with
the anticipated future higher sales volume of Nautilus Sleep Systems, we expect 
to take advantage of overseas production to strengthen the margins for these    
products.*                                                                      

OPERATING EXPENSES                                                              

SELLING AND MARKETING                                         

         Selling and marketing expenses grew to $44.6 million in 1999 from $22.6
million in 1998, an increase of 97.3%. This increase in selling and marketing   
expenses resulted primarily from the continued expansion of our Bowflex direct  
marketing campaign and variable costs associated with our sales growth. The     
addition of our Nautilus business accounted for $5.1 million of the increase.   

        As a percentage of net sales, selling and marketing expenses decreased
by 2.6% in 1999 to 36.9%, compared to 39.5% in 1998. Selling and marketing      
expenses within our direct marketing business                                   

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were $39.5 million, a 0.7% decrease as a percentage of net sales compared to    
1998. Selling and marketing expenses within our Nautilus business               
traditionally have been a lower percentage of net sales than we have            
experienced in direct marketing. In real dollar terms, we expect our            
aggregate selling and marketing expenses will continue to increase, but not     
materially as a percentage of net sales,* as we:                                

             -      Continue to expand our Bowflex direct marketing campaign;*
             -      Continue rolling out the direct marketing campaign for our
Nautilus Sleep Systems;*              
      -      Continue integrating the marketing and distribution
                    infrastructure for our Nautilus line of commercial fitness
equipment;* and                       
          -      Begin marketing new home fitness equipment products and
             fitness accessories under the Nautilus brand name.*

GENERAL AND ADMINISTRATIVE                                    

       General and administrative expenses grew to $4.2 million in 1999 from
$1.7 in 1998, an increase of 147.1%. Our direct marketing business accounted for
$1.3 million of the increase in general and administrative expenses, due        
primarily to increased staffing levels in our accounting and information systems
departments necessitated by our continued growth and the implementation of our  
new information system. Nautilus operations accounted for the remaining increase
of $1.2 million. As a percentage of net sales, general and administrative       
expenses increased to 3.5% in 1999 from 3.0% in 1998. We believe our general and
administrative expenses, in real dollar terms and as a percentage of net sales, 
will increase in future periods as we continue to integrate the Nautilus        
business into our operations and expand our administrative staff and other      
resources to manage anticipated growth.*                                        

ROYALTY                                                       

         Royalty expense grew to $2.9 million in 1999 from $1.6 million in 1998,
an increase of 81.3%. The increase in our royalty expense is attributable to    
increased sales of our Bowflex products in 1999. Our royalty expenses will      
increase if sales of our Bowflex products continue to increase.*                

OTHER INCOME                                                                    

      In 1999, other income increased to $1.0 million from $0.3 million in
1998. The $0.7 million increase resulted primarily from interest income         
generated by higher cash investments accumulated from a combination of results  
from operations and our public offering completed during the second quarter of  
1999.                                                                           

INCOME TAX EXPENSE                                                              

        Income tax expense increased by $4.8 million in 1999 compared to 1998.
We expect our income tax expense to increase in line with increases of our      
income before taxes.* Our effective tax rate increased by 1.2% to 36.1% due to  
state tax liability. We believe this higher rate is indicative of our future    
effective tax rate.*                                                            

NET INCOME                                                                      

      For the reasons discussed above, net income increased 62.4% to $20.3
million in 1999 compared to $12.5 million in 1998.                              

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COMPARISON OF YEARS ENDING DECEMBER 31, 1998, AND DECEMBER 31, 1997             

NET SALES                                                                       

       Net sales grew by 187.9% to $57.3 million in 1998, from $19.9 million
in 1997. Sales of our Bowflex Power Pro grew by 199.0% and accounted for 93.3%  
of our aggregate net sales in 1998. Sales of our Bowflex Motivator increased by 
73.0% and sales of our Bowflex accessories increased by 148.0% in 1998, and     
accounted for 1.8% and 4.5% of our aggregate net sales, respectively. We        
introduced and began test marketing our airbeds in late 1998, but this product  
did not materially contribute to our net sales in 1998.                         

  Our sales growth in 1998 primarily resulted from expanded direct
marketing of our Bowflex products. In 1998, we increased our advertising        
expenditures by 196.1%, focusing principally on expanded broadcasts of our      
Bowflex spot television commercials and television infomercials. Both of these  
direct marketing techniques generated strong sales in 1998.                     

GROSS PROFIT                                                                    

   Our gross profit grew 203.4% to $44.9 million in 1998, from $14.8
million in 1997. Our gross profit as a percentage of net sales increased by 4.0%
to 78.3% in fiscal 1998, from 74.3% in 1997. We believe that our improved       
percentage gross profit in 1998 resulted primarily from a March 1998 increase in
the shipping charge for our Bowflex products, as well as reduced component costs
for our Bowflex products and improved labor and overhead efficiencies. We       
benefited from reduced component costs principally through volume discounts. Our
improved labor and overhead efficiencies resulted primarily from improved       
manufacturing methods and the implementation of a second work shift.            

OPERATING EXPENSES                                                              

SELLING AND MARKETING                                         

        Selling and marketing expenses grew to $22.6 million in 1998 from $9.6
million in 1997, an increase of 135.4%. This increase in selling and marketing  
expenses resulted primarily from the expansion of our Bowflex direct marketing  
campaign and variable costs associated with our sales growth.                   

        As a percentage of net sales, selling and marketing expenses decreased
to 39.5% in 1998 from 48.3% in 1997. This decrease in selling and marketing     
expenses as a percentage of net sales reflects the improved efficiency of our   
Bowflex direct marketing campaign. As we refined our spot commercial and        
infomercial advertising policies and our customer response techniques, we were  
able to stimulate sales growth at a more rapid rate than the growth in our      
selling and marketing expenses.                                                 

GENERAL AND ADMINISTRATIVE                                    

       General and administrative expenses grew to $1.7 million in 1998 from
$975,000 in 1997, an increase of 74.3%. This increase in general and            
administrative expenses was due primarily to increased staffing and             
infrastructure expenses necessary to support our continued growth. As a         
percentage of net sales, general and administrative expenses decreased to 3.0%  
in 1998 from 4.9% in 1997. The decline in general and administrative expenses as
a percentage of our net sales resulted primarily from our substantial increase  
in net sales.                                                                   

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ROYALTY                                                       

        Royalty expense grew to $1.6 million in 1998 from $581,000 in 1997, an
increase of 175.4%. The increase in our royalty expenses is attributable to the 
increased sales of our Bowflex products in 1998. Our royalty expenses will      
increase if sales of our Bowflex products continue to increase.                 

OTHER INCOME                                                  

       In 1998, other income increased to $305,000 from $31,000 in 1997. The
$274,000 increase resulted primarily from interest income generated by our cash 
investments, which was partially offset by a $135,000 increase in our state     
business tax expense.                                                           

INCOME TAX EXPENSE                                            

     Income tax expense increased by $5.5 million in 1998 because of the
growth in our income before taxes. We expect our income tax expense to increase 
in line with increases in our income before taxes.                              

NET INCOME                                                                      

      For the reasons discussed above, net income grew to $12.5 million in
1998 from $2.4 million in 1997, an increase of 420.8%.                          

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QUARTERLY RESULTS OF OPERATIONS                                                 

    The following table presents our operating results for each of the
eight quarters in the period ended December 31, 1999. The information for each  
of these quarters is unaudited and has been prepared on the same basis as the   
audited financial statements appearing elsewhere in this Annual Report on Form  
10-K. In the opinion of management, all necessary adjustments, consisting only  
of normal recurring adjustments, have been included to present fairly the       
unaudited quarterly results when read together with our audited financial       
statements and the related notes. These operating results are not necessarily   
indicative of the results of any future period.                                 

SELECTED QUARTERLY INFORMATION                                                  

                                                                [Download Table]


                                           QUARTER ENDED                        
                                   (IN THOUSANDS, EXCEPT PER SHARE)             

                         MARCH 31    JUNE 30           SEPTEMBER 30  DECEMBER 31
                         --------    -------           ------------  -----------
                                                                                
Fiscal 1999:                                                                    
     Net sales           26,113       25,244               31,773       37,889  
     Gross profit        18,723       17,882               22,982       27,008  
     Operating income     6,907        1,999 (1)            8,099       13,827  

     Net income           4,479        1,399 (1)            5,495        8,969  

     Earnings per share                                                         
          Basic             .47          .14 (1)              .52          .86  
          Diluted           .45          .13 (1)              .51          .84  

Fiscal 1998:                                                                    
     Net sales           11,051       12,236               15,200       18,809  
     Gross profit         8,497        9,584               11,766       15,007  
     Operating income     3,852        3,014                4,370        7,653  

     Net income           2,571        1,982                2,910        5,023  

     Earnings per share                                                         
          Basic             .28          .21                  .31          .54  
          Diluted           .27          .20                  .30          .52  


(1)      Includes a $4 million litigation settlement expense. Net income and    
earnings per share amounts also reflect $1.4 million of income tax benefit      
related to the litigation settlement.                                           

LIQUIDITY AND CAPITAL RESOURCES                                                 

         Historically, we have financed our growth primarily from cash generated
by our operating activities. During 1999, our operating activities generated    
$20.8 million in net cash, which contributed to an aggregate $35.7 million in   
cash and cash equivalents on hand as of December 31, 1999. We used $16.6 million
in cash to fund the Nautilus acquisition in January 1999. Our public offering on
May 5, 1999 generated $15.1 million in cash and the underwriters' exercise of   
their over-allotment option on June 10, 1999 generated an additional $2.8       
million in cash, bringing the total net offering proceeds to $17.9 million.     
Through a stock repurchase program, we bought back $3.7 million in common stock 
on the open market. These activities contributed to a $16.8 million, or 88.9%   
increase in our cash and cash equivalents during 1999.                          

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   We anticipate our working capital requirements will increase as a
result of increased inventory and accounts receivable related to our Nautilus   
operations.* We also expect to increase our cash expenditures on spot           
commercials and infomercials as we continue to expand the direct marketing      
campaigns for our Bowflex products and Nautilus Sleep Systems.*                 

     We maintain a $5.0 million line of credit with Bank of America. The
line of credit is secured by our general assets and contains certain financial  
covenants. As of the date of these financial statements, we are in compliance   
with all material covenants applicable to the line of credit and there is no    
outstanding balance under the line.                                             

  We believe our existing cash balances, combined with our line of
credit, will be sufficient to meet our capital requirements for at least the    
next twelve months.*                                                            

INFLATION AND PRICE INCREASES                                                   

         Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had or is likely in the        
foreseeable future to materially adversely affect our results of operations,    
cash flows or our financial position.* However, increases in inflation over     
historical levels or uncertainty in the general economy could decrease          
discretionary consumer spending for products like ours. We have not raised the  
prices on our Bowflex products since 1997. Consequently, none of our revenue    
growth is attributable to price increases.                                      

YEAR 2000                                                                       

       We did not experience any material year 2000 problems with respect to
our products, information systems, suppliers or resellers. To help ensure a     
smooth transition into 2000, we did the following:                              

-  Upgraded all computer hardware and equipment determined to have  
potential Year 2000 problems;                                 
-  Stockpiled certain inventory components;                         
-  Acquired and prepared to use back-up power generators;           
 -  Developed manual workarounds for all critical automated processes;
     -  Downloaded and printed critical data and reports by December 30, 1999;
-  Created specific plans of action for dealing with critical       
non-compliant suppliers and resellers; and                    
   -  Executed critical operations, such as payroll, prior to December 31,
1999.                                                         

    We estimate that, as of December 31, 1999, the cost of remediating
and/or replacing our internal systems was approximately $1.3 million. We funded 
this effort through normal working capital.                                     

        Because we experienced no major Year 2000-related issues internally or
externally over the Year 2000 transition, we do not currently believe that we   
will incur material costs or experience material disruptions in our business    
associated with the year 2000. However, there can be no assurance that our      
computer systems or those of our suppliers do not contain undetected errors or  
defects associated with Year 2000 date functions. These could give rise to      
increased customer satisfaction costs related to Year 2000 and to litigation    
over Year 2000 compliance issues.                                               

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RECENT ACCOUNTING PRONOUNCEMENT                                                 

 In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING           
ACTIVITIES" ("SFAS 133"). SFAS 133 establishes accounting and reporting         
standards for all derivative instruments. SFAS 133, as amended, is effective for
fiscal years beginning after June 15, 2000. We do not currently have any        
derivative instruments and, accordingly, do not expect the adoption of SFAS 133 
to have an impact on our financial position, results of operations, or cash     
flows.                                                                          

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK            

No disclosure is required under this item.                    

ITEM 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA    

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                      

                                                        [Enlarge/Download Table]


Direct Focus, Inc. Consolidated Financial Statements                                PAGE
                                                                                    ----
                                                                                        
Independent Auditor's Report                                                          27

Consolidated Balance Sheets as of December 31, 1998 and 1999                          28

Consolidated Statements of Income for the three years ended December 31, 1999         29

Consolidated Statements of Stockholders' Equity for the three years ended December      
  31, 1999                                                                            30

Consolidated Statements of Cash Flows for the three years ended December 31, 1999     31

Notes to Consolidated Financial Statements                                            32

Schedule II - Valuation and Qualifying Accounts                                       43


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                                      INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders                                             
of Direct Focus, Inc.:                                                          

        We have audited the accompanying consolidated balance sheets of Direct
Focus, Inc. and subsidiaries as of December 31, 1998 and 1999 and the related   
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also       
included the financial statement schedule at Item 14. These financial statements
and financial statement schedule are the responsibility of the Company's        
management. Our responsibility is to express an opinion on the financial        
statements and financial statement schedule based on our audits.                

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan  
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a 
test basis, evidence supporting the amounts and disclosures in the financial    
statements. An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall     
financial statement presentation. We believe that our audits provide a          
reasonable basis for our opinion.                                               

        In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Direct Focus, Inc. and      
subsidiaries at December 31, 1998 and 1999 and the results of their operations  
and their cash flows for each of the three years in the period ended December   
31, 1999 in conformity with accounting principles generally accepted in the     
United States of America. Also, in our opinion, such financial statement        
schedule, when considered in relation to the basic consolidated financial       
statements taken as a whole, presents fairly in all material respects the       
information set forth therein.                                                  

DELOITTE & TOUCHE LLP                                                           

Portland, Oregon                                                                
February 21, 2000                                                               

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                                      DIRECT FOCUS, INC.
                                     CONSOLIDATED BALANCE SHEETS
                                      DECEMBER 31, 1998 AND 1999

                                                        [Enlarge/Download Table]

                                                                    December 31,        December 31,    
                                                                        1998                1999        
                                                                  ------------------  ----------------- 
                                                                                                        
ASSETS                                                                                                  

CURRENT ASSETS:                                                                                         
  Cash and cash equivalents                                        $   18,910,675      $   35,703,457   
  Trade receivables (less allowance for doubtful accounts of:                                           
    1998, $40,000 and 1999, $304,727)                                     218,207           4,744,213   
  Inventories                                                           2,614,673           9,167,554   
  Prepaid expenses and other current assets                               378,409           1,863,951   
  Current deferred tax asset                                              215,737             820,789   
                                                                  ------------------  ----------------- 

         Total current assets                                          22,337,701          52,299,964   
                                                                  ------------------  ------------------

PROPERTY, PLANT AND EQUIPMENT (less accumulated                                                         
  Depreciation of: 1998, $438,790 and 1999, $1,100,255)                 1,842,712          10,644,838   
                                                                  ------------------  ----------------- 

OTHER ASSETS (less accumulated amortization of:                                                         
  1998, $49,967 and 1999, $272,183)                                       192,859           4,364,963   
                                                                  ------------------  ----------------- 

TOTAL ASSETS                                                       $   24,373,272      $   67,309,765   
                                                                  ==================  ================= 

LIABILITIES AND STOCKHOLDERS' EQUITY                                                                    

CURRENT LIABILITIES:                                                                                    
  Trade payables                                                   $    3,602,074      $    5,871,369   
  Accrued liabilities                                                   1,851,253           4,051,540   
  Income taxes payable                                                    504,775           2,177,236   
  Royalty payable to stockholders                                         548,211             893,563   
  Customer deposits                                                       148,937           1,097,748   
                                                                  ------------------  ----------------- 

               Total current liabilities                                6,655,250          14,091,456   
                                                                  ------------------  ----------------- 

LONG-TERM DEFERRED TAX LIABILITY                                           66,880             187,484   
                                                                  ------------------  ----------------- 

COMMITMENTS AND CONTINGENCIES (Note 7)                                          -                   -   
STOCKHOLDERS' EQUITY:                                                                                   
  Common stock - authorized, 50,000,000 shares of no par value;                                         
    Outstanding, 1998: 9,448,523 shares, 1999: 10,444,148 shares        3,565,628          18,602,420   
  Retained earnings                                                    14,085,514          34,428,405   
                                                                  ------------------  ----------------- 

               Total stockholders' equity                              17,651,142          53,030,825   
                                                                  ------------------  ----------------- 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $   24,373,272      $   67,309,765   
                                                                  ==================  ================= 

See notes to consolidated financial statements.                                 

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                                        DIRECT FOCUS, INC.
                                         CONSOLIDATED STATEMENTS OF INCOME
                                         THREE YEARS ENDED DECEMBER 31, 1999

                                                        [Enlarge/Download Table]

                                               1997             1998               1999       
                                         -----------------  --------------   -----------------
                                                                                              
NET SALES                                $  19,886,354       $ 57,296,880      $121,018,477   

COST OF SALES                                 5,113,980        12,442,307        34,422,577   
                                         -----------------  --------------   -----------------

               Gross profit                  14,772,374         44,854,573       86,595,900   
                                         -----------------  --------------   -----------------

EXPENSES:                                                                                     
Selling and marketing                         9,600,076         22,642,885       44,629,825   
General and administrative                      974,887          1,700,956        4,236,804   
Royalties                                       580,677          1,622,726        2,897,278   
Litigation settlement                                 -                  -        4,000,000   
                                         -----------------  --------------   -----------------

               Total operating expenses      11,155,640         25,966,567       55,763,907   
                                         -----------------  --------------   -----------------

INCOME FROM OPERATIONS                        3,616,734         18,888,006       30,831,993   
                                         -----------------  --------------   -----------------

OTHER INCOME (EXPENSE):                                                                       
Interest income                                 118,541            526,961        1,003,586   
Other - net                                     (88,041)          (221,889)           2,737   
                                         -----------------  ---------------  -----------------
               Total other income - net          30,500            305,072        1,006,323   

                                         -----------------  ---------------  -----------------
INCOME BEFORE INCOME TAXES                    3,647,234         19,193,078       31,838,316   

INCOME TAX EXPENSE                            1,226,068          6,707,584       11,495,425   
                                         -----------------  ---------------  -----------------

NET INCOME                               $    2,421,166     $   12,485,494   $   20,342,891   
                                         =================  ===============  =================

BASIC EARNINGS PER SHARE                 $          .27     $        1.34    $        2.00    
                                         =================  ===============  =================
DILUTED EARNINGS PER SHARE               $          .25     $        1.28    $        1.95    
                                         =================  ===============  =================

Basic shares outstanding                      8,986,655          9,336,525       10,165,617   

Diluted shares outstanding                    9,510,868          9,725,958       10,425,208   


See notes to consolidated financial statements.                                 

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                                      DIRECT FOCUS, INC.
                               CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                               FOR THE THREE YEARS ENDED DECEMBER 31, 1999

                                                        [Enlarge/Download Table]

                                                   COMMON STOCK                                         
                                                   -------------        RETAINED EARNINGS               
                                            SHARES           AMOUNT       (ACCUM. DEF.)        TOTAL    
                                         ------------     ------------    -------------     ----------- 
                                                                                                        
BALANCES, JANUARY 1, 1997                  8,921,541       $3,040,425     $  (821,146)       $2,219,279 

Options exercised                            129,887           15,586               -            15,586 
Stock repurchased                            (46,100)         (98,120)              -           (98,120)
Tax benefit of exercise of nonqualified                                                                 
   options                                         -           34,281               -            34,281 
Net income                                         -                -       2,421,166         2,421,166 
                                         ------------     ------------   -------------     ------------ 
BALANCES, DECEMBER 31, 1997                9,005,328       $2,992,172      $1,600,020        $4,592,192 
                                         ============     ============   =============     ============ 

Options exercised                            443,195          134,004               -           134,004 
Tax benefit of exercise of nonqualified                                                                 
   options                                         -          439,452               -           439,452 
Net income                                         -                -      12,485,494        12,485,494 
                                         ------------     ------------   -------------     ------------ 
BALANCES, DECEMBER 31, 1998                9,448,523       $3,565,628     $14,085,514       $17,651,142 
                                         ============     ============   =============     ============ 

Public offering                              975,000       17,937,691               -        17,937,691 
Options exercised                            231,825          300,482               -           300,482 
Stock repurchased                           (211,200)      (3,698,793)              -        (3,698,793)
Tax benefit of exercise of nonqualified                                                                 
   options                                         -          497,412               -           497,412 
Net income                                         -                -      20,342,891        20,342,891 
                                         ------------     ------------   -------------     ------------ 
BALANCES, DECEMBER 31, 1999               10,444,148      $18,602,420     $34,428,405       $53,030,825 
                                         ============     ============   =============     ============ 


See notes to consolidated financial statements                                  

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                                DIRECT FOCUS, INC.
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 THREE YEARS ENDED DECEMBER 31, 1999

                                                        [Enlarge/Download Table]

                                                             1997            1998            1999    
                                                        --------------   -------------   ------------
                                                                                                     
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                
Net income                                              $   2,421,166   $  12,485,494   $ 20,342,891 
Adjustments to reconcile net income to net cash                                                      
Provided by operating activities:                                                                    
   Depreciation and amortization                               96,133         301,913      1,183,412 
   Loss on equipment disposal                                       -               -          1,262 
   Deferred income taxes                                      140,659          99,484       (484,448)
   Changes in:                                                                                       
     Trade receivables                                        (29,128)         41,336     (1,519,116)
     Inventories                                           (1,156,643)       (668,900)    (3,448,750)
     Prepaid expenses and other current assets                373,807        (166,027)    (1,377,336)
     Trade payables                                           277,909       2,423,819      2,001,235 
     Income taxes payable                                     835,409         143,099      2,169,873 
     Accrued liabilities and royalty payable to                                                      
        Stockholders                                          944,547       1,099,819        988,414 
     Customer deposits                                         25,473         107,084        948,811 
                                                        --------------   -------------   ------------

   Net cash provided by operating activities                3,929,332      15,867,121     20,806,248 
                                                        --------------   -------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:                                                                
   Additions to equipment                                    (278,886)     (1,738,836)    (1,929,137)
   Proceeds from sale of property, plant and equip.                 -               -        159,238 
   Additions to other assets                                  (22,514)        (12,309)      (167,935)
   Acquisition cost of Nautilus                                     -        (120,454)   (16,615,012)
   Sale of certificate of deposit                             100,000               -              - 
                                                        --------------   -------------   ------------
   Net cash used in investing activities                     (201,400)     (1,871,599)   (18,552,846)
                                                        --------------   -------------   ------------
CASH FLOWS FROM FINANCING                                                                            
ACTIVITIES:                                                                                          
   Principal payments under capital lease obligations          (9,113)         (9,167)             - 
   Proceeds from public offering                                    -               -     17,937,691 
   Funds used for stock repurchase                            (98,120)              -     (3,698,793)
   Proceeds from exercise of stock options, net                15,586         134,004        300,482 
                                                        --------------   -------------   ------------
   Net cash provided by (used in) financing activities        (91,647)        124,837     14,539,380 
                                                        --------------   -------------   ------------

NET INCREASE IN CASH AND CASH                                                                        
EQUIVALENTS                                                 3,636,285      14,120,359     16,792,782 

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CASH AND CASH EQUIVALENTS,                                                                           
BEGINNING OF YEAR                                           1,154,031       4,790,316     18,910,675 
                                                        --------------   -------------   ------------
CASH AND CASH EQUIVALENTS,                                                                           
END OF YEAR                                               $ 4,790,316     $18,910,675    $35,703,457 
                                                        ==============   =============   ============

SUPPLEMENTAL DISCLOSURE OF                                                                           
CASH FLOW INFORMATION:                                                                               

    Cash paid for interest                                      1,381             455              - 
    Cash paid for income taxes                                250,000       6,465,006      9,835,000 

SUPPLEMENTAL DISCLOSURE OF NONCASH                                                                   
FINANCING TRANSACTIONS:                                                                              
    Tax benefit of exercise of nonqualified options            34,281         439,452        497,412 


See notes to consolidated financial statements                                  

DIRECT FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 THREE YEARS ENDED DECEMBER 31, 1999

1.       ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES                       

ORGANIZATION                                                  

  Direct Focus Inc. (the "Company," a Washington corporation) is a
direct marketing company that develops and markets premium quality, premium     
priced, branded consumer products. The Company has two operating segments.      
One is the direct business through which they market consumer products          
directly through a variety of direct marketing channels, including spot         
television commercials, infomercials, print media, response mailings, and the   
Internet. The Company's principal products are the Bowflex line of home         
fitness equipment and a line of premium quality airbeds (Nautilus Sleep         
Systems). As a result of the acquisition in January 1999 of Nautilus            
International, Inc., the Company added a second business segment which          
comprises a significant component of the Company's operations and includes      
Nautilus commercial and home fitness equipment.                                 

CONSOLIDATION                                                 

     The consolidated financial statements of the Company include Direct
Focus, Inc., Nautilus HPS, Inc., Nautilus, Inc., DFI Properties, LLC, BFI       
Advertising, Inc., DFI Sales, Inc., and Nautilus Fitness Products, Inc. All     
inter-company transactions have been eliminated.                                

USE OF ACCOUNTING ESTIMATES                                   

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and        
assumptions that affect the reported amounts of assets and liabilities and      
disclosure of contingent assets and liabilities at the date of the financial    
statements and the reported amounts of revenues and expenses during the         
reporting period. Actual results could differ from those estimates.             

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CASH AND CASH EQUIVALENTS                                     

     Cash and cash equivalents include cash on hand, cash deposited with
banks and financial institutions and highly liquid debt instruments purchased   
with maturity dates of three months or less at date of acquisition. The         
Company maintains its cash in bank deposit accounts which, at times, may        
exceed federally insured limits. The Company has not experienced any losses     
in such accounts.                                                               

INVENTORIES                                                   

Inventories are stated at the lower of average cost or market.

ADVERTISING                                                   

    The Company expenses the production costs of advertising the first
time the advertising takes place.                                               

PROPERTY, PLANT AND EQUIPMENT                                 

  Property, plant and equipment is stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of      
the assets.                                                                     

 Management reviews investment in long-lived assets for possible
impairment whenever events or circumstances indicate the carrying amount of     
an asset may not be recoverable. There have been no such events or              
circumstances in the three years ended December 31, 1999. If there were an      
indication of impairment, management would prepare an estimate of future cash   
flows (undiscounted and without interest charges) expected to result from the   
use of the asset and its eventual disposition. If these cash flows were less    
than the carrying amount of the asset, an impairment loss would be recognized   
to write down the asset to its estimated fair value.                            

OTHER ASSETS                                                  

Other assets consist of acquisition costs, license agreements,
patents and trademarks. Amortization is computed using the straight-line        
method over estimated useful lives of three to twenty years. The trademark      
associated with the Nautilus acquisition was valued at $4,349,839 and is        
being amortized over twenty years.                                              

WARRANTY COSTS                                                

    The Company's warranty policy provides for coverage for defects in
material and workmanship. Warranty periods on the Company's products range      
from two to five years on the Bowflex lines of fitness products and twenty      
years on airbeds. The Nautilus commercial line of fitness products includes a   
lifetime warranty on the structural frame, welded moving parts and weight       
stacks, a 120-day warranty on upholstery and padded items, and a one-year       
warranty on all other parts. A provision for estimated warranty costs of        
$70,000 and $383,356 is included in accrued liabilities at December 31, 1998    
and 1999, respectively.                                                         

REVENUE RECOGNITION                                           

   Revenue from product sales is generally recognized at the time of
shipment. Revenue is recognized upon installation for the Nautilus commercial   
equipment, if the Company's truck fleet is used for delivery of the products.   
The Company has established reserves for potential sales returns for 1998 and   
1999 of $600,704 and $786,921, respectively, based upon historical experience.  

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INCOME TAXES                                                  

      Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and         
liabilities that will result in taxable or deductible amounts in the future     
based on enacted tax laws and rates applicable to periods in which the          
differences are expected to affect taxable income. A valuation allowance is     
established when necessary to reduce deferred tax assets to the amount more     
likely than not to be realized. Income tax expense is the tax payable or        
refundable for the period plus or minus the change during the period in         
deferred tax assets and liabilities.                                            

COMPREHENSIVE INCOME                                          

Effective January 1, 1998, the Company adopted Statement of   
Financial Accounting Standards ("SFAS") No. 130, "REPORTING COMPREHENSIVE       
INCOME," which requires presentation of comprehensive income within an          
entity's primary financial statements. Comprehensive income is defined as net   
income as adjusted for changes to equity resulting from events other than net   
income or transactions related to an entity's capital structure.                
Comprehensive income equaled net income for all periods presented.              

FAIR VALUE OF FINANCIAL INSTRUMENTS                           

     The carrying amount of the Company's cash, trade receivables, trade
payables, royalty payables, and accrued liabilities approximates their          
estimated fair values due to the short-term maturities of those financial       
instruments.                                                                    

RECENT ACCOUNTING PRONOUNCEMENT                               

 In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING           
ACTIVITIES" ("SFAS 133"). SFAS 133 establishes accounting and reporting         
standards for all derivative instruments. SFAS 133, as amended, is effective    
for fiscal years beginning after June 15, 2000. We do not currently have any    
derivative instruments and, accordingly, do not expect the adoption of SFAS     
133 to have an impact on our financial position or results of operations.       

RECLASSIFICATIONS                                             

      Certain amounts from 1997 and 1998 have been reclassified to conform
to the 1999 presentation.                                                       

2.       PUBLIC OFFERING                                                        

On May 5, 1999, the Company completed its initial U.S. public 
offering of common stock listed on the Nasdaq exchange. The initial offering    
consisted of one million total shares at $20.50 per share, of which 825,000     
shares were offered by the Company, with an additional 175,000 shares offered   
by selling shareholders. On June 10, 1999, the underwriting group exercised a   
150,000 share over-allotment. Total net proceeds realized by Direct Focus,      
Inc. from the offerings were $17.9 million. The Company was listed on the       
Toronto Stock Exchange from January 1993 to May 1999.                           

3.       ACQUISITION OF NAUTILUS                                                

      Effective January 4, 1999, the Company acquired substantially all of
the net assets of Nautilus International, Inc. ("Nautilus"). Nautilus was a     
manufacturer and distributor of commercial fitness equipment and, to a          
limited extent, consumer fitness equipment and accessories. The acquisition     
has been                                                                        

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accounted for under the purchase method of accounting and, accordingly, the     
assets acquired, liabilities assumed, and results of operations have been       
included in the accompanying financial statements since the date of             
acquisition. The Company paid approximately $16.7 million, including            
acquisition costs of approximately $500,000, for the assets and intellectual    
property of Nautilus and assumed $1.8 million of current liabilities.           

    The total cost of the acquisition has been allocated to the assets
acquired and liabilities assumed as follows:                                    

                                                                [Download Table]
                                                                        
Cash                                                        $      8,512
Trade receivables                                              3,006,890
Inventories                                                    3,104,131
Prepaid expenses and other current assets                        108,206
Furniture and equipment                                        7,991,685
Other assets                                                   4,349,839
Liabilities assumed                                          (1,825,285)
                                                          --------------
              Total                                         $ 16,743,978
                                                          ==============

  The unaudited pro forma financial information below for the year
ended December 31, 1998 was prepared as if the transaction had occurred on      
January 1, 1998:                                                                

                                                                [Download Table]
                                                           
Revenue                                         $76,600,696
Net income                                      $ 9,868,213
Basic earnings per share                        $      1.06
Diluted earnings per share                      $      1.01


      The unaudited pro forma information is not necessarily indicative of
what actual results would have been had the transaction occurred at the         
beginning of the respective year, nor does it purport to indicate the results   
of future operations of the Company.                                            

4.       INVENTORIES                                                            

Inventories at December 31 consisted of the following:        

                                                                [Download Table]

                                                1998              1999     
                                                ----              ----     
                                                                           
Finished goods............................... $1,758,171         $1,145,848
Work in process..............................        -            1,141,803
Parts and components.........................    856,502          6,879,903
                                             ------------     -------------
                                              $2,614,673         $9,167,554
                                             ============     =============

5.       PROPERTY, PLANT AND EQUIPMENT                                          

     Property, plant and equipment are stated at cost and depreciated on
the straight-line method over the estimated useful lives of the assets.         
Details of property, plant and equipment are summarized as follows at           
December 31:                                                                    

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                                                        [Enlarge/Download Table]

                                                          Estimated                                    
                                                         Useful Life        1998            1999       
                                                         ------------  --------------  ----------------

                                                                                                       
Land....................................................     N/A        $          -     $      140,000
Buildings...............................................    31.5                   -          5,870,592
Computer equipment......................................    3 - 5          1,411,523          2,737,488
Production equipment....................................     10              410,682          2,481,839
Furniture and fixtures..................................      5              459,297            462,174
Automobiles.............................................      7                    -             53,000
                                                                       --------------   ---------------
                                                                           2,281,502         11,745,093
Less accumulated depreciation...........................                     438,790          1,100,255
                                                                       --------------   ---------------
Property, plant and equipment, net......................                $  1,842,712      $  10,644,838
                                                                       ==============   ===============

6.       ACCRUED LIABILITIES                                                    

Accrued liabilities at December 31 consisted of the following:

                                                        [Enlarge/Download Table]

                                                              1998              1999  
                                                              ----              ----  
                                                                                      
Accrued payroll.........................................   $  660,888      $ 2,318,771
Accrued warranty expense................................       70,000          383,356
Sales return reserve....................................      600,704          786,921
Accrued advertising.....................................      275,298          137,742
Accrued other...........................................      244,363          424,750
                                                         -------------  --------------
   Total................................................  $ 1,851,253      $ 4,051,540
                                                         =============  ==============


7.       COMMITMENTS AND CONTINGENCIES                                          

LINES OF CREDIT                                               

   During 1999, the Company obtained a line of credit for $5 million
with a bank. The line is secured by the Company's general assets, and           
interest is payable on outstanding borrowings under the line at the bank's      
prime rate (8.5% at December 31, 1999). There were no outstanding borrowings    
on the line of credit at December 31, 1999.                                     

OPERATING LEASES                                              

   The Company leases its Vancouver, Washington office and warehouse
facilities under an operating lease which expires April 30, 2002. The lease     
commitment is subject to an annual rent adjustment based upon changes in the    
consumer price index, limited to a 6.0% annual change. The agreement provides   
for an annual cancellation provision by the Company upon proper notification.   
Under a separate agreement in 1997, which was amended in 1998, the Company      
leased additional warehouse facilities. This operating lease expires May 21,    
2000.                                                                           

   In December 1999, the Company leased a distribution center in Las
Vegas, Nevada to service the Southwestern part of the United States. This       
operating lease expires November 30, 2002.                                      

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       Nautilus HPS, Inc. leases trucks and trailers and other equipment used in
the Nautilus commercial business. These leases expire over various terms through
December 2002.                                                                  

       Rent expense under all leases was $107,361 in 1997, $239,197 in 1998,
and $664,922 in 1999.                                                           

OBLIGATIONS                                                   

     Future minimum lease payments under the operating leases during the
years ending December 31 are as follows:                                        

                                                                [Download Table]

                                                             
2000..........................................    $  609,677 
2001..........................................       427,906 
2002..........................................       245,973 
                                                  -----------
Total minimum lease payments..................    $1,283,556 
                                                  ===========


8.       STOCK OPTIONS                                                          

 The Company's stock-based compensation plan was adopted in June
1995. The Company can issue both nonqualified stock options to the Company's    
officers and directors and qualified options to the Company's employees. The    
plan was amended in June 1998 so the Company may grant options up to            
1,857,961 shares of common stock. At December 31, 1999, 561,215 shares are      
available for future issuance under the plan. The plan is administered by the   
Company's Board of Directors which determines the terms and conditions of the   
various grants awarded under these plans. Stock options granted generally       
have an exercise price equal to the closing market price of the Company's       
stock on the date of the grant, and vesting periods vary by option granted,     
generally no longer than four years.                                            

  In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," which encouraged       
(but did not require) that stock-based compensation cost be recognized and      
measured by the fair value of the equity instrument awarded. The Company did    
not change its method of accounting for its stock-based compensation plans      
and will continue to apply Accounting Principles Board Opinion No. 25,          
"ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS ISSUED TO EMPLOYEES," and        
related interpretations in accounting for these plans. Accordingly, no          
compensation cost has been recognized for these plans in the financial          
statements. If compensation cost on stock options granted in 1997, 1998 and     
1999 under these plans had been determined based on the fair value of the       
options consistent with that described in SFAS No. 123, the Company's net       
income and earnings per share would have been reduced to the pro forma          
amounts indicated below for the years ended December 31, 1997, 1998 and 1999.   

                                                        [Enlarge/Download Table]

                                                        1997         1998         1999    
                                                     ----------  ------------  -----------
                                                                                          
Net income, as reported............................. $2,421,166  $12,485,494   $20,342,891
Net income, pro forma...............................  2,334,082   12,274,208    19,958,204

Diluted earnings per share, as reported.............   $   0.25     $   1.28     $    1.95
Diluted earnings per share, pro forma...............   $   0.25     $   1.26     $    1.91


The pro forma amounts may not be indicative of the effects on 
reported net income for future years due to the effect of options vesting       
over a period of years and the granting of stock compensation awards in         
future years.                                                                   

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  The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following           
weighted-average assumptions used for grants in 1997, 1998 and 1999,            
respectively; all options granted will vest as scheduled; no dividend yield     
for all three years; risk-free interest rate of 5.5%, 5% and 6.4%; expected     
volatility of 93%, 76% and 60%; and expected lives of five years for all        
three years.                                                                    

   A summary of the status of the Company's stock option plans as of
December 31, 1997, 1998 and 1999, and changes during the years ended on those   
dates is presented below.                                                       

                                                        [Enlarge/Download Table]

                                              1997                          1998                           1999           
                                    --------------------------  ----------------------------  ----------------------------
                                                     Weighted                    Weighted                       Weighted  
                                                     Average                     Average                        Average   
                                                     Exercise                    Exercise                       Exercise  
                                       Shares         Price        Shares          Price         Shares           Price   
                                      --------      ---------     -------         -------       --------       -----------

                                                                                                                          
Outstanding at beginning of year....   646,500         $0.18       813,113         $0.47         550,618         $2.39    
Granted.............................   386,500          0.96       188,000          5.70         169,680         20.21    
Forfeited or cancelled..............   (90,000)         0.98        (7,300)         0.96         (21,334)        10.71    
Exercised...........................  (129,887)         0.12      (443,195)         0.30        (231,825)         1.30    
                                      ------------ -----------  ------------- --------------  -------------- -------------
Outstanding at end of year..........   813,113         $0.47       550,618         $2.39         467,139         $9.03    
                                      ============ ===========  ============= ==============  ============== =============

Options exercisable at end of          504,779                     309,199                       214,502                  
year................................  ============              =============                 ==============              


The following table summarizes information about stock options
outstanding as of December 31, 1999:                                            

                                                        [Enlarge/Download Table]


                         Options Outstanding                                                       Options Exercisable     
                         -------------------                                                       -------------------     

                                                                   Average         Weighted       Number         Weighted  
                                                                  Remaining        Average          of           Average   
                                                  Number         Contractual      Exercise        Shares         Exercise  
          RANGE OF EXERCISE PRICES              Outstanding      Life (Years)       Price       Exercisable        Price   
          ------------------------              -----------      ------------       -----       -----------        -----   
                                                                                                                           
               $0.12 - $0.98                      159,451            2.3           $0.90          138,951          $0.89   
               $4.62 - $9.75                      143,008            3.2            5.23           65,671           4.65   
              $18.50 - $20.69                     164,680            4.6           20.20            9,880          19.84   
--------------------------------------------  -----------------  ------------- --------------  -------------- -------------
               $0.12 - $20.69                     467,139            3.4           $9.03          214,502          $3.39   
                                              =================  ============= ==============  ============== =============


9.       INCOME TAXES                                                           

          The Company realizes income tax benefits as a result of the exercise
of non-qualified stock options and the exercise and subsequent sale of certain  
incentive stock options (disqualifying dispositions). For financial statement   
purposes, any reduction in income tax obligations as a result of these tax      
benefits is credited to common stock.                                           

         The provision for (benefit from) income taxes consists of the following
for the three years ended December 31, 1999:                                    

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                                                        [Enlarge/Download Table]

                                                                          1997            1998            1999       
                                                                     ---------------- -------------- --------------- 
                                                                                                                     
Current:                                                                                                             
   Federal..........................................................  $ 1,085,409      $ 6,608,100    $11,634,863    
   State............................................................       -                -             345,010    
                                                                     ---------------- --------------  ---------------
        Total Current...............................................    1,085,409        6,608,100     11,979,873    
                                                                     ---------------- -------------- --------------- 
Deferred:                                                                                                            
   Federal..........................................................      140,659           99,484       (484,448)   
   State............................................................        -                -              -        
                                                                     -------------- ---------------  --------------- 
        Total Deferred..............................................      140,659           99,484       (484,448)   
                                                                     ---------------- -------------- --------------- 

 Total Provision....................................................   $1,226,068    $   6,707,584    $11,495,425    
                                                                     ================ ============== =============== 

             The components of the net deferred tax asset/liability at
December 31, 1998 and 1999 are as follows:                                      

                                                        [Enlarge/Download Table]


                                                                                     1998             1999       
                                                                                ---------------- ----------------
                                                                                                                 
Current:                                                                                                         
   Assets:                                                                                                       
          Accrued vacation.....................................................    $  12,468        $ 124,933    
          Allowance for doubtful accounts......................................       14,000          106,633    
          Inventory reserve....................................................       17,500          107,083    
          Uniform capitalization...............................................       20,114           43,750    
          Accrued reserves.....................................................      195,216          442,847    
          Customer deposits....................................................       52,128          384,034    
          Other................................................................            -          202,205    

   Liabilities:                                                                                                  
      Prepaid advertising......................................................     (82,984)        (440,476)    
      Other prepaids...........................................................     (12,705)        (150,220)    
                                                                                ---------------- ----------------
   Net current deferred tax asset..............................................    $ 215,737       $  820,789    
                                                                                ================ ================

Non Current                                                                                                      
   Liabilities:                                                                                                  
      Other....................................................................   $       -       $  (39,908)    
      Depreciation.............................................................     (66,880)        (147,576)    
                                                                                ---------------- ----------------
   Net long-term deferred tax liability........................................   $ (66,880)      $ (187,484)    
                                                                                ================ ================

      A reconciliation of the statutory income tax rate with the company's
effective income tax rate is as follows:                                        

                                                        [Enlarge/Download Table]

                                                                               1998           1999      
                                                                          --------------- --------------
                                                                                                        
Federal..................................................................      35.00%       35.00%      
State....................................................................       -            1.08%      
Other....................................................................       (.05%)       0.03%      
                                                                          --------------- --------------
   Total.................................................................      34.95%       36.11%      
                                                                          =============== ==============

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10.      EARNINGS PER SHARE                                                     

         The per share amounts are based on the weighted average number of basic
and dilutive common equivalent shares assumed to be outstanding during the      
period of computation. Net income for the calculation of both basic and diluted 
earnings per share is the same for all periods.                                 

       The calculation of weighted average outstanding shares is as follows:

                                                        [Enlarge/Download Table]

                                                                                Average Shares                       
                                                               ------------------------------------------------------

                                                                     1997              1998               1999       
                                                               ----------------- ------------------ -----------------
                                                                                                                     
Basic shares outstanding......................................     8,986,655          9,336,525          10,165,617  
Common stock equivalents......................................       524,213            389,433             259,591  
                                                               ----------------- ------------------ -----------------
Diluted shares outstanding....................................     9,510,868          9,725,958          10,425,208  
                                                               ================= ================== =================


11.      STOCK REPURCHASE PROGRAM                                               

In the third quarter, the Board of Directors authorized the   
expenditures of up to $8 million to purchase shares of Direct Focus, Inc. common
stock in open market transactions until December 31, 1999. During the third     
quarter, the Company bought back $3.7 million, or 211,200 common shares in the  
open market.                                                                    

12.      RELATED-PARTY TRANSACTIONS                                             

The Company incurred royalty expense under an agreement with a
stockholder of the Company of $530,805 in 1997, $1,603,821 in 1998, and         
$2,815,116 in 1999, of which $548,211 and $893,563 was payable at December 31,  
1998 and 1999, respectively.                                                    

       The Company incurred investment consulting expense under an agreement
with a director of the Company of $30,000 in 1997, all of which was paid in     
1997. This agreement expired in 1997.                                           

13.      LITIGATION SETTLEMENT                                                  

         On July 17, 1999, the Company reached an agreement with a competitor to
settle pending litigation. As a result of the settlement, the Company took a    
one-time, after-tax charge of $2.6 million in the second quarter. The Company   
made an $8 million cash payment to the competitor, of which $4 million was paid 
by insurance.                                                                   

        The Company made no admission of guilt in the settlement and continues
to believe that the competitor's claims were without merit. However, when the   
court denied the Company's motions to have the case dismissed before trial, the 
Company was faced with a lengthy jury trial and the possibility of a large jury 
verdict, including multiple damages as allowed under federal law. Under those   
circumstances, the Company determined that it was in the best interest of its   
shareholders to settle the case on terms that will have no negative long-term   
impact on the Company.                                                          

       This settlement does not affect the ongoing direct marketing campaign
for the Company's Bowflex home fitness equipment Additionally, in the normal    
course of business, the Company is a party to various other legal claims,       
actions and complaints. Although it is not possible to predict with certainty   
whether the Company will ultimately be successful in any of these legal matters,
or what the impact might be, the                                                

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Company believes that disposition of these matters will not have a material     
adverse effect on the Company's financial position, results of operations or    
cash flows.                                                                     

14.      OPERATING SEGMENTS                                                     

      The Company's operating segments include its direct products segment
which includes all products marketed directly to consumers through a variety    
of direct marketing channels. The Bowflex line of fitness equipment and the     
Nautilus Sleep Systems are the principal products in the Company's direct       
products segment. The other operating segment is the Nautilus products line     
which includes products and operations that are not directly marketed to        
consumers. Products in the segment include Nautilus commercial fitness          
equipment and Nautilus fitness accessories. Accounting policies used by the     
segments are the same as those disclosed in Note 1.                             

  The following table presents information about the Company's two
operating segments (in thousands):                                              

                                                        [Enlarge/Download Table]


                                                Direct Products     Nautilus Products         Total       
                                               ------------------- --------------------- -----------------
                                                                                                          
YEAR ENDED DECEMBER 31, 1999                                                                              
   Revenues from external customers                  $101,927            $ 19,091              $121,018   
   Interest income                                      1,002                   2                 1,004   
   Depreciation and amortization expense                  565                 618                 1,183   
   Income tax expense                                  11,084                 411                11,495   
   Segment net income                                  19,715                 628                20,343   
   Segment assets                                      47,753              19,557                67,310   
   Additions to property, plant and equipment           1,379                 550                 1,929   

YEAR ENDED DECEMBER 31, 1998                                                                              
   Revenues from external customers                 $  57,297                   -              $ 57,297   
   Interest income                                        527                   -                   527   
   Depreciation and amortization expense                  302                   -                   302   
   Income tax expense                                   6,708                   -                 6,708   
   Segment net income                                  12,485                                    12,485   
   Segment assets                                      24,373                   -                24,373   
   Additions to property, plant and equipment           1,739                   -                 1,739   

YEAR ENDED DECEMBER 31, 1997                                                                              
   Revenues from external customers                 $  19,886                   -              $ 19,886   
   Interest income                                        119                   -                   119   
   Depreciation and amortization expense                   96                   -                    96   
   Income tax expense                                   1,226                   -                 1,226   
   Segment net income                                   2,421                                     2,421   
   Segment assets                                       7,922                   -                 7,922   
   Additions to property, plant and equipment             279                   -                   279   


15.      EMPLOYEE BENEFIT PLAN                                                  

       The Company adopted a 401(k) profit sharing Plan in 1999 covering all
employees over the age of 18, who also have three months of service. Each       
participant in the 401(k) Plan may contribute up to 15% of eligible compensation
during any calendar year, subject to certain limitations. The 401(k) Plan       
provides for Company matching contributions of up to 50% for eligible           
contributions for participants who have one year of service. In addition, the   
Company may make discretionary contributions. Employees are 100% vested in      

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the matching and discretionary contributions after four years of service.       
Expense for the Plan was $103,793 for the year ended December 31, 1999.         

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                                                        [Enlarge/Download Table]


                                                    DIRECT FOCUS, INC.                                                      
                                                       Schedule II                                                          
                                            Valuation and Qualifying Accounts                                               
                                           Three years ended December 31, 1999                                              
                                                      (in thousands)                                                        
--------------------------------------------------------------------------------------------------------------------------- 

                                                     Balance at          Charged to                          Balance at     
                                                     Beginning           Costs and                            End of        
                Description                          of Period           Expenses          Deductions         Period        
--------------------------------------------     ------------------   ----------------   -------------- --------------------
                                                                                                                            
 Allowance for doubtful accounts:                                                                                           
 1997.......................................           12,000               73,000                  -           85,000      
 1998.......................................           85,000                    -             45,000           40,000      
 1999.......................................           40,000              264,727                  -          304,727      

 Sales returns and allowances:                                                                                              
 1997.......................................           37,000              248,000                  -          285,000      
 1998.......................................          285,000              315,704                  -          600,704      
 1999.......................................          600,704              186,217                  -          786,921      

 Warranty reserves                                                                                                          
 1997.......................................           10,000               10,000                  -           20,000      
 1998.......................................           20,000               50,000                  -           70,000      
 1999.......................................           70,000              313,356                  -          383,356      


      All other financial statement schedules have been omitted since they
are not required, not applicable, or the information is included in the         
consolidated financial statements or notes thereto.                             

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING   
AND FINANCIAL DISCLOSURE                    

None.                                                                           

                                  PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT            

      The Information required by this item is included under the captions
"ELECTION OF DIRECTORS," "EXECUTIVE OFFICERS" and "SECTION 16(a) BENEFICIAL     
OWNERSHIP REPORTING COMPLIANCE," respectively, in the Company's Proxy Statement 
for its 2000 Annual Meeting of Shareholders and is incorporated herein by       
reference.                                                                      

ITEM 11. EXECUTIVE COMPENSATION                                                 

     The information required by this item is included under the caption
"EXECUTIVE COMPENSATION" in the Company's Proxy Statement for its 2000 Annual   
Meeting of Shareholders and is incorporated herein by reference.                

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT         

     The information required by this item is included under the caption
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the         
Company's Proxy Statement for its 2000 Annual Meeting of Shareholders and is    
incorporated herein by reference.                                               

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                         

               The information required by this item is included under the
caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's Proxy 
Statement for its 2000 Annual Meeting of shareholders and is incorporated herein
by reference.                                                                   

                                 PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K        

(a)(1)   FINANCIAL STATEMENTS                                                   

See the Consolidated Financial Statements in Item 8.          

(a)(2)   FINANCIAL STATEMENT SCHEDULE                                           

See Schedule II - Valuation and Qualifying Accounts in Item 8.

(a)(3)   EXHIBITS                                                               

        The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:                                                   

                                                                [Download Table]


Exhibit No.                                                                     
-----------                                                                     
                                                                                
   3.1         Articles of Incorporation, as Amended - Incorporated by reference
               to Exhibits 3.1, 3.2 and 3.3 of the Company's Registration       
               Statement on Form S-1, as filed with the Securities and Exchange 
               Commission (the "Commission") on March 3, 1999.                  

   3.2         Amended and Restated Bylaws - Incorporated by reference to       
               Exhibit 3.4 of Amendment No. 2 to the Company's Registration     
               Statement on Form S-1, as filed with the Commission on April 30, 
               1999.                                                            

   10.1        Direct Focus, Inc. Stock Option Plan, as amended - Incorporated  
               by reference to Exhibit 10.1 to the Company's Registration       
               Statement on Form S-1, as filed with the Commission on March 3,  
               1999.                                                            

   10.2        Lease Agreement dated September 16, 1992, between Bow-Flex of    
               America, Inc. and Christensen Group, Inc. - Incorporated by      
               reference to Exhibit 10.2 of the Company's Registration Statement
               on Form S-1, as filed with the Commission on March 3, 1999.      

   10.3        First Amendment to Lease dated September 16, 1992, between       
               Bow-Flex of America, Inc. and Christensen Group, Inc. -          
               Incorporated by reference to Exhibit 10.3 of the Company's       
               Registration Statement on Form S-1, as filed with the Commission 
               on March 3, 1999.                                                

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   10.4        Amendment to Bowflex, Inc. Lease Extension, dated August 27,     
               1996, between Bowflex, Inc. and Ogden Business Park Partnership -
               Incorporated by reference to Exhibit 10.4 of the Company's       
               Registration Statement on Form S-1, as filed with the Commission 
               on March 3, 1999.                                                

   10.5        First Amendment to Lease, dated December 10, 1996, between       
               Bowflex, Inc. and Ogden Business Park Partnership - Incorporated 
               by reference to Exhibit 10.5 of the Company's Registration       
               Statement on Form S-1, as filed with the Commission on March 3,  
               1999.                                                            

   10.6        Lease Agreement, dated June 4, 1998, between Direct Focus, Inc.  
               and Hart Enterprises - Incorporated by reference to Exhibit 10.6 
               of the Company's Registration Statement on Form S-1, as filed    
               with the Commission on March 3, 1999.                            

   10.7        Amendment to Lease, dated as of October 20, 1998, between Direct 
               Focus, Inc. and LeRoy Hart Rentals. Incorporated by reference to 
               Exhibit 10.6 of the Company's Registration Statement on Form S-1,
               as filed with the Commission on March 3, 1999.                   

   10.8        Borrowing Agreement, dated December 16, 1998, between Direct     
               Focus, Inc. and Seafirst Bank - Incorporated by reference to     
               Exhibit 10.8 of the Company's Registration Statement on Form S-1,
               as filed with the Commission on March 3, 1999.                   

   10.9        Royalty Agreement, dated as of April 9, 1988, between Bow-Flex of
               America, Inc. and Tessema D. Shifferaw - Incorporated by         
               reference to Exhibit 10.9 of the Company's Registration Statement
               on Form S-1, as filed with the Commission on March 3, 1999.      

   10.10       Royalty Payment Agreement, dated as of June 18, 1992, between    
               Tessema D. Shifferaw, Brian R. Cook and R.E. "Sandy" Wheeler -   
               Incorporated by reference to Exhibit 10.10 of the Company's      
               Registration Statement on Form S-1, as filed with the Commission 
               on March 3, 1999.                                                

   10.11       First Amended and Restated Merchant Agreement dated as January   
               27, 1999, between Direct Focus, Inc. and Household Bank (SB),    
               N.A. - Incorporated by reference to Exhibit 10.11 of the         
               Company's Registration Statement on Form S-1, as filed with the  
               Commission on March 3, 1999.                                     

   10.12       Lease Agreement, dated July 19, 1999, between Direct Focus, Inc. 
               and Las Vegas Motor Speedway, LLC.                               

   21          Subsidiaries of Direct Focus, Inc. - Incorporated by reference to
               Exhibit 21 of the Company's Registration Statement on Form S-1,  
               as filed with the Commission on March 3, 1999.                   

   23          Consent of Deloitte & Touche LLP                                 

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   24.1        Power of Attorney for Kirkland C. Aly                            

   24.2        Power of Attorney for C. Reed Brown                              

   24.3        Power of Attorney for C. Rowland Hanson                          

   24.4        Power of Attorney for Paul F. Little                             

   24.5        Power of Attorney for Roger J. Sharp                             

   24.6        Power of Attorney for Roland E. "Sandy" Wheeler                  

   27          Financial Data Schedule                                          


(b)      REPORTS ON FORM 8-K                                                    

         No reports on Form 8-K were filed during the quarter ended December 31,
1999.                                                                           

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SIGNATURES                                                                      

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.                       

Date:  March 29, 2000                                DIRECT FOCUS, INC.         

                                                  By______________________
                                                  Brian R. Cook, President

      Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the     
Registrant and in the capacities indicated on March 29, 2000:                   

SIGNATURE                           TITLE                                       
----------                          ------                                      

--------------                      President (Principal Executive Officer)     
Brian R. Cook                                                                   

--------------                      Chief Financial Officer and Secretary       
Rod W. Rice                         (Principal Financial and Accounting Officer)

Kirkland C. Aly*                    Director                                    
----------------                                                                
Kirkland C. Aly                                                                 

C. Reed Brown*                      Director                                    
-----------------                                                               
C.  Reed Brown                                                                  

C. Rowland Hanson*                  Director                                    
------------------                                                              
C. Rowland Hanson                                                               

Paul F. Little*                     Director                                    
-------------------                                                             
Paul F. Little                                                                  

Roger J. Sharp*                     Director                                    
-------------------                                                             
Roger J. Sharp                                                                  

Roland E. "Sandy" Wheeler*          Director                                    
-------------------------                                                       
Roland E. "Sandy" Wheeler                                                       

*By: ________________________       March 29, 2000                              
Rod W. Rice                                                 
ATTORNEY-IN-FACT                                            

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SIGNATURES                                                                      

Pursuant to the requirements of Section 13 or 15(d) of the    
Securities Exchange Act of 1934, the Registrant has duly caused this report     
to be signed on its behalf by the undersigned, thereunto duly authorized.       

Date:  March 29, 2000                   DIRECT FOCUS, INC.                      

                                    By: ______________________________
                                    Brian R. Cook, President

SIGNATURE                                TITLE                                  
----------                               -------                                

/s/ BRIAN R. COOK                        President (Principal Executive Officer)
-----------------                                                               
Brian R. Cook                                                                   

/s/ ROD W. RICE                           Chief Financial Officer and Secretary 
------------------                        (Principal Financial and Accounting   
Rod W. Rice                                Officer)                             

/s/ KIRKLAND C. ALY                        Director                             
-------------------                                                             
Kirkland C.  Aly                                                                

/s/ C. REED BROWN                          Director                             
-------------------                                                             
C. Reed Brown                                                                   

/s/ C. ROWLAND HANSON                      Director                             
--------------------                                                            
C. Rowland Hanson                                                               

/s/ PAUL F. LITTLE                         Director                             
------------------                                                              
Paul F. Little                                                                  

/s/ ROGER J. SHARP                         Director                             
-------------------                                                             
Roger J.  Sharp                                                                 

/s/ ROLAND E. "SANDY" WHEELER              Director                             
----------------------------                                                    
Roland E. "Sandy" Wheeler                                                       

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K405 Filing		Date		First		Last			Other Filings
		6/18/92		45
		9/16/92		44
		8/27/96		45
		12/10/96		45
		12/31/97		22		41
		1/1/98		34		35
		6/4/98		45
		10/20/98		45
		12/16/98		45
		12/31/98		19		41
		1/4/99		34
		1/27/99		45
		3/3/99		44		45			S-1
		4/30/99		44					S-1/A
		5/4/99		16					S-1/A
		5/5/99		24		34
		6/10/99		24		34
		7/17/99		40
		7/19/99		45					8-K
		12/1/99		16
		12/30/99		25
For The Period Ended		12/31/99		1		46			11-K
		2/21/00		27
		2/29/00		1		17
		3/22/00		16
Filed On / Filed As Of		3/29/00		47		48
		5/21/00		36
		5/30/00		15
		6/15/00		26		34
		4/30/02		15		36
		11/30/02		16		36
		4/27/04		15
		2/16/05		15
		4/14/07		15
		1/4/10		15
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