Sherborne Investors Mails Letter to Nautilus, Inc. Shareholders

Business Wire, Dec 10, 2007

Company's Largest Shareholder Encourages Investors to Elect All of Sherborne Investors' Director Nominees at the Upcoming Special Shareholders Meeting

NEW YORK -- Sherborne Investors LP mailed a letter to Nautilus, Inc. (NYSE: NLS) shareholders today, encouraging them to hold the Company's Board of Directors accountable for its recent actions and the Company's multi-year stock price decline. Sherborne Investors encouraged shareholders to vote "FOR ALL" of its nominees at Nautilus' upcoming special shareholder meeting on December 18.

The text of the letter follows below:

December 7, 2007

Dear Fellow Shareholder:

Nautilus' special shareholder meeting will be held in just over one week's time. As you consider your position in this important matter, we wanted to take the opportunity to address several key points raised by the Company's Board in their most recent letter. The current Board's propensity to omit key facts and distort Sherborne Investors' record is telling. Particularly troubling is the mischaracterization of an incentive compensation arrangement that was offered in lieu of stock options to one of our principals, who was serving as CEO of Ampex Corporation, one of our previous investments.

Nautilus goes on to point out in its letter that we declined the Company's offer to appoint two Sherborne Investors representatives to its Board of Directors. However, the letter fails to fully explain that, had we accepted the offer, we would have been locked into an ineffective position with only two directors out of 10 and would have been subject to an onerous Company-drafted "standstill" agreement, which could have effectively precluded us from taking any matters directly to shareholders and from voting our shares in what we believe to be the best way. In fact, the agreement could have tied our hands for up to 15 months with related notice periods, ensuring that the Board was free to continue to make decisions that we believe are not in the best interests of all shareholders. We have presented a very clear path to returning Nautilus to profitability and sustained growth, and the offer presented by the Company could have severely restricted our ability to deliver on that plan.

A greater concern to us than the exact form of Board representation is the need for increased operational oversight. We feel strongly that there should be a division of responsibility between the chairman and CEO. This would ensure closer operational supervision, which we believe could only benefit the Company. Unfortunately, the CEO has declined to accept such an arrangement and his employment contract, approved recently by the current Board, specifically provides that if the roles of chairman and CEO are separated, he is entitled to severance of $1.15 million and immediate vesting of 400,000 options. For this reason, we believe this employment contract is onerous to shareholders.

In the past two years, when most members of the current Board were in office, including the current CEO, Nautilus shares declined by 62%. Since the appointment of the current CEO only four months ago, the shares have declined by 24%. The recent public unveiling of the Company's strategy has not caused the shares to recover and, in our opinion, the reaction to it is likely to continue to be disappointing. One must question the decision of the Board to hire a CEO who was a director over the past four years while the share price has dramatically declined. We feel the Company would have been better served by a search process that yielded outside candidates with more appropriate experience and the ability to provide a fresh look at Nautilus' operations.

Sherborne Investors, on the other hand, has made money for shareholders in every investment it has made in the past five years except, up to this point, Nautilus. We are confident, and have demonstrated this confidence with a 25% shareholding, that our approach and experience will make a significant, positive difference to the value of your shares and ours and that the improvements will be seen relatively quickly. The Board's approach, which is largely to continue as before, offers the prospect of mediocre returns, even if it ultimately succeeds. Meanwhile, the Company is expected to record, on a recurring basis, a $35 million loss in 2007. The Board's approach will take a number of years to prove itself and the Company may not have the financial resources to wait that long. We feel strongly that more immediate action is required.

Nautilus' current Board has not represented its shareholders well and should be held accountable. Importantly, two leading proxy governance firms recently recognized the need for change on the Nautilus Board. Both Institutional Shareholder Services and Glass Lewis LLC have recommended shareholders elect two of Sherborne Investors' nominees to the Board, which would provide incremental additional governance and management oversight. As Glass Lewis noted in its analysis of the actions recently taken by the Company: "It appears that most of the Company's actions were taken only after [Sherborne Investors] threatened a proxy contest and following many months of disappointing results. This gives us little faith that the Board has been proactively seeking to remedy the Company's poor performance." This further underscores the need for a serious change in approach at the Board level. We believe that to take a truly fresh perspective on Nautilus' strategy and restore financial stability and profitable growth in the near-term, you should vote "FOR" all four of our nominees on the GREEN proxy card.