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2002

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

or

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File No. 000-24657

MANNATECH, INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

Registrant’s Telephone Number, including Area Code: (972) 471-7400

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $0.0001 per share

Title of each class

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 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. ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes ¨ No x

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2002 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $33,127,700. The number of shares of the Registrant’s common stock outstanding as of March 20, 2003 was 25,134,840.

Documents Incorporated by Reference

Mannatech incorporates information required by Part III (Items 10, 11, 12, and 13) of this report by reference to its definitive proxy statement for the Registrant’s 2003 annual shareholders’ meeting to be filed pursuant to Regulation 14A on or before April 30, 2003.

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Special Note Regarding Forward-Looking Statements

Certain disclosure and analysis in this report, including information incorporated by reference, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995 that are subject to various risks and uncertainties. Opinions, forecasts, projections, guidance or other statements other than statements of historical fact are considered forward-looking statements and reflect the current views about the future events and financial performance of Mannatech, Incorporated, also referred to herein as Mannatech or the Company. These forward-looking statements are subject to certain events, risks, and uncertainties that may be outside Mannatech’s control. Some of these forward-looking statements include statements regarding:

Actual results and developments could materially differ from those expressed in or implied by such statements due to a number of factors, including:

Forward-looking statements may be identified by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “approximates,” “predicts,” “projects,” “potential,” and “continues” or the negative of such terms and other comparable terminology. Readers are cautioned when considering these forward-looking statements to keep in mind these risks and uncertainties and any other cautionary statements in this report, as all of the forward-looking statements contained herein speak only as of the date of this report.

Unless stated otherwise, all financial information throughout this report and in the Consolidated Financial Statements and related Notes include Mannatech, Incorporated and all of its subsidiaries on a consolidated basis and may be referred to herein as “Mannatech,” “the Company,” “its,” “we,” “our,” or “their.” Mannatech’s products are not intended to diagnose, cure, treat, or prevent any disease. Statements about Mannatech’s products contained in this report have not been evaluated by the Food and Drug Administration, also referred to herein as the FDA.

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PART I

Item 1. Business

General

Mannatech has operated for almost a decade developing innovative, high-quality, proprietary nutritional supplements, topical products, and weight-management products that are sold through a global network-marketing system throughout the United States, Canada, Australia, the United Kingdom, Japan, and New Zealand. The New Zealand operation began in June 2002 and is serviced by Mannatech’s Australian operation. Currently, Mannatech operates as a single segment and primarily sells its products through a network of approximately 200,000 independent associates and members who have purchased Mannatech’s products within the last 12 months.

Mannatech believes that specific carbohydrates and antioxidants are essential to maintaining a healthy immune system and that food alone does not provide the amount of nutrients the body needs for optimal cell-to-cell communication or to combat the harmful free radicals found in today’s environment, including pollutants in the air, food, and water. Based on this philosophy, Mannatech formulates high-quality, primarily naturally-occurring, plant-derived, carbohydrate-based products that work through the body’s normal physiology rather than developing synthetic-based products that are easily duplicated and considered less effective. Mannatech bases its products on scientific advances in the emerging field of phytochemistry, where certain naturally-occurring components of various plants, known as “phytochemicals,” are believed to help support optimal health and wellness.

In late 1993, Mannatech first introduced products containing Manapol^®. Manapol^® is an ingredient that helps cell-to-cell communication and is included in Mannatech’s proprietary-blend of glyconutrients called Ambrotose^® Complex. Ambrotose^® Complex was introduced by Mannatech in 1996 to combine naturally-occurring monosaccharides and polysaccharides, which contain specific sugars essential to help support optimal cell-to-cell communication. Currently Ambrotose^® Complex is a key compound found in all but one of Mannatech’s 29 different products. In addition, in 2001, Mannatech developed Ambroglycin^™, which is a proprietary, balanced food-mineral matrix supplement that delivers certain vitamins, chelated minerals, trace minerals, antioxidant co-factors, and Ambrotose^® Complex to the body. Mannatech is committed to introducing new products that are designed to support overall health and wellness and may focus on specific systems and functions of the human body, including:

Mannatech believes its business and products are well-suited to network-marketing. Network-marketing is an effective communication channel that allows Mannatech to effectively educate consumers about the unique potential benefits of its products, as well as the science of its products. Additionally, Mannatech believes network-marketing allows it to introduce products into the marketplace more quickly and at a lower cost than other more conventional marketing methods. Furthermore, Mannatech believes network-marketing allows its independent associates to supplement their income or develop financial freedom by building their own businesses.

2002 proved to be a year of both challenges and accomplishments for Mannatech. Mannatech’s business accomplishments during the last 12 months included:

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Since its initial public offering in February 1999, Mannatech’s common stock has traded on the Nasdaq National Market under the symbol “MTEX.” Information for each of Mannatech’s most recent five fiscal years, with respect to the amounts of net sales, results of operations, and identifiable assets is set forth in Item 6 – Selected Financial Data of this report.

Mannatech’s principal executive offices are located at 600 S. Royal Lane, Suite 200, Coppell, Texas 75019 and its telephone number is (972) 471-7400. Mannatech’s corporate filings can be viewed on its corporate website at www.mannatech.com or obtained by contacting its investor relations department at (972) 471-6512 or IR@mannatech.com.

Industry Overview

According to the Nutrition Business Journal, the global nutrition industry was a $150 billion industry in 2001 and is projected to grow by approximately 6% annually through 2004 and 3.3% annually from 2005 through 2007. This projected growth equates to an annual growth rate of approximately $8.4 billion a year for the next five years. The Nutrition Business Journal defines the global nutrition industry as companies that sell vitamins, minerals, herbs and botanicals, sports performance products, organic food, personal care products, and functional foods. Mannatech expects the global nutrition industry to continue to grow as a result of the following:

Mannatech believes it can benefit from the projected growth in the global nutrition industry by the following:

Operating Strengths

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Mannatech focuses its product development on the fundamental discovery that the body needs eight monosaccharides to support cell-to-cell communication and help maintain optimal health and wellness. Mannatech’s products are predominately formulated with naturally-occurring, plant-derived, carbohydrate-based products that are designed to use nutrients working through normal physiology to help achieve and maintain optimal health and wellness rather than attempting to develop synthetic, carbohydrate-based products, as many other companies are doing.

In 1996, Mannatech introduced its proprietary blend of glyconutrients called Ambrotose^® Complex, which Mannatech believes distinguishes Mannatech as a leader in the nutritional supplements industry. Mannatech believes no other combination of vitamins, minerals, amino acids, or herbals can replace the saccharides found in Ambrotose^® Complex. As a result, Mannatech has filed several patents in the United States and abroad for this compound. Mannatech believes that using this compound in its high-quality, proprietary products is important to differentiate and distinguish its products from its competitors’ products.

Mannatech’s existing products must also pass its comprehensive quality assurance program to maintain such high-quality products. Mannatech continually seeks to identify clinical studies to further validate its products. Mannatech believes it offers a variety of resources detailing its product research and quality assurance program including a scientific Internet database, called GlycoScience.com, and a corporate website, which describe its research and its products.

Mannatech believes that its research and development team of experienced personnel, as well as its facilities and strategic alliances with its suppliers, consultants, and manufacturers allow it to effectively identify, develop, and market high-quality, innovative, proprietary products that will increase its competitive advantage in the marketplace. Mannatech incurred expenses of $4.8 million, $3.4 million, and $3.4 million, in 2000, 2001, and 2002, respectively, related to its various research and development efforts. Historically, Mannatech has budgeted between 2% and 3% of its annual net sales for its various research and development efforts. In 2003, Mannatech projects it will spend between $3.5 million and $4.0 million for its research and development efforts. These research and development efforts are led by a research team comprised of several scientists with significant years of experience including designing products based on carbohydrate-based technology. Certain research and development efforts are conducted in Mannatech’s laboratory, which is equipped with the capability of performing gas and liquid chromatography and mass spectrometers that are used to:

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Mannatech’s comprehensive quality assurance program is based on the Good Manufacturing Practices for foods and the recently proposed requirements for the Good Manufacturing Practices for dietary supplements. Mannatech’s team of experts helps ensure that its formulations are consistently made with high quality ingredients and follow Mannatech’s guidelines. Mannatech further requires that its formulations meet rigorous specifications for microbiological, chemical, and physical analysis. The strict manufacturing standards, along with the purity of the ingredients in certain of Mannatech’s products, have resulted in certain of its products being certified as strict kosher.

To ensure strict controls over its products through all phases of production, packaging, and distribution, Mannatech contracts with suppliers and manufacturers that have equally high-quality assurance standards, meet stringent FDA requirements, and are certified by official accredited bodies such as the NSF International or the National Nutritional Foods Association. Mannatech routinely reviews its suppliers’ and manufacturers’ quality assurance programs to ensure that Mannatech’s required specifications, sampling plans, and test procedures are being followed. To ensure consumer satisfaction, Mannatech’s quality assurance team samples and tests each batch of products produced by its manufacturers. In addition, Mannatech performs stability studies under controlled and accelerated temperature storage conditions to ensure the accuracy of the expiration dates of its products. Mannatech’s dietary supplements are packaged with inner and outer seals to minimize possible tampering.

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Business Strategy

Mannatech’s goals for the future include the following:

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Net sales by country, as a percentage of consolidated net sales, are as follows:

Products and Product Development

Currently, Mannatech offers 21 different nutritional products, three topical products, and a weight-management system consisting of five different products. Mannatech also offers a full spectrum of sales aids to its associates. Sales aids include various enrollment and renewal packs, orientation and training programs, brochures, audio and videotapes, web-based data management tools, and personalized website development, all of which accounted for approximately 17.3%, 15.5%, and 21.0% of total net sales in 2000, 2001, and 2002, respectively.

Mannatech’s products are based on the assumption that certain carbohydrates and antioxidants provide the body with nutritional benefits. Healthy bodies consist of many sophisticated components working together, which need accurate internal communication to function at an optimal level. In its most basic form, this communication occurs at the cellular level and is referred to as cell-to-cell communication. To maintain a healthy body, cells must effectively “talk” to other cells. Scientists have learned that certain molecules found on the surface of all cells, called “glycoproteins,” play an essential role in all cell-to-cell communication. Glycoproteins are proteins that have one or more sugar molecules attached to them. The body’s need for carbohydrates is important because up to 85% of glycoproteins are composed of specific monosaccharides and polysaccharides. Mannatech believes that these carbohydrate-based monosaccharides and polysaccharides are necessary to support and maintain optimal health and wellness. In addition, Harper’s Biochemistry, a leading biochemistry reference source, lists eight different monosaccharides commonly found in human glycoproteins, which are believed to be key in helping healthy cell-to-cell communication in the human body. These eight monosaccharides include:

Mannatech’s fundamental proprietary compound, Ambrotose^® Complex, is formulated to provide the body with certain of these monosaccharides. Because of the uniqueness of the compound, Mannatech has applied for patents around the globe to protect its formulation and use of this proprietary compound.

In response to recent public concerns related to products containing the ingredient ephedra, Mannatech discontinued selling two of its products that contained small amounts of ephedra—MVP and GlycoLEAN^® BODY SYSTEM ACCELERATOR^™. In January 2002, Mannatech identified a high-quality ephedra-free substitute ingredient and reformulated its GlycoLEAN^® BODY SYSTEM ACCELERATOR^™ product to include the ephedra-free formula, and renamed it GlycoLEAN^® BODY SYSTEM ACCELERATOR2^™. Mannatech is currently searching for the most effective ephedra-free substitute for its MVP product, which was completely discontinued in July 2002. Mannatech has never had any significant complaints or allegations resulting from the consumption of its products that contained ephedra. However, Mannatech cannot make any assurances or guarantees regarding any future risk, but it believes the risk of any liability would be minimal.

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Mannatech has separated its products into seven specific areas all of which target achieving and maintaining optimal health and wellness. These areas are as follows:

Mannatech plans to explore additional products that focus on skin care and other nutritional products. Mannatech’s product committee primarily focuses on identifying and analyzing potential new products and compounds that target overall health and wellness. The product committee uses the following criteria when considering new products and compounds:

Mannatech’s products are manufactured by outside contractors in order to provide it with a flexible operating strategy and unlimited production capacity. This allows Mannatech to quickly respond to significant fluctuations with minimal investment in capital equipment. Mannatech ensures that its suppliers and manufacturers are high quality and can meet Mannatech’s current and projected inventory requirements over the next several years. Mannatech also identifies alternative suppliers and manufacturers to ensure that it will be able to meet demand in a timely manner. Mannatech has a supply agreement with its supplier of Manapol^®, which requires Mannatech and its manufacturers to collectively buy a minimum monthly volume at an agreed-upon price through August 2003. Mannatech maintains a good working relationship with this supplier and expects to renew this supply agreement. Historically, Mannatech and its manufacturers have purchased up to 40% of the production of Manapol^® from this supplier.

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Mannatech’s main distribution operation is located in Coppell, Texas, and consists of 75,000 square feet of leased space in which it maintains an automated system capable of processing up to 18,000 orders per day. This system enhances productivity and is able to support planned sales volume growth. To maximize its operating strategy yet minimize costs, Mannatech contracts with third-party contract distribution facilities in Canada, Australia, the United Kingdom, and Japan. By entering into these contracted distribution facility agreements, Mannatech minimizes the cost of processing an order and is generally able to process an order within 24-hours after order placement and payment. For further information on these contract facilities, see Item 2 Properties of this report.

Competition

Other Nutritional Supplement Companies. The nutritional supplement industry is steadily increasing and is intensely competitive. Mannatech competes directly with companies that sell similar nutritional products including:

Network-Marketing. Nutritional supplements are offered for sale in a variety of ways. Mannatech believes that network-marketing is the best sales approach because of the following:

Population of Associates. Mannatech competes with other direct selling and network-marketing companies for new associates and for retention of existing associates. Some of these companies have longer operating histories, are better known, and/or have greater financial resources. These companies include:

The pool of individuals interested in network-marketing is limited and the availability of associates decreases when other network-marketing companies successfully recruit and retain people into their operations. Mannatech competes for associates by stressing the following:

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I ntellectual Property

Mannatech pursues registrations for its trademarks associated with its key products and protects its legal rights concerning its trademarks. Mannatech has approximately 22 trademark registrations in the United States and approximately eight trademark applications pending with the United States Patent and Trademark Office. Mannatech also has approximately 31 trademark applications pending in 17 foreign jurisdictions. The protection available in foreign jurisdictions may not be as extensive as the protection available to Mannatech in the United States. Furthermore, Mannatech must rely on common law trademark rights to protect its unregistered trademarks, even though such rights do not provide Mannatech with the same level of protection as afforded by a United States federal registration of a trademark. Common law trademark rights are limited to the geographic area in which the trademark is actually used, whereas the United States federal registration of a trademark enables Mannatech to discontinue the unauthorized use of the trademark by a third party anywhere in the United States, even if Mannatech has never used the trademark in such geographic area provided that the unauthorized third party user has not perfected its common law rights of the trademark in the specific geographic area prior to the registration date.

Mannatech has one patent application pending in the United States Patent and Trademark Office and has four issued patents and 18 patent applications submitted in various foreign jurisdictions in connection with Ambrotose^® Complex. Until a patent is approved and issued, Mannatech cannot protect itself from another company replicating one or more of its products.

Associate Distribution System

Overview. Mannatech’s sales philosophy is to distribute its products through a network-marketing operation. In Mannatech’s network-marketing operation, consumers, referred to as associates, purchase products for personal consumption and/or resale. Members and retail customers purchase Mannatech’s products for personal consumption but do not participate in Mannatech’s global associate career and compensation plan. All of Mannatech’s associates are independent contractors who are contractually bound to follow certain policies and procedures. Mannatech’s policies and procedures are designed to help ensure the legality of associates’ activities and require associates to comply with regulatory guidelines and act in a consistent, professional manner.

Mannatech’s net sales depend upon the retention and productivity of its associates, members and retail customers. Although Mannatech experienced a decline of the number of associates in 2000 and 2001, the number of associates increased in 2002. To help reverse the decline of associates in 2001, Mannatech introduced a travel incentive program and its new global associate career and compensation plan. Mannatech believes this plan motivates associates and helps expand Mannatech’s customer purchasing base. Mannatech believes that the enrollment of new associates and the retention of existing associates and members are necessary to achieve long-term growth. Mannatech remains actively committed to the development of its associates through recruitment, support, motivation, and compensation.

Mannatech does not have any significant accounts receivable from its associates because associates are required to pay for purchases prior to shipment. Associates, members, and customers generally pay for products by credit cards, although orders can also be paid with cash, direct account withdrawal, money orders, or checks. To gain operating efficiencies, Mannatech offers a 10% discount to associates and members who enroll in its automatic monthly order program. Automatic orders have continued to increase and accounted for approximately 65.0% of net sales in 2002 compared to 63.0% of net sales in 2001.

Associate Development. Network-marketing consists of enrolling associates to create multiple levels that purchase products directly from Mannatech and sponsor other associates in order to build a network of associates, members, and retail customers.

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Mannatech believes that providing a high level of support for its associates’ efforts is very important. Mannatech provides a large number of support services that can be tailored to each associates’ needs, including:

Mannatech and its existing associates train new associates. Mannatech has developed a global orientation/training program to assist in associate training. This orientation/training program integrates audio, video, and motion graphics that associates can customize into their own individual, unique marketing and training program. This training program helps provide systematic and uniform training related to Mannatech’s products and the related global regulatory requirements, global associate career and compensation plan, and various methods of conducting business. Mannatech also offers various brochures, magazines, and other promotional materials to associates to assist them in sales training and continuing education. Mannatech continually updates its training and promotional materials to include its new products and new branding images and to give associates the most current information.

Mannatech’s global associate career and compensation plan consists of ten different associate leadership achievement levels. The associate leadership levels from lowest to highest include:

An associate leadership level is based upon the associate pack purchased, the associates’ downline growth and the volume of direct and indirect commissionable net sales. Global commissionable net sales are calculated based on product and pack sales, which are assigned certain product point volume. Promotional materials are not assigned any point volume. Associates earn commissions for their organization’s direct and indirect global product sales, as well as the expansion of their networks, also referred to as their global seamless downline structure. The global seamless downline structure allows associates to build their global organization by expanding their existing downlines into all international markets rather than having to establish new downlines to qualify for higher levels of commissions within each new country. Mannatech believes it has formulated its global associate career and compensation plan to comply with governmental regulations that govern the various aspects of associate compensation in each country.

Mannatech’s global associate career and compensation plan combines the aspects of two widely used direct selling and network-marketing compensation plan concepts. The plan pays various types of commissions and incentives based upon a percentage of the associate’s commissionable direct and indirect net sales and the attainment of certain associate leadership levels. The essential elements of Mannatech’s plan are similar to other direct selling and network-marketing incentive plans. Mannatech believes its global associate career and compensation plan fairly compensates its associates at every stage of building their business, by rewarding an associate for both the breadth and depth of establishing a global seamless downline structure.

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Mannatech’s global associate career and compensation plan pays various commissions and incentives to qualified associates including:

Based upon its knowledge of industry-related network-marketing compensation plans, Mannatech believes that its global associate career and compensation plan is currently among the most financially rewarding plans offered in the industry. Mannatech’s commission as a percentage of net sales was 41.2%, 40.4%, and 42.1% for 2000, 2001, and 2002, respectively and is expected to continue to be in the same percentage range in the future.

Management of Associates. Mannatech takes an active role in managing its associates, which is complicated because its associates are independent contractors rather than employees. Mannatech attempts to ensure that its associates’ conduct complies with applicable laws and regulations governing the sale of its products and the promotion of its business opportunities by contractually binding associates to abide by Mannatech’s associate policies and procedures. Mannatech provides each associate with a copy of its policies and procedures together with any updates that must be followed in order to remain compliant with respect to Mannatech’s policies and procedures. Mannatech requires its associates to act in an ethical and consistent manner. Furthermore, Mannatech’s legal/compliance department monitors its associates’ websites for content on an on-going basis. In an effort to decrease the number of independent websites owned by associates and to preserve and protect its trademarks, Mannatech offers Mannapages^™, a standardized, personal, Internet website program created to help associates with their sales efforts, provide consistent information and assist in monitoring its associates’ websites.

Mannatech’s legal/compliance program is largely dependent on associate self-regulation. When a complaint is filed against an associate, the legal/compliance department conducts a thorough investigation of the allegations by obtaining a written response from the accused associate, as well as witness statements, if applicable. Depending on the nature of the investigation, Mannatech may suspend and/or terminate that associates’ rights and may impose various sanctions, including warnings, probation, and/or the withholding of commissions until the complaint is rectified. Mannatech’s legal/compliance department, in cooperation with other departments, and associates, periodically evaluates the conduct of its associates and the need for new and revised policies and procedures. Mannatech’s compliance program assists in maintaining associate ethics and helps associates in their sales efforts. Mannatech is proactive regarding associate complaints and non-compliance by offering continuing education to ensure that its associates understand and abide by Mannatech’s associate policies and procedures.

Product Return Policy. Mannatech believes it offers a reasonable product return policy. Mannatech’s retail sale return policy states that any retail customer may return the unused portion of any product to the original associate who sold them the product and receive a full cash refund from that associate. Mannatech subsequently reimburses the associate who provides such refund to a retail customer with replacement product after the associate provides Mannatech with the proper documentation and returns the remainder of the product or empty bottle to Mannatech.

Mannatech’s associate product return policy states that any associate requesting a refund for its purchase will receive a 90% refund of the paid wholesale cost for any returned, unopened, restockable products, and any up-to-date corporate literature that is in good, reusable condition. Mannatech believes that its return policy complies with the Direct Selling Association’s Code and is consistent with the return policies of other direct selling and network-marketing companies. Mannatech’s product returns as a percentage of gross sales were 0.8%, 0.6%, and 0.7% in 2000, 2001, and 2002, respectively.

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Information Technology Systems

Mannatech’s technologically advanced e-commerce systems include a transaction processing database, financial systems, and comprehensive management tools that are designed to:

To complement its transaction database, Mannatech developed a comprehensive management tool called Success Tracker^™ that is used by its associates to manage their business organization. With this tool, associates have constant access to reports on the status of their individual organization, which enables each associate to maximize earnings.

Mannatech also maintains a comprehensive service continuity plan to help minimize the risk of loss. Additionally, Mannatech employs a wide-range of information technology professionals who perform daily backup procedures, monitor various software and hardware systems, and perform routine maintenance procedures. Furthermore, Mannatech routinely upgrades its software and hardware to help ensure that its systems are working efficiently and effectively and to minimize the risk of business interruption.

Mannatech also maintains a comprehensive financial system that includes five sub-modules that directly interface with the general ledger module and report-writing system. This financial system is windows-based and capable of operating on several platforms, and enables Mannatech to track and analyze financial information and produce customized reports. Mannatech believes its current financial system is adequate for its reporting needs over the next 12 months. Nonetheless, in 2003 Mannatech intends to research a new financial system that would enhance its existing system and provide greater operating efficiencies.

Mannatech believes it must continue to enhance its e-commerce platforms to remain competitive and efficient. During 2003, Mannatech plans to spend approximately $7.8 million on its information technology systems. In addition, Mannatech plans to spend between $2.0 million and $2.5 million for targeted capital improvements. Such capital improvements include the following:

Government Regulations

Domestic Regulations. In the United States, governmental regulations, laws, administrative determinations, court decisions, and similar legal requirements at the federal, state, and local levels regulate companies and network-marketing activities. Such regulations address, among other things:

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The following governmental agencies regulate various aspects of Mannatech’s business and its products in the United States:

The FDA regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution, and sale of foods, dietary supplements, over-the-counter drugs, and pharmaceuticals. The FDA issued a final rule called “Statements Made for Dietary Supplements Concerning the Effect of the Product on the Structure or Function of the Body,” which includes regulations requiring companies, including Mannatech, and its suppliers and manufacturers, to meet Good Manufacturing Practices in the preparation, packaging, storage, and shipment of its products. The FDA has also published a Notice of Advanced Rule Making for Good Manufacturing Practices that requires manufacturing of dietary supplements to follow Good Manufacturing Practices. Mannatech believes it meets the necessary regulations of the FDA and that its suppliers and manufacturers are in compliance with applicable laws and regulations. In 2003, the FDA proposed additional regulations that would require additional information about a company’s product ingredients and require such information to be included on the company’s product labels.

Mannatech’s core sales philosophy is based on the Dietary Supplement Health and Education Act of 1994, referred to as the DSHEA Act. The DSHEA Act revised the provisions of the Federal Food, Drug and Cosmetic Act concerning the composition and labeling of dietary supplements and statutorily created a new class entitled “dietary supplements.” Dietary supplements include vitamins, minerals, herbs, amino acids, and other dietary substances used to supplement current diets. A majority of Mannatech’s products are considered to be dietary supplements as outlined in the Federal Food, Drug and Cosmetic Act. This act requires a company to provide evidence establishing that a dietary supplement is reasonably safe. Each manufacturer of dietary supplements may make a statement of nutritional support that includes a disclaimer statement. The statement of nutritional support describes certain types of product performance characteristics and evidence that a statement is truthful and not misleading. The disclaimer provides a statement that the product has not been evaluated by the FDA and is not intended to diagnose, treat, cure, or prevent any disease. A company must notify the FDA of this statement no later than thirty-days after the statement is first made.

The FDA has also issued regulations governing the labeling and marketing of dietary and nutritional supplement products. The regulations include:

Mannatech’s substantiation program involves the compilation and review of scientific literature pertinent to the ingredients contained in each of its products. Mannatech continuously updates its substantiation program to increase its evidence for each of its product claims and notifies the FDA of certain types of performance claims made in connection with its products.

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In certain markets, including the United States, specific claims made by Mannatech with respect to its products may change the regulatory status of a product. For example, a product sold as a dietary supplement but marketed as a treatment, prevention, or cure for a specific disease or condition would likely be considered by the FDA or other regulations as unapproved and thus an illegal drug. To maintain the product’s status as a dietary supplement, the labeling and marketing must, at a minimum, be consistent with the provisions in the DSHEA Act and the FDA’s extensive regulations regarding drugs. As a result, Mannatech has procedures designed to help ensure its associates and employees comply with the requirements of the DSHEA Act, the Food, Drug and Cosmetic Act, and various other regulations. Because the scope of regulators including the FDA, the DSHEA Act, and the Food, Drug and Cosmetic Act, and other acts is often open to interpretation and debate, Mannatech can make no assurances that regulators will not question its actions in the future.

Currently Emprizone^® is the only Mannatech product sold that is labeled as an over-the-counter monograph drug. If regulators assert that any of Mannatech’s other products should be considered a drug or fall within the scope of over-the-counter monographs, Mannatech would be required to file a drug application and comply with the specific applicable monographs and change the claims made in connection with such products.

Dietary supplements are also subject to the Nutrition, Labeling and Education Act and various other international acts that regulate health claims, ingredient labeling, and nutrient content claims that characterize the level of nutrients in a product. These acts prohibit the use of any specific health claim for dietary supplements unless the health claim is supported by significant scientific research and is pre-approved by regulators such as the FDA.

Regulators, such as the FTC, regulate marketing practices and advertising of a company and its products. In the past several years, regulators, including the FTC, have instituted various enforcement actions against several dietary supplement companies for false and misleading marketing practices and misleading advertising of certain products. These enforcement actions have resulted in consent decrees and monetary payments by the companies involved. Regulators require a company to convey product claims clearly and accurately and require marketers to maintain adequate substantiation for their claim. Specifically, the FTC requires that a company have a reasonable basis for the expressed and implied product claim before it disseminates an advertisement. A reasonable basis is determined based on the claims made, how the claims are presented in the context of the entire ad, and how the claims are qualified. The FTC’s standard for evaluating substantiation is to ensure that consumers have access to information about the emerging areas of science and also requires reasonable evidence proving product claims at the time such claims are first made. The failure to have this evidence violates the Federal Trade Commission Act. Although the FTC has never threatened any enforcement action against Mannatech for the advertising of its products, Mannatech can give no assurance that the FTC will not question its advertising or claims in the future.

International Regulations. Mannatech is also subject to extensive regulations in each international country in which it operates. Currently Mannatech operates in Canada, Australia, the United Kingdom, Japan, and New Zealand. Some of the country-specific regulations include the following:

Network-Marketing System. Mannatech’s network-marketing system, which includes its global associate career and compensation plan, is subject to a number of governmental regulations including various federal and state statutes administered by the FTC, various state authorities, and foreign government agencies. The legal requirements governing network-marketing organizations are, in part, directed to ensure that product sales are ultimately made to consumers. In addition, achievement within a network-marketing company must be based on the sale of products rather than compensation for the recruitment of associates, investments in the organization, or other non-retail sales-related criteria. For instance, various states or provinces limit the amount associates may earn from commissions on sales by other associates that are not directly sponsored by the associate. Prior to Mannatech expanding its operations into other foreign jurisdictions, Mannatech must first obtain regulatory approval for its network-marketing system in jurisdictions requiring such approval. Mannatech also relies on its outside counsel to help ensure regulatory compliance.

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Mannatech is also subject to inquiries and enforcement actions from various state attorneys general offices. Each state has its own state acts referred to as Little FTC Acts. Each of the state acts are similar to the requirements of the federal laws. As a result, each state may perform its own inquiries about Mannatech’s organization, including allegations against any of its associates. To combat such risk, Mannatech publishes and explains its associates policies and procedures and also maintains a compliance department that investigates allegations of improper associate conduct.

In Canada, Mannatech’s network-marketing system is regulated by both national and provincial laws. Under Canada’s Federal Competition Act, Mannatech must make sure that any representations relating to associate compensation made to prospective associates constitute fair, reasonable, and timely disclosure and that such representations meet other legal requirements of the Federal Competition Act. Mannatech’s global associate career and compensation plan is reviewed by the appropriate Canadian authorities and Mannatech has not received any objections to the provisions of its plan. Any future change to the plan requires review by the appropriate Canadian authorities. All Canadian provinces and territories, other than Ontario, have legislation requiring that Mannatech register or become licensed as a direct seller within that province. Licensing is designed to maintain the standards of the direct selling industry and to protect the consumer. Some provinces require that both Mannatech and its associates be licensed as direct sellers. Mannatech believes that it holds the required provincial or territorial direct sellers’ licenses.

In Australia, Mannatech’s network-marketing system is subject to both federal and state regulations. Mannatech’s global associate career and compensation plan is designed to meet state requirements and the requirements of Australia’s Trade Practices Act. The Trade Practices Act and various state offices regulate Mannatech’s business and trade practices, as well as those of its associates. Australia’s Therapeutic Goods Act and the Trade Practices Act regulate any claims or representations relating to Mannatech’s products and its global associate career and compensation plan.

In the United Kingdom, Mannatech’s network-marketing system is subject to national regulations. Mannatech’s global associate career and compensation plan is designed to meet national requirements, the requirements of the Fair Trading Act of 1973, and the Trading Schemes Regulations of 1997. The U.K. Codes of Advertising and Sales Promotion regulate Mannatech’s business and trade practice and the practices of its associates. The Trading Standards Office regulates any claims or representations relating to Mannatech’s operations.

In Japan, Mannatech’s network-marketing system, overall business operations, trade practices, global associate career and compensation plan, and its associates are all governed by the Door-to-Door Sales Law as enacted in 1976 by the Ministry of International Trade and Industry. Mannatech’s global associate career and compensation plan is designed to meet Japan’s governmental requirements. Mannatech’s product claims are subject to the Pharmaceutical Affairs Law, which prohibits the making and publication of “drug effectiveness” claims regarding products that have not received approval from the Ministry of Health, Welfare and Labor.

In New Zealand, Mannatech’s network-marketing system and its operations are subject to certain Commerce Commission regulations, the Unsolicited Goods Act of 1975, the Privacy Act of 1993, and the Fair Trading Act of 1993. These regulations enforce specific kinds of business or trade practices and police the general conduct of network-marketing companies. The Commerce Commission also enforces the Consumer Guarantees Act, which establishes a regime of rights and remedies with respect to transactions involving the provisions of goods and services to consumers. Finally, the Commerce Commission enforces the Door-to-Door Sales Act of 1967, which regulates the conduct of Mannatech’s associates.

Other Regulations. Mannatech’s global operations are also subject to a variety of other regulations, including:

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In many markets, Mannatech is limited in imposing certain rules and termination criteria that it can contractually impose on its associates. If Mannatech does not comply with these restrictions, it may be required to pay social security or other tax or tax-type assessments on behalf of its associates and may incur severance obligations in order to terminate an associate.

In some countries, including the United States, Mannatech is also governed by regulations concerning the activities of its associates. Regulators may find that Mannatech is responsible for its associates’ conduct and may request or require that Mannatech take steps to ensure that its associates comply with these regulations. The types of conduct governed by regulations may include:

In some markets, including the United States, improper product claims by associates could result in Mannatech’s products being scrutinized by certain regulatory authorities. This review could result in Mannatech’s products being re-classified as drugs or classified into another product category that requires stricter regulations or labeling changes.

Mannatech researches and monitors the laws governing its associate conduct, its operations, global associate career and compensation plan, and products and sales aids as required by regulations in each market. Mannatech attempts to educate its associates about acceptable business conduct in each market through its associates’ policies and procedures, manuals, seminars, and other training materials and programs. However, Mannatech cannot guarantee that its associates will always act in a professional and consistent manner.

Employees

As of December 31, 2002, Mannatech employed 256 people in the United States, of which nine employees held executive positions. Mannatech also employs 25 people in Australia, 13 people in the United Kingdom, and 18 people in Japan. These numbers do not include Mannatech’s associates, who are independent contractors and not employees of Mannatech. Mannatech employees are not unionized and Mannatech believes it maintains a good relationship with its employees.

Risk Factors

In addition to the other information included in this report, the following risk factors should be considered in evaluating Mannatech’s business and future prospects.

Mannatech’s success depends largely upon its ability to attract, maintain, motivate, and retain a large base of associates, who purchase and sell its products. Mannatech cannot give any assurances that the productivity of its associates will continue at their current levels or increase in the future. Several factors affect Mannatech’s ability to maintain a sufficient number of associates, including:

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Competition for new individuals interested in network-marketing is intense. Mannatech expects that competition will intensify as network-marketing becomes more popular and as new network-marketing organizations enter the marketplace. The pool of individuals interested in network-marketing is limited in each market, and when its competitors successfully recruit individuals, the potential pool of associates is reduced. Mannatech’s sales and profits could suffer if:

Although Mannatech maintains policies and procedures to govern the conduct of its associates, conducts training seminars, and uses various means to address associate misconduct, it is still difficult to detect and correct all instances of associate misconduct. Violations of Mannatech’s associates policies and procedures by its associates could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or foreign regulatory authorities against Mannatech and/or its associates. Because Mannatech has expanded into foreign countries, Mannatech’s associates’ policies and procedures must conform to the legal requirements of each foreign country in which Mannatech does business. Litigation, complaints, and enforcement actions involving Mannatech and its associates could consume considerable amounts of money and other corporate resources and could have a negative impact on Mannatech’s business, profitability and growth prospects.

Mannatech’s success and competitive position largely depend on the ability to protect and promote the following proprietary rights:

Mannatech has filed a composition of matter and use patent application for Ambrotose^® Complex and has entered into confidentiality agreements with its associates, suppliers, manufacturers, directors, and officers to protect its proprietary rights. Nevertheless, Mannatech continues to face the risk of its patent protection for Ambrotose^® Complex being denied or a patent protection granted that is more limited than originally requested. As a precaution, Mannatech consults with outside legal counsel and consultants to help ensure that it has properly protected its proprietary rights. However, Mannatech’s business, profitability, and growth prospects could be adversely affected if it fails to properly protect its proprietary rights.

Mannatech’s business depends, in part, upon consumer and associate perception of its integrity and the safety and quality of its products. Any adverse publicity could negatively affect Mannatech’s perception and could result in a decline in the number of associates or in its operations. Mannatech and its products are subject to adverse publicity regarding:

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Mannatech could face financial liability due to product liability claims if the use of its products results in significant loss or injury. To date, Mannatech has not been the subject of significant product liability claims. Mannatech could be exposed to future product liability claims, including that its products contain contaminants that it provides consumers with inadequate instructions regarding product use, or that it provides inadequate warnings concerning side effects or interactions of its products with other substances. Mannatech believes it and its suppliers and manufacturers maintain adequate product liability insurance coverage, but potential product liability claims could exceed the amount of insurance coverage or the product claim could be excluded under the terms of an existing insurance policy, which could adversely affect Mannatech’s future financial condition.

In 2002, Mannatech voluntarily discontinued the sale of GlycoLEAN BODY SYSTEM^® ACCELERATOR^™ and MVP, each of which contained ephedra. Products containing ephedra have been the subject of adverse publicity in the United States and other countries due to alleged harmful effects, including death. The FDA is proposing regulations that, if adopted, would subject any products containing ephedra to additional labeling requirements and possible reformulation. In addition, certain states, including Texas and Nebraska, have imposed regulations, including labeling requirements on ephedra products. As a precaution, Mannatech voluntarily reformulated its GlycoLEAN BODY SYSTEM^® ACCELERATOR^™ to include a non-ephedra ingredient and renamed it GlycoLEAN BODY SYSTEM^® ACCELERATOR2.^™ Mannatech is currently exploring an ephedra free ingredient for its MVP product and has discontinued selling MVP. Aggregate sales for these products were $2.0 million, $1.4 million, and $1.2 million in 2000, 2001, and 2002, respectively, which were 1.3%, 1.1%, and 0.9% of consolidated net sales, respectively.

Outside manufacturers make all of Mannatech’s products. Mannatech’s profit margins and timely product delivery are dependent upon the ability of its outside suppliers and manufacturers to supply its products in a timely and cost-efficient manner. Mannatech’s ability to enter new markets and sustain satisfactory levels of sales in each market depends upon the ability of outside suppliers and manufacturers to produce its products and to comply with all applicable regulations. As a precaution, Mannatech has identified alternate suppliers and manufacturers for its products. However, the failure of Mannatech’s suppliers or manufacturers to supply products or ingredients could adversely affect Mannatech’s business operations.

Mannatech believes it has dependable alternative suppliers for all of its ingredients except Manapol^® and Arabinogalactan, which are components of Mannatech’s proprietary compounds. Although Mannatech maintains good relationships with these suppliers and could produce or replace any of its ingredients if its suppliers are unable to perform, a delay in replacing or substituting such ingredients could affect Mannatech’s business.

The global nutrition industry is intensely competitive. Mannatech also competes for associates with other network-marketing companies outside the global nutrition industry. Many competitors have greater name recognition and financial resources than Mannatech, which may give them a competitive advantage. Mannatech’s competitors may be able to devote greater resources to marketing, promotional, and pricing campaigns that may influence Mannatech’s existing and potential associates to buy products from competitors rather than Mannatech, which could adversely affect Mannatech’s business.

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Various governmental agencies regulate Mannatech’s network-marketing activities. A government agency’s determination that Mannatech has violated a law or regulation could adversely affect Mannatech’s business. Each of the laws and regulations are generally intended to prevent fraudulent or deceptive schemes. Mannatech believes it has complied with current standards and laws. However, Mannatech’s business faces constant regulatory scrutiny due to the interpretive and enforcement discretion given to regulators, periodic misconduct by its associates, adoption of new laws or regulations, and changes in the interpretation of existing laws or regulations.

Mannatech’s network-marketing system has always been subject to extensive governmental regulation, including foreign, federal, and state regulation regarding network-marketing companies. Any change in legislation and regulations could affect Mannatech’s business. Furthermore, significant penalties could be imposed upon Mannatech for failure to comply with various statutes or regulations. Violations may result from:

Mannatech is subject to extensive laws, governmental regulations, administrative determinations, court decisions, and similar constraints at the federal, state, and local level in its domestic and foreign markets. These regulations primarily involve the following:

Sudden or unexpected new regulations or changes in existing regulations could significantly restrict Mannatech’s ability to continue operations without significant changes, which could adversely affect Mannatech’s business. For example, changes regarding health and safety and food and drug regulations for its nutritional products could require Mannatech to reformulate its products to comply with such regulations.

In some foreign countries, nutritional products are considered foods, while other countries consider them drugs. Future health and safety, or food and drug regulations could delay or prevent Mannatech’s introduction of new products or suspend or prohibit the sale of existing products in a given country or marketplace. In addition, if Mannatech expands into other foreign markets, its operations or products could also be affected by the general stability of foreign governments and the regulatory environment relating to network-marketing and its products. If Mannatech’s products are subject to high customs duties, its sales and competitive position could suffer as compared to locally produced goods. Furthermore, import restrictions in certain countries and jurisdictions could limit Mannatech’s ability to import products from the United States.

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Mannatech currently operates in the international markets of Canada, Australia, the United Kingdom, Japan, and New Zealand and plans to enter additional international markets in the future. As a result, Mannatech’s international operations could experience changes in legal and regulatory requirements, as well as difficulties in adapting to new foreign cultures and business customs. If Mannatech does not adequately address such issues, its international markets may not meet growth expectations. Mannatech’s international operations and future expansion plans are subject to political, economic, and social uncertainties, including:

Any changes related to these factors could adversely affect Mannatech’s business, profitability, and growth prospects. Furthermore, changes in its distribution channels may force Mannatech to invest significant time and money related to its distribution and sales to maintain its position in the various international markets.

Mannatech’s business is heavily dependent upon information technology to effectively manage and operate many of its key business functions, including:

Mannatech maintains an extensive disaster recovery program, but the failure or impairment of any of its information technology systems could adversely impact Mannatech’s ability to conduct day-to-day business. The severity and duration of the failure and the ability to remedy such failure will determine the extent and harm to its business.

Mannatech does not have any immediate plans to sell additional shares of its common stock. Nonetheless, the trading price of Mannatech’s common stock and the price at which Mannatech could sell securities in the future could be subject to fluctuations in response to:

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Mannatech’s directors and executive officers, together with their families and affiliates, beneficially own approximately 46.1% of Mannatech’s total outstanding common stock. As a result, Mannatech’s directors and officers could influence such business matters as the election of directors and approval of significant corporate transactions. As a result, various transactions could be delayed, deferred or prevented without the approval of shareholders, including:

As a result, Mannatech’s shareholders may not have the opportunity to sell their shares for more than the then-prevailing market price of Mannatech’s common stock or the market price of its common stock may decline.

Certain shareholders of Mannatech, including Samuel L. Caster, J. Stanley Fredrick, Marlin Ray Robbins, Jr., Jett, H. Reginald McDaniel, and Donald W. Herndon, together beneficially own approximately 52.8% of Mannatech’s outstanding common stock as reflected in a Schedule 13D filed with the Securities and Exchange Commission, on March 21, 2003. All of the shareholders named above are directors and officers of Mannatech except for Jett, who is a Mannatech associate, and H. Reginald McDaniel, who is a former employee of Mannatech. These shareholders, if they choose to act together, based on their current share ownership, are able to control a majority of the shares of stock of Mannatech and could control the outcome of an election of directors, as well as the adoption or amendment of provisions in Mannatech’s certificate of incorporation or bylaws and the approval of mergers and other significant corporate transactions. As a result, certain transactions such as the approval or disapproval of mergers or acquisitions could be determined by this group without the approval of the remaining shareholders, which could have the effect of impeding such a transaction.

Provisions of Mannatech’s current articles of incorporation, bylaws, and the Texas Business Corporation Act help discourage unsolicited proposals to acquire Mannatech, even if the proposal benefits its shareholders. In addition, Mannatech’s bylaws provide for three classes of directors on its board of directors with members of each class serving staggered three-year terms. Mannatech’s board of directors is authorized, without shareholder approval, to issue up to 1,000,000 shares of preferred stock having such rights, preferences and privileges as the board of directors designates. Furthermore, the Texas Business Corporation Act restricts, subject to exceptions, business combinations with any “affiliated shareholder.” Any or all of these provisions could delay, deter or prevent a takeover of Mannatech and could limit the price investors are willing to pay for Mannatech’s common stock.

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Item 2. Properties

Mannatech leases property at several locations for its headquarters and distribution facilities, including:

For its international operations, Mannatech contracts with several third party contractors for distribution and fulfillment operations and believes all of its leased facilities are adequate for its current and projected operations. Mannatech’s third party contract distribution operations include the following:

Item 3. Legal Proceedings

In October 1997, Mannatech filed a Notice of Objection to the issuance of a registered trademark issued to IntraCell Nutrition, Inc., which had filed a trademark application for the name “Manna.” On May 19, 2000, Mannatech’s Notice of Opposition was rejected. To date, no infringement action has been filed against Mannatech by IntraCell. If IntraCell brings any infringement action against Mannatech, a negative determination could adversely affect Mannatech’s business, results of operations, financial condition, and liquidity.

In February 2003, Mannatech was notified by the Ministry of Health that it was the subject of an investigation into the sales practices relating to certain of its independent associates in New Zealand. Mannatech’s associates’ policies and procedures strictly prohibit the making of any therapeutic claims related to its products. Mannatech believes it has reached an agreement with the Ministry of Health under which Mannatech will not be prosecuted; however, Mannatech has agreed to discipline those associates who allegedly have violated the NZ Medicines Act by making or publishing therapeutic claims. The Ministry of Health stated it will continue to monitor Mannatech’s actions and may prosecute individual distributors or Mannatech in the event of any further violations. As a result, Mannatech is reviewing its policies and procedures to strengthen its training, compliance and disciplinary processes to emphasize regulatory compliance in all countries where it operates.

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In February 2003, Mannatech was also notified that it was the subject of an investigation by the Therapeutic Goods Administration of Australia, or the TGA, alleging certain violations of the advertising provisions of the Therapeutic Goods Legislation. The TGA subsequently notified Mannatech that it believes Mannatech and certain associates have also allegedly breached its Australian Therapeutic Goods Advertising Code, or the Code, and alleges that certain Mannatech associates were misusing Mannatech’s Australian patent specifications. Mannatech is currently investigating these alleged violations and any associate found to be in violation of any Australian laws will be terminated in accordance with Mannatech’s policies and procedures. Mannatech has asked the TGA to provide further information related to these violations and intends to fully cooperate with the TGA to resolve this matter. However, if the TGA finds that Mannatech has violated the Code, it may impose certain sanctions and/or fines on Mannatech and its associates that could have an adverse effect on Mannatech’s business, financial condition, results of operations, and liquidity.

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

None.

PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

Market for its Common Stock. On February 12, 1999, Mannatech completed its initial public offering and on February 16, 1999, its common stock began trading on the Nasdaq National Market under the symbol “MTEX.” As of March 20, 2003, the total number of outstanding shares of its common stock was 25,134,840 and the closing price on such date was $2.57. Below are the high and low sales prices of Mannatech’s common stock as reported on the Nasdaq National Market for each quarter of the fiscal years ended December 31, 2001 and 2002:

Holders. As of March 20, 2003, there were approximately 5,100 shareholders of record who held Mannatech’s common stock directly and approximately 130 security brokers and dealers who held approximately 47.8% of Mannatech’s common stock on behalf of approximately 8,200 shareholders.

Dividends. Mannatech did not pay any dividends in 2001 or 2002 and does not intend to pay any dividends in 2003. Thereafter, Mannatech’s board of directors will periodically reevaluate its dividend policy based on its consolidated results of operations, financial condition, cash requirements, and other relevant factors. Any future payments of dividends will be subject to the discretion of the board of directors and subject to certain limitations under the Texas Business Corporation Act.

Sales of Unregistered Securities.

None.

Uses of Proceeds from Registered Securities.

None.

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Item 6. Selected Financial Data

The Selected Financial Data set forth below for each of the five years ended December 31, 2002 have been derived from and should be read in conjunction with (A) Mannatech’s Consolidated Financial Statements and related notes set forth in Item 15 of this report, beginning on page F-1, and (B) “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Item 7 of this report.

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Item 7A. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in the understanding of Mannatech’s financial position and results of operations for each of the three years ended December 31, 2002. This discussion should be read in conjunction with Item 15 – the Consolidated Financial Statements and related Notes, beginning on page F-1 of this report.

Company Overview and Critical Accounting Policies and Estimates

For nearly a decade, Mannatech has developed innovative, high-quality, proprietary nutritional supplements, topical products, and weight-management products that are sold through a global network-marketing system throughout the United States, Canada, Australia, the United Kingdom, Japan, and New Zealand. New Zealand began operations on June 10, 2002 and is serviced by Mannatech’s Australian subsidiary. Currently, Mannatech operates as a single segment and primarily sells its products through a network of approximately 200,000 associates and members who have purchased Mannatech’s products within the last 12 months.

Mannatech’s significant accounting policies are described in Note 1 to its Consolidated Financial Statements and related Notes in Item 15 of this report. In response to SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” Mannatech identified certain policies that are important to the portrayal of its financial condition and results of operations. These policies require the application of significant judgment by Mannatech’s management. Mannatech periodically analyzes its estimates, including the need for inventory reserves and write-downs, impairment of long-lived assets, tax valuation allowances, provisions for doubtful accounts, sales returns, contingencies and litigation, and bases its estimates on Mannatech’s historical experience, industry standards, and various other assumptions that may be reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on Mannatech’s financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions. Mannatech’s critical accounting policies include the following:

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General Summary

Mannatech primarily derives its revenues from sales of its products, starter and renewal packs, and from shipping fees. Substantially all product sales are sold to independent associates at published wholesale prices or sold to members at discounted published retail prices. Mannatech periodically changes its starter and renewal packs to meet the current market demands. Each starter and renewal pack includes some combination of Mannatech’s latest products and promotional materials. Mannatech tries to offer comparable packs in each country in which it does business; however, because each country has different regulatory guidelines, not all of Mannatech’s packs can be offered in all countries. Mannatech defers the recognition of revenue for product sales until its customers receive the products. On September 14, 2002, Mannatech implemented a price increase of approximately 4% on certain wholesale and retail sale prices. The net sales by country as a percentage of consolidated net sales and in dollars are as follows:

In 2002, Mannatech’s operations, excluding its North American operations, accounted for 13.9% of consolidated net sales, whereas in 2001, operations, excluding its North American operations accounted for 8.8% of consolidated net sales. Mannatech attributes this increase in net sales to the change in its international management team along with the expansion of products offered in its international operations and the launching of its new global associate career and compensation plan.

Fourth quarter 2002 net sales increased 20.2% as compared to the fourth quarter 2001 net sales. For the year ended December 31, 2002, net sales increased 9.5% as compared to the year ended 2001. The increase is largely attributable to the increase in pack sales, launching Mannatech’s global associate career and compensation plan, expanding the products lines offered in its international operations, and initiating effective personnel changes in its international operations.

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For 2002, quarterly pack sales continued to range between $7 million and $8 million as compared to 2001, where quarterly pack sales ranged between $4 million and $5 million. Mannatech believes the increase in its quarterly pack sales directly correlates to the introduction of the travel incentive program and the launching of the new global associate career and compensation plan.

For 2002, both the number of new associates and members and the number of associates and members who have purchased Mannatech’s products within the last 12 months have increased. Mannatech believes these increases are primarily attributed to the travel program offered and the launching of its new global associate career and compensation plan. The number of new associates and members, as well as the number of associates and members who have not cancelled their status, are as follows: