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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004.

OR

For the transition period from              to             .

Commission File No. 000-24657

MANNATECH, INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

600 S. Royal Lane, Suite 200

Coppell, Texas 75019

(Address of Principal Executive Offices, including Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

As of April 30, 2004, the number of shares outstanding of the registrant’s sole class of common stock, par value $0.0001 per share was 26,339,956.

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Mannatech, Incorporated

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MANNATECH, INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

See accompanying notes to consolidated financial statements.

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MANNATECH, INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share information)

See accompanying notes to consolidated financial statements.

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MANNATECH, INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

See accompanying notes to consolidated financial statements.

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MANNATECH, INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Mannatech, Incorporated (the “Company”) was incorporated in the state of Texas on November 4, 1993 and is located in Coppell, Texas. The Company develops and sells high-quality, proprietary nutritional supplements, topical products, and weight-management products primarily through a network-marketing system operating in the United States, Canada, Australia, the United Kingdom, Japan, and New Zealand. Independent associates (“associates”) purchase the Company’s products at published wholesale prices for the purpose of personal consumption and/or sale to retail customers. Members (“members”) purchase the Company’s products at a discount from published retail prices. Only associates are eligible to earn commissions and incentives on their downline growth and sales volume. The Company has ten wholly-owned subsidiaries although only the following subsidiaries are currently active:

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the Company’s consolidated financial information as of, and for, the periods presented. The consolidated results of operations of an interim period are not necessarily indicative of the consolidated results of operations to be expected for the fiscal year. For further information, refer to the Company’s consolidated financial statements and accompanying footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassification

Certain prior years’ balances have been reclassified to conform to the Company’s 2004 consolidated financial statement presentation.

Revenue Recognition

The Company’s revenues are primarily derived from sales of its products, sales of starter and renewal packs, and shipping fees. Substantially all product sales are sold to associates at published wholesale prices and to members at discounted published retail prices. The Company records a reserve for expected sales refunds based on its historical experience.

The Company defers all revenue received for customer shipments until its customers receive their shipments. Total deferred revenue related to undelivered shipments at December 31, 2003 was $2.7 million and $4.4 million at March 31, 2004.

The Company also defers a portion of its revenue from the sale of its starter and renewal packs related to a one-year magazine subscription offered in some of its packs and from revenue related to each pack that exceeds the total average wholesale value of all individual components included in such packs. The Company amortizes this deferred revenue over twelve months. Deferred revenue related to magazine subscriptions and revenue exceeding the total average wholesale value was $0.4 million at December 31, 2003, and $0.6 million at March 31, 2004.

Shipping and Handling Costs

The Company records freight and shipping revenue collected from associates and members as revenue. The Company records shipping and handling costs associated with customer shipments as selling and administrative expenses. Total shipping and handling costs included in selling and administrative expenses was approximately $2.2 million and $2.9 million for the three months ended March 31, 2003 and 2004, respectively.

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Accounting for Stock-Based Compensation

The Company has three stock-based compensation plans. The Company generally grants stock options to its employees and board members at the fair market value of the stock on the date of grant. The stock options usually vest over three years and are exercisable for ten years. Stock options granted to shareholders who own five percent or more of the Company’s outstanding stock are granted at an exercise price that may not be less than 110% of the fair market value of the Company’s common stock on the date of grant and have a term no greater than five years.

For stock-based compensation issued to nonemployees, the Company is required to follow Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” Under SFAS 123, stock-based compensation to nonemployees is measured and recognized at the calculated fair value on the date of grant.

For stock-based compensation issued to employees and members of its board of directors, the Company elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and its related interpretations. Under the recognition and measurement principles of APB 25, no compensation expense is recognized unless the market price of the stock option exceeds the exercise price on the date of grant.

For disclosure purposes only, the Company estimated the fair value for all of its stock options granted to employees and board members on the date of grant using the Black-Scholes option-pricing model and estimated the amount of expense that it would have recognized for each stock option granted over its vesting period. The following table illustrates the effect on the Company’s net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to all of its stock options:

Earnings Per Share

Basic Earnings Per Share (“EPS”) calculations are based on the weighted-average number of common shares outstanding during the period, while diluted EPS calculations are calculated using the weighted-average number of common shares and dilutive common share equivalents outstanding during each period.

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The following data shows the amounts used in computing EPS and their effect on the weighted-average number of common shares and dilutive common share equivalents. At March 31, 2003, 2,937,333 common stock options and 133,000 warrants were excluded from the diluted EPS calculation, as their effect was antidilutive. At March 31, 2004, none of the Company’s common stock options or warrants were excluded from the diluted EPS calculation. The amounts are rounded to the nearest thousand, except for per share amounts.

NOTE 2 INVENTORIES

During the first three months of 2004, the Company wrote-off inventories against its inventory reserves of approximately $127,000. At December 31, 2003 and March 31, 2004, inventories consisted of the following:

NOTE 3 COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company’s comprehensive income is as follows:

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NOTE 4 COMMITMENTS AND CONTINGENCIES

Supply Agreement

In March 2004, the Company entered into a new supply agreement with a supplier to purchase a raw material used in its antioxidant product. The supply agreement requires the Company to purchase a minimum of $0.4 million of its raw material per year for five years.

Royalty Agreement

On August 7, 2003, the Company entered into a royalty agreement with Dr. Bill McAnalley, its Chief Science Officer. While Dr. McAnalley is employed by the Company, the Company agreed to pay him the greater of his annual royalties or an annual executive bonus. After Dr. McAnalley’s employment with the Company ceases, the Company is required to pay Dr. McAnalley, or his heirs, royalties that are based on Mannatech’s annual global sales of its products containing Ambrotose^™ in excess of $105.4 million for each year over the ten years subsequent to termination of his employment. As of March 31, 2004, the Company accrued $0.2 million related to future payments for this royalty agreement.

NOTE 5 RECENT ACCOUNTING PRONOUNCEMENTS

FIN 46. In January 2003, Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 is effective for variable interest entities created after January 31, 2003 and is required to be adopted for variable interest entities that existed prior to February 1, 2003 by December 31, 2003. FIN 46 is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities and is entitled to receive a majority of the entity’s residual returns or both. The adoption of this interpretation did not have a significant impact on the Company’s consolidated financial condition, results of operations, or cash flows.

FIN 46R. In December 2003, FASB issued a revision to FIN 46 (“FIN 46R”), to clarify some of the provisions and to exempt certain entities from its requirements. Under the new guidance, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of the revised interpretation. Otherwise, application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities (“SPE’s”) for periods ending after December 15, 2003. Application by public entities, other than business issuers, for all other types of variable interest entities other than SPE’s is required in financial statements for periods ending after March 15, 2004. The Company does not have interest in structures commonly referred to as SPE’s, therefore the adoption of FIN 46R is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

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NOTE 6 INVESTMENTS

The Company began purchasing investments in 2003 and classifies its investments as available for sale. At March 31, 2004, the Company’s investments consisted of the following:

The Company’s fair value of investments by contractual maturity at December 31, 2003 and March 31, 2004, are as follows:

Note 7 LITIGATION

The Company was notified in February 2003 by the New Zealand Ministry of Health of an investigation of the sales practices of some of the Company’s New Zealand associates. The matter was investigated and the Company disciplined the independent associates related to this matter. The New Zealand Ministry of Health has continued to monitor the Company’s actions and reserves the right to prosecute individual associates or the Company in the event of any further violations.

In March 2004, MedSafe, a business unit of the New Zealand Ministry of Health, notified the Company that several of its associates in New Zealand were using promotional materials that made therapeutic claims to promote the Company’s products, which claims were in violation of the New Zealand’s Medicines Act 1981. In response to the inquiry and allegations from MedSafe, the Company initiated disciplinary investigation proceedings against the named associates identified by MedSafe and discovered that unapproved materials were being used by its New Zealand associates. The matter remains open, pending the conclusion of the Company’s disciplinary proceedings against its associates and submission of its findings to MedSafe. In addition, the Company intends to introduce additional training materials to further inform its New Zealand associates about the regulatory environment and relevant New Zealand legal requirements.

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Note 8 SEGMENT INFORMATION

The Company conducts its business within one industry segment. No single associate has ever accounted for more than 10% of its total sales.

The Company aggregates its operating segments because it operates as a single reportable segment as a seller of nutritional supplements through its network-marketing distribution channels operating in six different countries. In each country, the Company markets their products and pays commissions and incentives in similar environments. The Company’s management reviews its financial information by country and concentrates its internal reporting and analysis of revenues on pack sales and product sales. The Company sells its products through its independent associates and distributes its products through similar distribution channels in each country. Each of the Company’s operations sells primarily the same products and possesses similar economic characteristics such as similar gross margins. The Company’s Canadian operation is serviced through its United States corporate facility and its products are shipped through a third party distribution facility located in Canada. The Company’s New Zealand operations are serviced through its Australian operations and its products are shipped through a third party distribution facility located in Australia. Net sales by country and pack and product information, in millions, for the three months ended March 31, 2003 and 2004, respectively are as follows:

Canada and New Zealand operations operate through offices in the United States and Australia, respectively. Long-lived assets by country include property, plant and equipment and are as follows:

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Item 2. 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 consolidated financial position and its results of operations for the three months ended March 31, 2004 as compared to the same period in 2003. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all of its subsidiaries on a consolidated basis.

Company Overview

For over 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. Currently Mannatech operates in 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. Mannatech plans to begin operations in South Korea in the third quarter of 2004 and in Taiwan in the first quarter of 2005.

Mannatech operates as a single segment and primarily sells its products through a network of approximately 287,000 associates and members who have purchased Mannatech’s packs and products within the last 12 months. Mannatech aggregates its operating segments because it believes it operates as a single reportable segment selling its nutritional supplements in similar distribution channels in each of its operations. Mannatech’s management reviews its financial information in each country by pack sales and by product sales. Each of Mannatech’s operations sells primarily the same products and possesses similar economic characteristics, such as similar gross margins. For the three months ended March 31, 2004, Mannatech’s foreign operations accounted for approximately 37.0% of its consolidated net sales, whereas in the same period in 2003, Mannatech’s foreign operations accounted for 30.9% of its consolidated net sales. Consolidated net sales by country in dollars and as a percentage of consolidated net sales for the three months ended March 31, 2003 and 2004 are as follows:

Net Sales in Dollars and as a Percentage of Consolidated Net Sales

Mannatech derives its revenues from sales of its products, sales of its starter and renewal packs, and from shipping fees and defers the recognition of its revenues until its customers receive their shipment. Substantially all of its product sales are either sold to independent associates at published wholesale prices, sold to members at discounted published retail prices, or sold to retail customers at published retail prices. Mannatech believes the majority of its product sales are for personal consumption; however, Mannatech cannot distinguish its personal consumption sales from its other sales because it has no involvement in its products after delivery other than usual and customary product returns.

Mannatech periodically changes its starter and renewal packs to meet current market demands. Each of Mannatech’s starter and renewal packs includes some combination of its products and promotional materials and entitles associates and members to published discounts related to Mannatech’s retail prices. 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.

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Mannatech attributes the improvement in its sales and operations to the following:

Mannatech believes that its revamped global associate career and compensation plan and its annual travel incentive program contributed to an increase in the number of independent associates, as reflected by the 51.2% increase in its pack sales for the three months ended March 31, 2004 as compared to the same period as 2003. Mannatech believes its annual travel incentive program helps increase the number of independent associates purchasing its products and is also a motivational vehicle for attracting and retaining independent associates. Mannatech’s annual travel incentive usually has a qualification period of between four to seven months, during which period independent associates qualify for the annual travel incentive by earning points primarily on the sales of high dollar packs and product purchases. Under its annual travel incentive program, Mannatech requires its associates to maintain their associate position up to the point of travel.

Mannatech believes that future success in increasing its net sales is dependent on the following factors:

In 2004, Mannatech is primarily focusing on registering its Ambrotose AO^™ product in its existing foreign markets and beginning to register its most popular products in South Korea and Taiwan. Mannatech also plans to improve its nutritional food bars to include a more complete array of essential nutrients and to continue its ongoing research of new products and product strategies for 2005.

Cost of sales consists of products purchased from third-party manufacturers, costs of promotional materials sold to Mannatech’s independent associates, costs of freight, and provisions for slow moving or obsolete inventories. Mannatech’s inventory turnover ratio decreased from 4.7 in the first quarter of 2003 to 4.1 in the first quarter of 2004 due to the receipt of $1.1 million of inventory purchases in early March 2004 related to the anticipated increase in net sales related to its annual travel incentive. Mannatech’s sales mix of products and packs affects its cost of sales and gross profit differently because the gross margin on its products sold has a higher gross margin than the gross margin on packs sold. Mannatech’s sales mix can be influenced by the following:

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Commissions and incentives are dependent on the sales mix and typically range between 40% and 45% of net sales. Commissions and incentives are paid to Mannatech’s independent associates in accordance with its global associate career and compensation plan and are based on commissionable net sales, which consist of sales of finished products and packs. Mannatech’s commission and incentive program calculates commissions and incentives based on the following criteria:

Mannatech’s global associate career and compensation plan allows new and existing independent associates to build their individual global networks by expanding their existing downlines into newly-opened international markets rather than requiring them to establish new downlines to qualify for commissions and incentives within each newly-opened country.

Periodically, Mannatech offers new travel incentives and contests, which are designed to stimulate both its pack and product sales. In the first quarter of 2003, Mannatech launched a travel incentive for its independent associates called “Sun and Salsa in 2003.” Approximately 750 of Mannatech’s independent associates qualified for a trip for two to Cancun, Mexico. This incentive cost Mannatech approximately $2.2 million. In March 2004, Mannatech announced its 2004 travel incentive contest, which is a 5-day cruise for two in the Caribbean. The 2004 travel incentive allows independent associates who achieve certain sales levels from February 28, 2004 through July 16, 2004 to qualify for this trip incentive. Mannatech anticipates that approximately 750 to 850 of its independent associates will qualify for this trip incentive at an estimated cost to Mannatech of between $2.2 million and $2.7 million.

Operating expenses consist of selling and administrative expenses and other operating costs. Operating expenses remained relatively constant as a percent of consolidated net sales for the first quarter of 2004 as compared to the same period in 2003. Selling and administrative costs include compensation and marketing type expenses. Other operating costs include all other types of operating type expenses.

Critical Accounting Policies and Estimates

In response to SEC Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” Mannatech has identified certain policies that are important to the portrayal of its consolidated financial condition and consolidated results of operations. These policies require the application of significant judgment by Mannatech’s management. Mannatech periodically analyzes the need for certain estimates, including the need for such items as inventory reserves, impairment of long-lived assets, tax valuation allowances, provisions for doubtful accounts, revenue recognition, sales returns, accounting for stock options, contingencies and litigation. Mannatech bases any estimates needed on its historical experience, industry standards, and various other assumptions that may be reasonable under the circumstances. Mannatech cautions its readers that actual results could differ from its estimates under different assumptions or conditions. If circumstances change relating to the various assumptions or conditions used in such estimates Mannatech could experience an adverse effect on its consolidated financial condition, changes in financial condition and results of operations. Mannatech’s critical accounting policies at March 31, 2004 include the following:

Inventory Reserves

Mannatech’s inventory carrying value is reviewed and compared to the fair market value of its inventory and any inventory value in excess of fair market value is written down. In addition, Mannatech reviews its inventory for obsolescence and any inventory identified as obsolete is reserved or written off. Mannatech’s determination of obsolescence is based on assumptions about the demand for its products, product expiration dates, estimated future sales, and management’s future plans. If actual sales or management plans are less favorable than those originally projected by management, additional inventory reserves or write-downs may be required. Mannatech’s inventory value at March 31, 2004 was $9.0 million and includes an inventory reserve of $0.1 million.

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Asset Impairment

Mannatech reviews the book value of its property and equipment for impairment whenever an event or change in circumstances indicates that the net book value of an asset or group of assets may be unrecoverable. Mannatech’s impairment review includes a comparison of future projected cash flows generated by the asset or group of assets with its associated carrying value. Mannatech believes its expected future cash flows approximate or exceed its net book value. However, if circumstances change and the net book value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges), Mannatech would have to recognize an impairment loss to the extent the net book value of an asset exceeds its fair value. At March 31, 2004, the net book value of Mannatech’s property and equipment was $5.3 million.

Tax Valuation Allowances

Mannatech evaluates the probability of realizing the future benefits of any of its deferred tax assets and records a valuation allowance when it believes a portion or all of its deferred tax assets may not be realized. If Mannatech is unable to realize the expected future benefits of its deferred tax assets, it would be required to provide an additional valuation allowance. As of March 31, 2004, Mannatech recorded deferred tax assets of $3.0 million, which includes a valuation allowance of approximately $1.5 million related to its Japanese net operating loss carry forwards.

Deferred Revenues

Mannatech defers all of its revenue until its customers receive their shipments. Mannatech also defers a portion of its revenue from the sale of its starter and renewal packs because of a one-year magazine subscription offered in some of its packs. In addition, Mannatech defers the portion of revenue from each pack that exceeds the total average wholesale value of all individual components included in such packs. Mannatech amortizes its deferred revenues associated with its magazine subscriptions and the excess amount over the total average wholesale value of the individual components in the packs over twelve months. Although Mannatech has no immediate plans to significantly change the contents of its packs or its shipping methods, any such changes in the future could result in additional revenue deferrals or could cause Mannatech to recognize its deferred revenue over a longer period of time.

Software Capitalization

Mannatech capitalizes salaries and consulting fees related to the development of certain qualifying internally-developed software applications including: GlycoScience.org, a scientific and educational web database and Success Tracker^™, a web-based training and marketing tool for its independent associates. Mannatech amortizes such qualifying costs over its estimated useful life of the software application, which is either three or five years. If accounting standards change or if the capitalized software becomes obsolete, Mannatech may be required to write-off its capitalized software or accelerate its amortization period. As of March 31, 2004, Mannatech’s capitalized software had a remaining net book value of $0.3 million. In the first quarter of 2004, Mannatech capitalized $0.1 million related to the development of its corporate website and data management tracking system. Mannatech anticipates capitalizing additional costs associated with salaries and consulting fees related to developing and implementing its new global back-office systems in 2004 and 2005.

Accounting for Stock-Based Compensation

Currently, Mannatech follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and its related interpretations for stock options granted to employees and members of its board of directors. Under the recognition and measurement principles of APB 25, Mannatech is not required to recognize any compensation expense unless the market price of the stock exceeds the exercise price on the date of grant or the terms of the grant are subsequently modified. The Financial Accounting Standards Board has recently indicated that it expects to issue a proposal to change the recognition and measurement principles for equity-based compensation granted to employees and board members. Under the proposed rules, Mannatech would be required to recognize compensation expense related to stock options granted to employees and board members after December 15, 2004. The compensation expense would be calculated based on the number of options expected to vest and would be recognized over the stock options’ vesting period, which could have a material effect on Mannatech’s future consolidated results of operations.

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Results of Operations

The following table summarizes Mannatech’s consolidated operating results as a percentage of net sales for each of the three months ended March 31, 2003 and 2004:

Three months ended March 31, 2004 compared with the three months ended March 31, 2003

Net Sales

Mannatech’s net sales have continued to increase in all countries. The dollar increase consisted of increases in both pack sales and product sales. Pack sales directly relate to new associates and members who will be purchasing Mannatech’s products. Therefore, as Mannatech’s pack sales increase, product sales usually increase; however, there is not a direct correlation between the increase in the number of new associates and members and the amount of the increase in product sales because associates and members consume different products and have different consumption levels.

For the first quarter of 2004, Mannatech’s quarterly pack sales primarily increased due to the increase of 33,000 new independent associates and members purchasing packs during the first quarter of 2004, which increased the total new associates and members within the 12-months ended March 31, 2004 to 141,000. The total new independent associates and members purchasing packs during the first quarter of 2003 was 30,000, which increased the total new associates and members within the 12-months ended March 31, 2003 to 100,000.

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The number of new and continuing independent associates and members who purchased Mannatech’s products during the 12 months ended March 31, 2003 and 2004 are as follows:

Pack Sales

Overall, pack sales increased $4.2 million for the three months ended March 31, 2004 as compared to the same period in 2003. This increase was primarily related to changes in the mix of new and existing associates. In the first quarter of 2004, pack sales from new associates increased $2.7 million, as compared to the same period in 2003. This increase attributed to 46.6% of the total increase in pack sales for the first quarter of 2004 as compared to the same period in 2003. New pack sales to new associates totaled $8.5 million in the first quarter of 2004 as compared to $5.8 million for the same period in 2003. Mannatech continues to believe the increase in the number of new associates and members over the past few years correlated to the changes in its revamped global associate and career plan; introducing new incentives, contests and products; and implementing several management changes over the past year.

Product Sales

Mannatech’s product sales have increased year-over-year in all countries. The increase results from new product launches and an overall increase in sales volume sold. In September 2003, Mannatech launched three new products, including its United States launch of a new antioxidant product called Ambrotose AO^™. New products increased total product sales in the first quarter of 2004 by approximately $4.8 million as compared to the same period in 2003. In 2004, Mannatech plans to improve its Mannabars and plans to continue its research to develop additional new products and strategies in 2005.

Changes in existing product sales related to an increase in sales volume as compared to the prior year. In the first quarter of 2004, the increase in existing product sales was $9.3 million, as compared to the same period in 2003. The increase in Mannatech’s existing product sales related to the continued increase in the number of new and existing associates and members purchasing Mannatech products.

Other Sales

Other sales consists of a $0.7 million increase in freight revenue charged to associates and members related to the increase in pack and product sales in the first quarter of 2004 as compared to the same period in 2003. This increase was offset by an increase in deferred revenue of $1.1 million related to the timing of shipments to customers.

Cost of Sales

Cost of sales increased $2.0 million in the first quarter of 2004 because of the increase in volume of packs and products sold during that period as compared to the same period in 2003. However, cost of sales as a percentage of net sales decreased from 16.6% in the first quarter of 2003 to 14.8% in the first quarter of 2004. This decrease as a percentage of net sales was the result of the change in product mix sold and gaining cost efficiencies from certain manufacturers in 2004, which favorably impacted Mannatech’s gross profit.

Inventory write-offs and reserves do not have a significant impact on Mannatech’s cost of sales. For the three months ended March 31, 2003 and 2004, Mannatech maintained a provision for inventory write-offs of $0.2 and $0.1 million, respectively. The provision primarily relates to discontinued promotional materials and normal spoilage or damaged products.

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Commissions and Incentives

Commissions and incentives increased to $25.8 million in the first quarter of 2004 as compared to $16.3 million in the same period in 2003. As a percentage of net sales, commissions and incentives increased to 44.3% in the first quarter of 2004 as compared to 40.3% for the same period in 2003. The 4.0% increase in commissions and incentives as a percentage of net sales is primarily attributable to the following:

Gross Profit

Gross profit increased to $23.9 million in the first quarter of 2004 as compared to $17.4 million in the same period in 2003 primarily as a result of an increase in net sales. As a percentage of net sales, gross profit decreased in the first quarter of 2004 as compared to the same period in 2003 due to an increase in commissions, which related to the sales mix sold, partially offset by gaining cost efficiencies from its manufacturers.