The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each of the three years ended December 31, 2008, 2007, and 2006. This discussion should be read in conjunction with "Item 15. - Consolidated Financial Statements and related Notes," beginning on page F-1 of this report and with other financial information included elsewhere in this report. 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 our subsidiaries on a consolidated basis.

Company Overview

Since November 1993, we have continued to develop innovative, high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products that are sold through a global network-marketing system operating in the United States, Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, and Singapore. The United States location processes orders for the United States, Canada, and South Africa. The Australian location process orders for Australia, New Zealand, and Singapore. The United Kingdom location processes orders for the United Kingdom, Denmark, and Germany. The Switzerland office was created to manage certain day-to-day business needs of non-North American markets and coordinates our continued global expansion.

We operate as a single business segment and primarily sell our products through a network of approximately 531,000 independent associates and members who have purchased our products and/or packs within the last 12 months, which we refer to as current independent associates and members. We operate as a seller of nutritional supplements through our network-marketing distribution channels operating in twelve different countries. We review and analyze our net sales by geographical location and further analyze our net sales by packs and by products. Each of our subsidiaries sells the same types of products and possesses similar economic characteristics, such as selling prices and gross margins.

Because we sell our products through network-marketing distribution channels, the opportunities and challenges that affect us most are: recruitment and retention of independent associates and members, entry into new markets and growth of existing markets, niche market development, new product introduction, and investment in our infrastructure.

Current Economic Conditions and Recent Developments.

During calendar year 2008, the U.S. and global economies slowed dramatically as a result of a variety of serious problems, including turmoil in the credit and financial markets, concerns regarding the stability and viability of major financial institutions, the state of the housing markets, high unemployment rates, and volatility in worldwide stock markets. Harsh economic conditions significantly reduced consumers' disposable income and impacted our customers' spending practices, causing a decline in our revenues in the second half of 2008. In addition, during 2007 and 2008, we were subjected to certain negative publicity resulting from heightened litigation and regulatory activities. See Note 14 ("Litigation") to the consolidated financial statements for a detailed discussion of such legal proceedings.

The global financial crisis, combined with the steep decline in customer demand and uncertainties associated with the potential outcome of outstanding litigation, have intensified our need to accelerate cost-cutting measures and has forced us to reevaluate certain business priorities. During 2008 and early 2009, we implemented various initiatives to reduce expenses while staying committed to our strategic plan of developing new, innovative science-based products, strengthening financial results, reduction in expenses, and adding value to our shareholders and independent associates.

In August 2008, our Board of Directors reduced the amount of our quarterly cash dividend to $0.02 per common share in response to lower sales and instability in the capital markets. The decrease represents a reduction of $0.07 per share from the dividend paid in the first and second quarters of 2008. With 26,460,788 shares outstanding as of December 31, 2008, this reduction allowed us to save approximately $3.7 million in dividend distributions. Strong liquidity is an important factor in our on-going efforts to weather the current economic downturn and we believe this initiative has made an important contribution. See "Risk Factors-We are not required to pay dividends, and our Board of Directors could decide not to declare a dividend or could reduce the amount of the dividend at any time" in item 1A of this Form 10-K for further discussion related to future payment of dividends.

We continue to focus on new product development. In 2008, we introduced two new products in selected markets. In March 2008, we launched the Bounce-Back™ capsules, an all natural product that supports recovery after physical activity or over-exertion. In September 2008, we launched our OsoLean™ powder, a new fat-loss product. The OsoLean™ whey protein supplement is an all-natural powder product that mixes with a variety of food and beverages allowing consumers to easily add it to any weight management and fitness program.

In order to reward our independent associates for their business building successes, we modified our global associate career and compensation plan by increasing opportunities for certain qualified independent associates to earn additional bonuses, including matching bonuses for enrollers. These changes became effective for all countries by the end of the second quarter of 2008. In addition, in March 2008, we launched a new global sales platform in the United States designed to assist our independent associates in their business-building efforts.

We remain committed to adding value to our independent associates. In January 2009, we announced a new, simplified offering, which features a $499 Premium/All-Star Pack. This $499 Premium/All-Star Pack provides income opportunities for business builders seeking a second income stream along with our leading wellness products. Developed in response to the current economic crisis, this more affordable pack includes more than $600 of products including our new fat loss product OsoLean™ powder. The enhanced compensation plan allows independent sales associates to start their business building opportunity in the wellness industry at a lower cost while providing faster access to leadership qualification.

During 2008, several of our core products were certified by NSF International, an independent, accredited testing laboratory. To date, we have received certifications from NSF for PhytoMatrix® caplets, PLUS™ caplets, Ambrotose AO® capsules, Advanced Ambrotose®, Ambrotose® complex, and Optimal Support Packets. The products were certified according to the NSF/ANSI 173 Dietary Supplement Standard, the only U.S. national standard for dietary supplements. We strive to ensure all of our products meet the strictest guidelines for purity, and these additional certifications from NSF exemplify our commitment to offering our customers the highest quality. We intend to carry the NSF certification mark on the supplements' labels and promotional materials to demonstrate compliance. We will continue to seek NSF certification on our entire product line to demonstrate the ultimate value and quality when purchasing and consuming Mannatech products.

We continue to focus our efforts on increasing operational efficiency. We have made certain changes to our management structure in 2008 to provide stronger foundation for growth and better align our organization with our long-term goals. We believe that efficiencies gained from the organization realignment will help us to improve cost controls and distinguish us in the marketplace by adding emphasis to brand management, associate recruitment, supply chain excellence, new product development, and international expansion.

We expect a turbulent economy for the foreseeable future and we have undertaken several actions to address this environment. We believe our aggressive cost reduction actions and financial discipline will enable us to effectively manage through the challenging economy. We believe recent changes to our business model will position us to support future long-term profitable growth.

Year Ended December 31, 2008 compared to Year Ended December 31, 2007

The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2008 and 2007.

                                    2008                       2007                               Change
                             Total        % of        Total           % of
                            Dollars    net sales     dollars       net sales                Dollar       Percentage
                                                      (in thousands, except percentages)
Net sales                  $ 332,703      100 %      $ 412,678         100 %             $    (79,975 )     (19.4 )%
Cost of sales                 48,564     14.6 %         59,765        14.5 %                  (11,201 )     (18.7 )%
Commissions and incentives   149,595     45.0 %        189,067        45.8 %                  (39,472 )     (20.9 )%
                             198,159     59.6 %        248,832        60.3 %                  (50,673 )     (20.4 )%
Gross profit                 134,544     40.4 %        163,846        39.7 %                  (29,302 )     (17.9 )%

Operating expenses:
Selling and administrative
expenses                      81,077     24.4 %         84,298        20.4 %                   (3,221 )      (3.8 )%
Depreciation and
amortization                  12,310      3.7 %         10,236         2.5 %                    2,074        20.3 %
Other operating costs         55,656     16.7 %         61,703        15.0 %                   (6,047 )      (9.8 )%
Total operating expenses     149,043     44.8 %        156,237        37.9 %                   (7,194 )      (4.6 )%
Income (loss) from
operations                   (14,499 )   (4.4 )%         7,609         1.8 %                  (22,108 )    (290.6 )%
Interest income                1,604      0.5 %          2,700         0.7 %                   (1,096 )     (40.6 )%
Other income (expense),
net                           (5,303 )   (1.6 )%           180         0.0 %                   (5,483 )   (3046.1 )%
Income (loss) before
income taxes                 (18,198 )   (5.5 )%        10,489         2.5 %                  (28,687 )    (273.5 )%
(Provision) benefit for
income taxes                   5,570      1.7 %         (3,895 )      (0.9 )%                   9,465       243.0 %
Net income (loss)          $ (12,628 )   (3.8 )%     $   6,594         1.6 %             $    (19,222 )    (291.5 )%

For geographical purposes, consolidated net sales primarily shipped to customers by location for the years ended December 31, 2008 and 2007 were as follows:

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



                                        2008                     2007
                                       (in millions, except percentages)
           United States        $   176.9      53.1 %            $ 244.5   59.2 %
           Japan                     44.8      13.5 %               42.3   10.3 %
           Republic of Korea         35.7      10.7 %               44.0   10.7 %
           Australia                 26.1       7.8 %               29.4    7.1 %
           Canada                    23.6       7.1 %               27.4    6.6 %
           South Africa               5.5       1.7 %                  -      -
           New Zealand                5.2       1.6 %                6.9    1.7 %
           Taiwan                     5.2       1.6 %                5.4    1.3 %
           United Kingdom             4.7       1.4 %                6.7    1.6 %
           Germany                    3.8       1.1 %                4.6    1.1 %
           Denmark                    1.2       0.4 %                1.5    0.4 %
           Totals               $   332.7       100 %            $ 412.7    100 %

For the year ended December 31, 2008, our operations outside of the United States accounted for approximately 46.9% of our consolidated net sales, whereas in the same period in 2007, our operations outside of the United States accounted for approximately 40.8% of our consolidated net sales.

Consolidated net sales for the year ended December 31, 2008 decreased by $80 million, or 19.4%, to $332.7 million as compared to $412.7 million for the same period in 2007. Expanding our business to South Africa in the second quarter of 2008 accounted for net sales of $5.5 million. Operations in Japan continue to grow as seen by a $2.5 million increase in net sales for 2008 as compared to 2007. These increases were offset by a decrease in North America and international net sales of $71.4 million and $16.6 million, respectively, as compared to 2007. This decrease in net sales is a result of independent associate and member concerns about certain negative publicity as well as a weakened economy. Overall, the appreciation/depreciation of foreign currencies during 2008 had approximately a $0.1 million favorable impact on net sales in 2008, with a favorable first half impact essentially offset by unfavorable second half results.

Our total sales and sales mix can be influenced by any of the following:

• changes in our sales prices;

• changes in consumer demand;

• changes in competitors' products;

• changes in economic conditions;

• changes in regulations;

• announcements of new scientific studies and breakthroughs;

• introduction of new products;

• discontinuation of existing products;

• adverse publicity; and

• changes in our commissions and incentives programs.

Our sales mix for the years ended December 31, was as follows:

                                                                    Change
                                       2008         2007     Dollar    Percentage
                                         (in millions, except percentages)
         Product sales               $   260.5    $  316.9   $ (56.4 )    (17.8 )%
         Pack sales                       57.7        79.0   $ (21.3 )    (27.0 )%
         Other, including freight*        14.5        16.8   $  (2.3 )    (13.7 )%
         Total net sales             $   332.7    $  412.7   $ (80.0 )    (19.4 )%

* In April 2007, we began operating our new ERP System, which allowed us to separately quantify deferred revenue associated with sales of packs and products that were shipped but not yet received by customers. As a result, in April 2007, we began recording deferred revenue related to packs with pack sales and deferred revenue associated with products with product sales. For the three months ended March 31, 2007, other sales included $1.9 million related to the change in deferred revenue for packs and products shipped but not yet received by customers, rather than in the applicable pack or product sales category.

The decrease in our consolidated net sales consisted of a decrease in the volume of products and packs sold and a change in the mix of packs and products sold. Pack sales generally correlate to the number of new independent associates and members who purchase starter packs as well as the number of continuing independent associates who purchase upgrade or renewal packs. However, there is not a direct correlation between the number of new and continuing independent associates and members purchasing packs and the amount of product sales because independent associates and members may consume different products at different consumption levels.

Product Sales

For the year ended December 31, 2008, product sales decreased $56.4 million, or 17.8%, to $260.5 million, as compared to $316.9 million for the same period in 2007. The $56.4 million decrease in product sales was comprised of a decrease in existing product sales of $54.1 million and a decrease attributable to the $2.3 million cost of introducing the

The following new products were introduced during 2008:

• Mannatech Optimal Skin Care System products in certain international markets;

• A new sales kit in the United States;

• PhytoMatrix® caplets in Japan, Taiwan, United Kingdom, Denmark, Germany, and South Korea;

• Bounce Back™ capsules in North America, Australia, and New Zealand;

• OsoLean™ powder in North America, Australia, New Zealand, Japan, and Korea;

• HeartSmart™ tablets in Taiwan;

• Various Optimal Health products in Singapore; and

• Various Optimal Health and Optimal Weight and Fitness products in South Africa.

Pack Sales

We sell packs to our independent associates, which entitles them to purchase our products at wholesale prices. Members can also purchase packs, which enables them to purchase our products at a discount from published retail prices. Depending on the type of pack purchased, a pack may include certain products, promotional and educational information, and policies and procedures. Independent associates can also purchase upgrade packs, entitling the independent associate to additional promotional materials and additional commissions and incentives. Our business-building associates purchase annual renewal packs.

The number of new and continuing independent associates and members, who purchased our packs during the years ended December 31, were as follows:

                                       2008               2007
                     New          133,000    25 %   191,000   33.2 %
                     Continuing   398,000    75 %   384,000   66.8 %
                     Total        531,000   100 %   575,000    100 %

For the year ended December 31, 2008, the overall number of independent associates and members decreased by 44,000 or 7.7%, to 531,000 as compared to 575,000 for 2007. We experienced a decrease in the number of upgrade and renewal packs purchased by our continuing independent associates and a decrease in the number of new independent associates and members purchasing starter packs as compared to the same period in 2007. We believe the decrease in upgrade and renewal packs and starter packs purchased was related to the current economic conditions and independent associate and member concerns over certain negative publicity resulting from ongoing litigation. In 2008, we took the following actions to help increase the number of independent associates and members:

• registered our most popular products with the appropriate regulatory agencies in all countries of operations;

• focused on new product development;

• launched a new, aggressive marketing and educational campaign;

• explored and entered new international markets;

• strengthened compliance initiatives;

• initiated additional incentives;

• explored new advertising and educational tools to broaden name recognition;

• implemented changes to our global associate career and compensation plan;

• introduced new products; and

• introduced a $499 Premium/Allstar Pack in the U.S., Canada and South Africa in January 2009.

Pack sales associated with the number of independent associates and members can be further analyzed as follows, for the years ended December 31:

                            2008                              2007
                 Number of                           Number of
                independent                         independent                     Percentage and
               associates and                       associates                       dollar change
                  members          Pack sales       and members    Pack sales        of pack sales
                      (in millions except percentages and independent associate information)
New                    133,000      $      28.0          191,000    $     39.6    $ (11.6 ) (29.3 )%
Continuing             398,000             29.7          384,000          39.4       (9.7 ) (24.6 )%
Total                  531,000      $      57.7          575,000    $     79.0    $ (21.3 ) (27.0 )%

For the year ended December 31, 2008, our total pack sales decreased by $21.3 million, or 27.0%, to $57.7 million as compared to $79.0 million for the same period in 2007. The decrease in total pack sales was composed of an $11.6 million decrease due to a decline in the number of new independent associates and members purchasing starter packs and a decrease of $9.7 million due to a decline in the number of business-building independent associates purchasing renewal and upgrade packs.

Other Sales

Other sales consisted of the following:

† freight revenue charged to our independent associates and members;

† sales of promotional materials;

† training and event registration fees;

† monthly fees collected for Success Tracker™, a customized electronic business-building and educational materials database for our independent associates that helps stimulate product sales and provide business management;

† a reserve for estimated sales refunds and returns; and

† through March 31, 2007, deferred revenue that pertains to the timing of recognition of revenue for pack and product shipments.

For the year ended December 31, 2008, other sales decreased by $2.3 million, or 13.7%, to $14.5 million as compared to $16.8 million for the same period in 2007. The decrease was primarily due to the decrease in product and pack shipments, which more than offset the increase in freight charged per shipment. The decrease in other sales is also related to the classification of deferred revenue of $1.9 million for pack and product sales, which was partially offset by an increase in income related to a transactional tax holiday for certain sales occurring in 2008.

Gross Profit

For the year ended December 31, 2008, gross profit decreased by $29.3 million, or 17.9%, to $134.5 million as compared to $163.8 million for the same period in 2007. The decrease was primarily due to a 19.4% decrease in net sales, which correlates to the 18.7% decrease in cost of sales, 19.6% decrease in commissions, and 39.5% decrease in incentives as compared to the same period in 2007. For the year ended December 31, 2008, gross profit as a percentage of net sales increased to 40.4% as compared to 39.7% for the same period in 2007.

Cost of sales decreased during the year ended December 31, 2008 by 18.7%, or $11.2 million to $48.6 million as compared to $59.8 million for the same period in 2007. The decrease in cost of sales was primarily due to a decline in product cost of $9.8 million. The inventory write-offs and adjustments decreased by $0.9 million primarily due to the complimentary products shipped in 2007 as a result of the recall of the North American Optimal Restoring Serum. A decrease in freight cost was slightly offset by an increase in shipping supplies, which generated a net decrease of $0.5 million as compared to the same period in 2007. Cost of sales as a percentage of net sales increased slightly to 14.6% as compared to 14.5% for the same period in 2007.

Commission costs decreased for the year ended December 31, 2008, by 19.6%, or $34.6 million, to $142.1 million as compared to $176.7 million for the same period in 2007. The decrease in commissions was primarily related to the decrease in commissionable net sales. For the year ended December 31, 2008, commissions as a percentage of net sales remained relatively flat at 42.7% as compared to 42.8% for the same period of 2007.

Incentive costs decreased for the year ended December 31, 2008, by 39.5%, or $4.9 million, to $7.5 million as compared to $12.4 million for the same period in 2007. The costs of incentives, as a percentage of net sales, decreased to 2.3% for the year ended December 31, 2008, as compared to 3.0% for the same period in 2007. The decrease in incentive costs was also the result of a decrease in the number of independent associates who qualified for annual travel incentives, which fell in 2008 by 33.0% to 889 as compared to 1,326 in 2007.

Selling and Administrative Expenses

Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor, outbound shipping and freight, and marketing-related expenses, such as monthly magazine development costs and costs related to hosting our corporate-sponsored events.

For the year ended December 31, 2008, overall selling and administrative expenses decreased $3.2 million, or 3.8%, to $81.1 million as compared to $84.3 million for the same period in 2007. Selling and administrative expenses, as a percentage of net sales for the year ended December 31, 2008, increased to 24.4%, as compared to 20.4% for the same period in 2007. Compensation and compensation-related costs increased by of $3.4 million, due to an increase in payroll and payroll-related costs of approximately $5.6 million. These compensation related costs were offset by a decrease in temporary and contract labor of approximately $1.8 million, as well as a decrease in stock option expense of $0.4 million, all of which were due to the conversion of a number of temporary and contract labor positions to permanent employees, normal merit increases, decreased capitalization of salaries for the development of our new Enterprise Resource Planning system, and costs related to staff reduction. This net increase was offset by a decrease in freight costs of $3.7 million due to a decrease in product and pack shipments, and a decrease in marketing costs of $2.9 million, which related to a change in distribution of an internal publication to associates, a reduction in cost related to corporate-sponsored events, and a reduction in the cost associated with advertising materials and printing.

Other Operating Costs

Other operating costs generally include travel, accounting/legal/consulting fees, royalties, credit card processing fees, banking fees, off-site storage . . .