The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three and nine months ended March 31, 2012. You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to the condensed consolidated financial statements included under Item 1 in this report, as well as the risk factors and other information included in our 2011 Annual Report and other reports and documents we file with the SEC. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below based on a variety of factors.

Executive Overview

The following overview does not address all of the matters covered in the other sections of this Item 2 or other items in this report or contain all of the information that may be important to our stockholders or the investing public. This overview should be read in conjunction with the other sections of this Item 2 and this report.

Our primary business activity is providing private label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. Historically, our revenue has been largely dependent on sales to one or two private label contract manufacturing customers and subject to variations in the timing of such customers' orders, which in turn is impacted by such customers' internal marketing programs, supply chain management, entry into new markets, new product introductions, the demand for such customers' products, and general industry and economic conditions. More recently, our revenue has included royalty and licensing revenue generated from our patent estate pursuant to license and supply agreements with third parties for the distribution and use of the ingredient known as beta-alanine and sold under the CarnoSyn® trade name.

A cornerstone of our business strategy is to achieve long-term growth and profitability and to diversify our sales base. We have sought and expect to continue to seek to diversify our sales by developing relationships with additional, quality-oriented, private label contract manufacturing customers, commercializing our patent estate through contract manufacturing, royalty and license agreements, and developing and growing our own line of branded products.

During the first nine months of fiscal 2012, our net sales were 25.2% higher than in the first nine months of fiscal 2011. Private label contract manufacturing sales increased 20.2% due primarily to higher volumes of existing products in existing markets, sales of new products to existing customers and sales to new customers. This increase was partially offset by lower product sales to other existing customers. Our revenue concentration risk for our two largest customers decreased to 68% as a percentage of our total sales for the first nine months of fiscal 2012 compared to 73% in the first nine months of fiscal 2011. We expect our contract manufacturing revenue concentration percentage for our two largest customers to decrease marginally during the remainder of fiscal 2012 with the anticipated increase of sales of new products to existing customers.

During fiscal 2011, we expanded our beta-alanine licensing programs through new agreements with Nestle Nutrition and Abbott Laboratories. During the nine months ended March 31, 2012, CarnoSyn® beta-alanine royalty and licensing revenue totaled $4.1 million, representing a 210% increase over the comparable prior year period. Our CarnoSyn® related income has grown considerably in recent periods due to the increased popularity of this ingredient as a sports nutrition supplement and expanded distribution channels and efforts. To protect our CarnoSyn® business and its underlying patent estate, we incurred litigation and patent compliance expenses of approximately $1.4 million during fiscal 2011, $544,000 during the three months ended March 31, 2012 and $1.1 million during the nine months ended March 31, 2012. Our efforts to protect our patent estate are described in more detail under Item 1 of Part II of this report. During the second quarter of fiscal 2012, we also purchased approximately $2.9 million of beta-alanine raw material to help ensure sufficient inventory to meet anticipated future customer demand and to remove infringing beta-alanine product from the industry supply chain. During the third quarter of fiscal 2012, we purchased an additional $307,000 and sold $364,000 of beta-alanine raw material. As of March 31, 2012, we had $2.9 million of beta-alanine raw material on hand. Subject to customer demand levels and other economic influences, we expect to liquidate a majority of this beta-alanine inventory during the next several quarters.

Our ability to maintain or further increase our beta-alanine royalty and licensing revenue will depend in large part on the availability of the raw material beta-alanine when and in the amounts needed, the ability to expand distribution of beta-alanine to new and existing customers, and the continued compliance by third parties with our patent and trademark rights.

Net sales from our branded products declined 14.2% in the first nine months of fiscal 2012 as compared to the first nine months of fiscal 2011 due to the continued softening of our Pathway to Healing® product line. Our branded products segment consists primarily of the products sold under our Pathway to Healing® product line. Beginning in April 2007, Dr. Cherry ceased airing his weekly television program, which had served as the primary customer acquisition vehicle in marketing the Pathway to Healing® product line. While sales of the product line have been primarily generated by continuity orders from long-standing repeat customers, the loss of the television program has had a negative impact on our ability to acquire new customers and retain existing customers. During fiscal 2011, we began the process of re-launching a portion of our Pathway to Healing® product line and are continuing to evaluate alternatives for this product line.

During the remainder of fiscal 2012, we plan to continue to focus on:

• Leveraging our state of the art, certified facilities to increase the value of the goods and services we provide to our highly valued private label contract manufacturing customers, and assist us in developing relationships with additional quality oriented customers;

• Expanding the commercialization of our beta-alanine patent estate through contract manufacturing, royalty and license agreements and protecting our proprietary rights;

• Evaluating and implementing focused initiatives to grow our Pathway to Healing® product line; and

• Improving operational efficiencies and managing costs and business risks to improve profitability.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies that we believe are important to the portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our 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.

Our critical accounting policies are discussed under Item 7 of our 2011 Annual Report. There have been no significant changes to these policies during the nine months ended March 31, 2012.

Results of Operations

The results of our operations for the periods ended March 31 were as follows
(dollars in thousands):



                                                            Three  Months Ended                                  Nine  Months Ended
                                                                 March 31,                                            March 31,
                                                                                       %                                                   %
                                                  2012              2011             Change            2012              2011            Change
Private label contract manufacturing         $     14,943       $   12,224                 22      $    46,586       $   38,758                20
Patent and trademark licensing                      2,092              720                191            4,146            1,336               210
Branded products                                      387              431               (10)            1,192            1,390              (14)

Total net sales                                    17,422           13,375                 30           51,924           41,484                25
Cost of goods sold                                 13,299           10,991                 21           39,765           33,576                18

Gross profit                                        4,123            2,384                 73           12,159            7,908                54
Gross profit %                                      23.7%             17.8%                                23.4%            19.1%
Selling, general & administrative expenses          2,493            2,126                 17            6,956            5,601                24

% of net sales                                        14.3%           15.9%                              13.4%              13.5%
Income from operations                              1,630              258                532            5,203            2,307               126
% of net sales                                         9.4%           1.9%                               10.0%               5.6%
Other expense (income), net                            19                7                171             (37)                5             (840)

Income before income taxes                          1,611              251                542            5,240            2,302               128
% of net sales                                         9.2%           1.9%                               10.1%               5.5%
Income tax expense                                    543               70                676            1,859              355               424

Net income                                   $      1,068       $      181                490      $     3,381       $    1,947                74

% of net sales                                         6.1%           1.4%                                  6.5%             4.7%

The percentage increase in contract manufacturing net sales was primarily attributed to the following for the periods ended March 31, 2012:

                                    Three Months                 Nine Months
                                         Ended                       Ended
  Mannatech, Incorporated (1)                (1.5)%                         7.4%
  NSA International, Inc. (2)                 7.1                          4.9
  Other customers (3)                        16.6                          7.9

  Total                                       22.2%                        20.2%

1 Net sales to Mannatech, Incorporated decreased during the three months ended March 31, 2012 as compared to the same period in the prior year primarily as a result of lower volumes of established products in existing markets. During the nine months ended March 31, 2012, net sales to Mannatech, Incorporated increased as compared to the same period in the prior year primarily as a result of higher volumes of established products in existing markets.

2 The increase in net sales to NSA International, Inc. (NSA) for the three months ended March 31, 2012 included an increase in international sales of 37.1% and a decrease in domestic sales of 2.2%. The increase in net sales to NSA for the nine months ended March 31, 2012 included an increase in international sales of 45.8% and a decline in domestic sales of 6.2%. The international sales increases were primarily due to increased demand by NSA's consumers. The domestic decreases were primarily due to lower average sales prices and lower sales volumes of existing products.

3 The increase in net sales was primarily due to sales of existing and new products to existing customers.

Net sales from our branded products segment decreased 10% during the third quarter of fiscal 2012 as compared to the comparable quarter in fiscal 2011 and 14% during the nine months ended March 31, 2012 compared to the comparable nine month period last year. These sales declines were primarily due to the continuing impact of the cessation of the Dr. Cherry weekly television program in April 2007, which had served as the primary acquisition vehicle in marketing the Pathway to Healing® product line.

Gross profit margin increased 5.9 percentage points during the third quarter of fiscal 2012 from the comparable quarter in fiscal 2011 and 4.3 percentage points during the nine months ended March 31, 2012 from the comparable nine month period last year. The change in gross profit margin was primarily due to the following for the periods ended March 31, 2012:

                                                           Three Months            Nine Months
                                                               Ended                  Ended
Contract manufacturing:
Shift in sales and material mix                                    (3.0)%                 (3.1)%
Reduced (incremental) overhead expenses                             2.7                   3.4
Reduced (incremental) direct and indirect labor                     2.4                   1.0
Patent and trademark licensing                                      4.4                   3.6
Branded products operations                                        (0.6)                 (0.6)

Total                                                                5.9%                  4.3%

Selling, general and administrative expenses increased $367,000 and $1.4 million, respectively, during the three and nine month periods ended March 31, 2012 as compared to the corresponding prior year periods. The increase during the third quarter of fiscal 2012 as compared to the same period in fiscal 2011 was primarily attributable to a $171,000 increase in patent litigation and prosecution expenses associated with our patent and trademark licensing business and $175,000 in increased expenses from our domestic private label contract manufacturing business primarily related to employee compensation costs. The increase during the nine month period ended March 31, 2012 as compared to the same period in fiscal 2011 was primarily attributable to a $640,000 increase in patent litigation and prosecution expenses associated with our patent and trademark licensing business and $703,000 in increased expenses from our domestic private label contract manufacturing business primarily related to employee compensation costs. Selling, general and administrative expenses for our branded products business during the three and nine month periods ended March 31, 2012 were consistent with the comparable prior year periods.

Other expense, net increased $12,000 during the third quarter of fiscal 2012 from the comparable quarter last year primarily due to foreign currency exchange activity. Other income, net increased $42,000 during the nine month period ended March 31, 2012 from the comparable nine month period last year due primarily to favorable foreign currency exchange activity associated with the Swiss Franc and the related impact on the translation of Swiss Franc denominated expenses.

Our income tax expense increased $473,000 during the third quarter of fiscal 2012 and $1.5 million during the nine months ended March 31, 2012 as compared to the same periods in the prior fiscal year. The increases were primarily due to the recognition of federal and state income tax expense on domestic fiscal 2012 earnings compared to zero federal domestic income tax recognized for the three and nine month periods ended March 31, 2011. No U.S-based federal income tax expense was recorded on domestic earnings during the three and nine month periods ended March 31, 2011 due to federal net operating loss carry forwards. As a result, the tax expense from operations for the three and nine month periods ended March 31, 2011 only included state tax expense on domestic operations and tax from our foreign subsidiary at a statutory tax rate of 20%. The three and nine month periods ended March 31, 2012 include both domestic federal and state income tax and income tax from our foreign subsidiary at a statutory tax rate of 20%.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facility. Net cash used by operating activities was $2.4 million for the nine months ended March 31, 2012 compared to $4.6 million provided by operating activities in the comparable period in the prior year.

At March 31, 2012, changes in accounts receivable, consisting primarily of amounts due from our private label contract manufacturing customers and our patent and trademark licensing activities, used $1.9 million in cash during the nine months ended March 31, 2012 compared to providing $879,000 in the comparable period in the prior year. The increase in cash used by accounts receivable during the nine months ended March 31, 2012 was the result of higher sales and royalty and licensing revenue as compared to the comparable prior year period. Days sales outstanding was 22 days as of March 31, 2012 compared to 29 days as of March 31, 2011.

At March 31, 2012, changes in inventory used $6.7 million in cash during the nine months ended March 31, 2012 compared to using $492,000 of cash in the comparable prior year period. The increase in cash used by inventory during the nine months ended March 31, 2012 was primarily related to timing of inventory shipments and receipts, increased sales demand and the net acquisition of approximately $2.9 million of beta-alanine raw material, which was acquired to help ensure sufficient inventory to meet anticipated future customer demand and to remove infringing beta-alanine product from the industry supply chain.

Approximately $786,000 of our operating cash flow was generated by NAIE in the nine months ended March 31, 2012. As of March 31, 2012, NAIE's undistributed retained earnings were considered indefinitely reinvested.

Capital expenditures were $1.8 million during the nine months ended March 31, 2012 compared to $1.3 million in the comparable period in the prior year. Capital expenditures during the nine months ended March 31, 2012 and March 31, 2011 were primarily for manufacturing equipment in our Vista, California and Manno, Switzerland facilities

We did not have any consolidated debt as of either March 31, 2012 or June 30, 2011.

On December 16, 2010, we executed a new Credit Agreement with Wells Fargo Bank, National Association. This Credit Agreement replaced our previous credit facility and provides us with a line of credit of up to $5.0 million. The line of credit may be used to finance working capital requirements. In consideration for granting the line of credit, we paid a commitment fee of $12,500 upon execution of the agreement and paid an additional commitment fee of $12,500 in December 2011. There are no amounts currently drawn under the line of credit.

Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) net income after taxes of not less than $750,000 on a trailing four quarter basis as of the end of each calendar quarter beginning with the four quarter period ended December 31, 2010; and (ii) a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by NAI from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 2.75% above the daily one month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 2.50% above the LIBOR rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before November 1, 2013; provided, however, that we must maintain a zero balance on advances under the line of credit for a period of at least 30 consecutive days during each fiscal year. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have a foreign exchange facility with Wells Fargo in effect until November 1, 2013, and with Bank of America, N.A. in effect until March 15, 2013.

On March 31, 2012, we were in compliance with all of the financial and other covenants required under the Credit Agreement.

On September 22, 2006, NAIE entered into a credit facility to provide it with a credit line of up to CHF 1.3 million, or approximately $1.4 million, which was the initial maximum aggregate amount that could be outstanding at any one time under the credit facility. This maximum amount is reduced annually by CHF 160,000, or approximately $177,000. On February 19, 2007, NAIE amended its credit facility to provide that the maximum aggregate amount that may be outstanding under the facility cannot be reduced below CHF 500,000, or approximately $554,000. As of March 31, 2012, there was no outstanding balance under this credit facility.

Under its credit facility, NAIE may draw amounts either as current account loan credits to its current or future bank accounts or as fixed loans with a maximum term of 24 months. Current account loans will bear interest at the rate of 5% per annum. Fixed loans will bear interest at a rate determined by the parties based on current market conditions and must be repaid pursuant to a repayment schedule established by the parties at the time of the loan. If a fixed loan is repaid early at NAIE's election or in connection with the termination of the credit facility, NAIE will be charged a pre-payment penalty equal to 0.1% of the principal amount of the fixed loan or CHF 1,000 (approximately $1,107), whichever is greater. The bank reserves the right to refuse individual requests for an advance under the credit facility, although its exercise of such right will not have the effect of terminating the credit facility as a whole.

As of March 31, 2012, we had $11.1 million in cash and cash equivalents and $5.6 million available under our credit facilities. Of these amounts, $5.3 million of cash and cash equivalents and $554,000 of the amount available under our credit facilities were held by NAIE. Our intent is to permanently reinvest all of our earnings from foreign operations, and we do not currently anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund our U.S. operations, we may be required to accrue and pay additional U.S. taxes to repatriate any such funds. Overall, we believe our available cash, cash equivalents and potential cash flows from operations will be sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months.

Off-Balance Sheet Arrangements

As of March 31, 2012, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses material to investors.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in the notes to our consolidated financial statements included under Item 1 of this report. Other than those pronouncements, we are not aware of any other pronouncements that materially affect our financial position or results of operations.