Indicate by check mark whether the RegistrantNatural Alternatives International, Inc. (NAI) (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 registrantNAI was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

The aggregate market value of the votingNAI’s common stock held by non-affiliates (assuming for this purpose that all officers and directors, and affiliates of officers and directors, are affiliates)NAI as of the Registrant, aslast business day of September 4, 2002NAI’s most recently completed second fiscal quarter (December 31, 2004) was approximately $15.5 million based$41,243,757 (based on the closing sale price asof $9.23 reported for such date by NASDAQ.

We use raw materials used in the Company’s products consist of nutrientour operations including powders, excipients, empty gelatin capsules, and necessary components for packaging and distribution ofdistributing our finished vitamin and nutritional supplement products. The nutrient powders and the empty gelatin capsules are purchased from manufacturers in the United States and foreign countries. To date, the Company has not experienced any difficulty in obtaining adequate sources of supply. Although there can be no assurance the Company will continue to be able to obtain adequate sources of theseWe typically buy raw materials in bulk from a limited number of qualified vendors located both within and outside the future,United States. During fiscal 2005, Carrington Laboratories Incorporated was our largest supplier, accounting for 35% of our total raw material purchases.

We test the Company believes it will be ableraw materials we buy to do so.

Major Customers

NSA International, Inc. has been our largest customer over the past several years. During the fiscal year ended June 30, 2002. For2005, NSA International, Inc. accounted for approximately 40% of our net sales. Our second largest customer was Mannatech, Incorporated, which accounted for approximately 39% of our net sales during fiscal 2005. Both NSA International, Inc. and Mannatech, Incorporated are private label contract manufacturing customers. No other customer accounted for 10% or more of our net sales during fiscal 2005. Our sales and marketing team is focused on obtaining new private label contract manufacturing customers and developing new direct-to-consumer marketing programs to reduce the year ended June 30, 2001,risks associated with deriving a significant portion of our net sales to NSA, Mannatechfrom a limited number of customers.

Competition

We compete with other manufacturers and Nikken USA, Ltd. (“Nikken”) comprised 72%distributors of vitamins, minerals, herbs, and other nutritional supplements both within and outside the Company’s net sales.

We believe competition in domesticour industry is based on, among other things, customized services offered, product quality and foreign markets in competitionsafety, innovation, price and customer service. We believe we compete favorably with other private labelcompanies because of our ability to provide comprehensive turn key solutions for customers, our certified manufacturing operations and marketing companies. our commitment to quality and safety through our research and development activities. Our future position in the industry will likely depend on, but not be limited to, the following:

The vitamin and nutritional supplement industry is highly competitive and we expect the level of competition continues to increase. The nutritional supplements category includes vitamins, minerals, herbs, botanicals, sports supplements, food supplements and homeopathic supplements. Competition forremain high over the sale of vitamins and supplements comes from many sources, including companies that sell supplements to supermarkets, large chain discount retailers, drug store chains and independent drug stores, health food stores, pharmaceutical companies and others who sell to wholesalers, as well as mail order vendors, eCommerce and network marketing companies. The Company doesnear term. We do not believe it is possible to accurately estimate the number or size of its many competitors sinceour competitors. The industry has undergone consolidation in the recent past and we expect that trend to continue in the near term.

Government Regulation

Our business is subject to varying degrees of regulation by a number of government authorities in the United States, including the United States Food and Drug Administration (FDA), the Federal Trade Commission (FTC), the Consumer Product Safety Commission, the United States Department of Agriculture, and the Environmental

Protection Agency. Various agencies of the states and localities in which we operate and in which our products are sold also regulate our business, such as the California Department of Health Services, Food and Drug Branch. The areas of our business that these and other authorities regulate include, among others:

The FDA, in particular, regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and sale of vitamin and other nutritional supplements in the United States, while the FTC regulates marketing and advertising claims. 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, their suppliers and manufacturers to meet GMP in the preparation, packaging, storage and shipment of their products. The FDA also published a Notice of Advance Rule Making for Good Manufacturing Practices that would require manufacturing of dietary supplements to follow GMP. While the final regulations are subject to revision, we are committed to meeting or exceeding the standards set by the FDA.

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

The Dietary Supplement Health and Education Act of 1994 (DSHEA) revised the provisions of the Federal Food, Drug and Cosmetic Act concerning the composition and labeling of dietary supplements and defined dietary supplements to include vitamins, minerals, herbs, amino acids and other dietary substances used to supplement industrydiets. DSHEA generally provides a regulatory framework to help ensure safe, quality dietary supplements and the dissemination of accurate information about such products. The FDA is largely privately heldgenerally prohibited from regulating active ingredients in dietary supplements as drugs unless product claims, such as claims that a product may heal, mitigate, cure or prevent an illness, disease or malady, trigger drug status.

We are also subject to a variety of other regulations in the United States, including those relating to bioterrorism, taxes, labor and highly fragmented.

Our operations outside the United States are similarly regulated by various agencies and entities in the countries in which we operate and in which our products are sold. The Company believesregulations of these countries may conflict with those in the industryUnited States and may vary from country to country. The sale of our products in certain European countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within the Union. In markets outside the United States, we may be required to obtain approvals, licenses or certifications from a country’s ministry of health or comparable agency before we begin operations or the marketing of products in that country. Approvals or licenses may be conditioned on reformulation of our products for a particular market or may be unavailable for certain products or product ingredients. These regulations may limit our ability to enter certain markets outside the United States.

Intellectual Property

Trademarks. We have developed and use registered trademarks in our business, particularly relating to corporate and product names. We own 21 trademark registrations in the United States and have six trademark applications pending with the United States Patent and Trademark Office. Federal registration of a trademark enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs.

We have filed applications and own trademark registrations and intend to register additional trademarks in foreign countries where products are or may be sold in the future. We have one trademark application filed with the Japan Trademark Office.

We also claim ownership and protection of certain product names, unregistered trademarks and service marks under common law. Common law trademark rights do not provide the same level of protection afforded by registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. We believe these trademarks, whether registered or claimed under common law, constitute valuable assets, adding to our recognition and the marketing of our products and that these proprietary rights have been and will continue to undergo significant consolidationbe important in enabling us to compete.

Trade Secrets. We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with mergeremployees and acquisition activityother parties. Although we regard our proprietary technology, trade secrets, trademarks and similar intellectual property as critical to our success, we rely on a combination of trade secrets, contract, patent, copyright and trademark law to establish and protect our rights in our products and technology. In addition, the near-term. Most industry experts expect consolidation activitylaws of certain foreign countries may not protect our intellectual property rights to continuethe same extent as the laws of the United States.

Patents and Patent Licenses. We own certain United States patents. In addition, we have licensed exclusive worldwide rights to four certain United States patents, and each patent’s corresponding foreign patent application, and are currently involved in research and development of products employing the licensed inventions. These patents relate to the ingredient formerly known as “Oxford Factor”. We are currently selling this ingredient to a customer for use in a limited market under the name of Beta-Alanine^TM.

Backlogs

Our backlog was approximately $16.0 million at September 2, 2005 and $15.8 million at September 2, 2004. Our sales are made primarily pursuant to standard purchase orders for the foreseeable futuredelivery of products. Quantities of our products to be delivered and delivery schedules are frequently revised to reflect changes in food and nutrition companies, multilevel marketing organizations and eCommerce internet firms.

Working Capital Practices

We manufacture products including shortagefollowing receipt of certaincustomer specific purchase orders and as a result our inventory primarily consists of raw materials and damagework in process. Our raw material purchases are made primarily pursuant to property or injurystandard purchase orders for the delivery of raw materials based upon anticipated demand. Customer specific delivery requirements combined with raw material lead times impact the amount of inventory on hand at any given time. We typically purchase raw materials on 30-day payment terms. Discounts are taken periodically for early payment.

Sales are typically made based upon 30-day terms. A 2% discount is provided to persons.

As of June 30, 2002, the Company2005, we employed 208 full-time employees in the United States, 134six of whom held executive management positions. Of the remaining full-time employees, with six32 were employed in executive management positions, 18 in the area of research, laboratory and quality control, eight11 in sales and marketing, while the remaining employees are engagedand 159 in productionmanufacturing and administration. The Company uses in its normal course of operationsFrom time to time we use temporary personnel to help us meet short-term operating requirements primarilyrequirements. These positions typically are in manufacturing and manufacturing support. As of June 30, 2002, approximately 35 individuals were employed as2005, we had 50 temporary personnel.

As of June 30, 2002, the Company’s Swiss subsidiary2005, NAIE employed 2625 full-time employees and two temporary personnel in Switzerland.employees. Most of these employees were engagedpositions are in the areas of manufacturing and manufacturing support.

Our employees are currentlynot represented by a union or any other form of collective bargaining unit. The Company believes its relationsagreement and we have not experienced any work stoppages as a result of labor disputes. We believe our relationship with itsour employees areis good.

We believe there is no material impact on our business or results of operations from seasonal factors.

Financial Information about Our Business Segment and Geographic Areas

Our business consists of one industry segment, the development, manufacturing, packaging, labeling, advertisingmarketing and distribution of the Company’snutritional supplements. Our products are subject to regulation by one or more federal agencies, includingsold both within the United States Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission (“CPSC”),in markets outside the United States, Departmentincluding Europe, Australia and Japan. Our primary market outside the United States is Europe.

For the last three fiscal years, net sales by geographic region were as follows (dollars in thousands):

The allocation of Agriculture (“USDA”)net sales between the United States and markets outside the Environmental Protection Agency (“EPA”). The Company’s activities are also regulated by various agenciesUnited States is based on the location of the statescustomers. Products manufactured by NAIE accounted for 46% of net sales in markets outside the United States in fiscal 2005, 42% in fiscal 2004 and localities51% in fiscal 2003. No products manufactured by NAIE were sold in the United States during the last three fiscal years.

For additional financial information, including financial information about our business segment and geographic areas, please see the consolidated financial statements and accompanying notes to the consolidated financial statements included under Item 8 of this report.

As we continue to expand into markets outside the United States, we will become increasingly subject to political, economic and other risks in the countries in which the Company’s products are sold including without limitation the California Department of Health Services, Food and Drug branch. The FDA in particular regulates the advertising, labelingwhich we operate. For more information about these and sales of vitaminother risks, please see Items 7 and mineral supplements and may take regulatory action concerning medical claims, misleading or untruthful advertising, and product safety issues. These regulations include the FDA’s Good Manufacturing Practices (“GMP”) for foods. Detailed dietary supplement GMPs have been proposed but no regulations have been adopted. Additional dietary supplement regulations were adopted by the FDA pursuant to the implementation of the Dietary Supplement Health and Education Act of 1994 (“DSHEA”).

This table summarizes our facilities consistas of approximately 123,000 square feet and are located in San Marcos and Vista, California. Of this space, the Company owns approximately 29,500 square feet and leases the remaining space. Approximately 68,000 square feet is used for production related activities, 35,000 square feet is used for warehousing, 5,000 square feet is used for laboratory and product development, and 15,000 square feet is used for offices.

Market Information

Our common stock trades on Thethe Nasdaq StockNational Market under the Symbol: NAII. The table below sets forthsymbol “NAII.” Below are the high and low salesclosing prices of our common stock as reported on the Company’s stockNasdaq National Market for each quarter of the fiscal years ended June 30, 20022005 and 2001.

In addition to the Nasdaq National Market, our shares are also listed for trading on the Berlin-Bremen Stock Exchange, the Frankfurt Stock Exchange, and the XETRA Stock Exchange, each of which is a foreign exchange located in Germany. We are not aware of any other exchanges on which our shares are traded.

Holders

As of June 30, 2002,September 8, 2005, there were approximately 418360 stockholders of record of NAIIour common stock.

Dividends

We have never paid a dividend on itsour common stock. Itstock and we do not intend to pay a dividend in the foreseeable future. Our current policy is the Company’s present policy to retain all earnings to help provide funds for future growth. Additionally, under the future growthterms of our credit facility, we are precluded from paying a dividend.

Recent Sales of Unregistered Securities

During the Company.

The following table sets forth selectedtables contain certain financial data forinformation about NAI, including its subsidiaries. When you review this information, you should keep in mind that it is historical. Our future financial condition and results of operations will vary based on a variety of factors. You should carefully review the Company. The selected financial datafollowing information together with the information on risks under Item 7 and elsewhere in the table are derived from thethis report, and our consolidated financial statements of the Company. The following data should be readincluded in conjunction with, and is qualified in its entirety by, the Company’s consolidated financial statements and related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includedthis report under Item 7 of this Form 10-K.

The Company’sfollowing discussion and analysis of itsis intended to help you understand our financial condition and results of operations are based upon itsfor the last three fiscal years ended June 30, 2005. You should read the following discussion and analysis together with our audited consolidated financial statements and the notes to the consolidated financial statements included under Item 8 in this report. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below. You should carefully review the risks described under this Item 7 and elsewhere in this report, which identify certain important factors that could cause our future financial condition and results of operations to vary.

Executive Overview

The following overview does not address all of the matters covered in the other sections of this Item 7 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 7 and this report.

Major business developments of fiscal 2005 included the following:

Our focus for fiscal 2006 includes the following:

Looking forward, we expect to continue our trend of annual revenue growth. We anticipate quarterly revenue fluctuations due to, among other things, the timing of customer orders that are impacted by marketing programs, supply chain management, entry into new markets and new product introductions.

We also expect our long-term trend of growth in annual operating income to continue, however; there may be periodic quarterly declines in operating income due to revenue fluctuations, regulatory compliance costs and investments in new marketing, brand development and channel diversification initiatives. Regulatory compliance costs related to our TGA recertification are largely complete. We anticipate the reduction in regulatory compliance costs to be offset by incremental costs for implementing focused initiatives to establish our own branded products through new distribution channels.

Critical Accounting Policies and Estimates

Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with United States generally accepted accounting principles generally accepted(GAAP). Our significant accounting policies are described in the United States.notes to our consolidated financial statements. The preparation of these financial statements in accordance with GAAP requires the Company tothat we make estimates and judgmentsassumptions that affect the amounts reported amountsin our financial statements and their accompanying notes. We have identified certain policies that we believe are important to the portrayal of assets, liabilities, revenuesour financial condition and expenses, and related disclosureresults of contingent assets and liabilities. On an on-going basis,operations. These policies require the Company evaluates the estimates including those related to bad debts and inventories. The Company bases itsapplication of significant judgment by our management. We base our estimates on our historical experience, industry standards, and on various other assumptions that we believe are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.circumstances. Actual results maycould differ from these estimates.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB 101). SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the more significant judgmentsfee is fixed or determinable; and estimates used in4) collectibility is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the preparationtime title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

As part of the consolidated financial statements:

Additionally, we record reductions to gross revenue for estimated market valuereturns of private label contract manufacturing products and direct-to-consumer products. The estimated returns are based upon assumptions about futurethe trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and direct-to-consumer product returns. However, the estimate for product returns does not reflect the impact of a large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.

Inventory Reserve

We operate primarily as a private label contract manufacturer that builds products following receipt of customer specific purchase orders. As a result, we have limited realization risk in finished goods and work-in-process inventories. Our inventory reserve primarily relates to, but is not necessarily limited to, realization risk for raw materials. Our estimate to reduce inventory to net realizable value is based upon expiration of the raw materials’ efficacy, foreseeable demand of raw materials, market conditions and market conditions.specific factors that arise from time to time related to regulatory and other factors. The reserve level reflects our historical experience. If future product demand and/or market conditions are less favorable than those projected by management,we estimate, additional inventory reserves may be required.

Accounting for Income Taxes—the Company is required toTaxes

We estimate income taxes in each of the jurisdictions in which it operates.we operate. This process involves estimating our actual current tax exposure, for the Company together with assessing temporary differences resulting from differing treatment of items, such as property plant and equipment depreciation, for tax and accountingfinancial reporting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax examexamination reviews. At June 30, 2002, the Company assessed

We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance on its deferred tax assets. A valuation allowance is provided when it is more likely than notallowance. If we determine that some portion or all of the deferred tax assetswe will not be realized. Based upon the historical operating losses and the uncertainty regarding sufficient near term taxable income, management believes that this evidence creates sufficient uncertainty regarding the realizability of the net deferred tax assets. Therefore, a full valuation allowance of $1,097,000 is recorded at June 30, 2002. Should the Company determine that it would be able to realize all or part of itsour deferred tax assets in the future, we will record an adjustment to the carrying value of the deferred tax asset, which

would be reflected as income tax expense. Conversely, if we determine that we will realize a deferred tax asset, which currently has a valuation allowance, we would reverse the valuation allowance, which would be reflected as income tax benefit.

Additionally, we have not recorded U.S. income tax expense for NAIE’s retained earnings that we have declared as indefinitely reinvested offshore, thus reducing our overall income tax expense. The earnings designated as indefinitely reinvested in NAIE are based upon the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of NAIE and NAI. Income tax laws are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.

We carefully review several factors that influence the ultimate disposition of NAIE’s retained earnings declared as reinvested offshore, and apply stringent standards to overcoming the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations of future events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, NAI’s actual cash needs may exceed our current expectations or NAIE’s actual cash needs may be less than our current expectations. Additionally, changes may occur in tax laws and or accounting standards that could change our conclusion about the status of NAIE’s retained earnings. This would result in additional income tax expense in the fiscal year we determine that amounts are no longer indefinitely reinvested offshore.

On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.

It is our policy to establish reserves based upon management’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon audit by tax authorities. The tax reserves are analyzed at least annually, generally in the fourth quarter of each year, and adjustments are made as events occur which warrant adjustments to the reserve.

Derivative Financial Instruments

We use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted transactions denominated in Euros. We may hedge our foreign currency exposures by entering into offsetting forward exchange contracts and currency options. We account for derivative financial instruments using the deferral method under FAS 133, “Accounting for Derivatives and Related Hedging Activity,” when such instruments are intended to hedge identifiable, firm foreign currency commitments or anticipated transactions and are designated as, and effective as, hedges. Foreign exchange exposures arising from certain transactions that do not meet the criteria for the deferral method are marked-to-market.

We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the underlying hedged transaction is realized. In the event the derivative instrument is deemed ineffective or sold prior to maturity, we would recognize the resulting gain or loss in income at that time.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. The allowance for doubtful accounts is based upon our assessment of the collectibility of specific customer accounts, the aging of accounts receivable and our history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance under current conditions; however, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to make payments, could materially change these expectations and additional allowance may be required.

Defined benefit pension plan

The plan obligation and related assets of the defined benefit pension plan are presented in the notes to the consolidated financial statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued based upon third party market quotations. Independent actuaries through the use of a number of assumptions determine plan obligation and annual pension expense. Key assumptions in measuring the plan obligation include the discount rate and estimated future return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based upon the historical returns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate is developed based on the overall rates and the plan’s asset allocation.

We have discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosure relating to these policies.

Results of Operations

The results of operations for the fiscal years ended June 30 were as follows (dollars in thousands, except per share amounts):

Fiscal 2005 Compared to Fiscal 2004

The percentage increase in private label contract manufacturing net sales was attributed to the following:

The increase in our private label contract manufacturing net sales was partially offset by the decrease in our direct-to-consumer net sales. This decrease was a continuation of the decline in sales for the Dr. Cherry Pathway to Healing^TM product line due to our prior reduction in media spending investment in new television markets for the product line and a reduction in new customer acquisitions from our primary television market. We market our Dr. Cherry Pathway to Healing^TM product line primarily through weekly television programming. During the third quarter we completed what we believe are improvements to the content and style of several of the programs. The new programming was introduced in the beginning of April 2005. The initial impact of the new programming appears to be positive as fourth quarter net sales improved 5% over the third quarter of fiscal 2005. In addition, we terminated the Chopra Center Essentials^TM product line in June 2005.

Gross profit margin decreased to 20.1% in fiscal 2005 from 23.6%, or 3.5 percentage points, from fiscal 2004. The decrease in gross profit margin was primarily due to the following:

Selling, general and administrative expenses decreased $583,000, or 4%, from the prior year primarily attributable to the following:

Other expense, net, increased $25,000 over the prior year primarily attributable to the following:

Our effective tax rate for fiscal 2005 was 35.5% compared to 1% in fiscal 2004. The increase in our effective rate is primarily attributable to the reduction in our valuation allowance on our net deferred tax assets in the future,prior year. Income taxes for fiscal 2005 differed from statutory rates primarily due to our Swiss federal and cantonal income tax holiday and the utilization of certain federal and state tax credits. Our Swiss tax holiday ended on June 30, 2005. We anticipate NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes will be approximately 23% in fiscal 2006 compared to our fiscal 2005 effective rate of 5%.

During the fourth quarter of fiscal 2005 we repatriated $2.0 million of NAIE’s foreign earnings under the American Jobs Creation Act (the “Act”), which was signed into law by the President on October 22, 2004. The Act creates a temporary incentive for U.S. multinational corporations to repatriate accumulated income earned outside the U.S. by providing an adjustment85% dividend received deduction for certain dividends from controlled foreign corporations. The $2.0 million repatriation resulted in an increase of $232,000 in our tax provision for fiscal 2005. NAIE’s repatriated foreign earnings previously had been designated as permanently reinvested and the remaining undistributed retained earnings continue to be designated as such subsequent to the deferred tax assets would be recorded to operations in the period such determination was made.

Consolidated private label contract manufacturing the remainder of $33.4 million. NAIE produced $7.5 million of the core business sales in fiscal 2001.

The Dr. Cherry Pathway to Healing^TM product line comprised 100% of our direct-to-consumer net sales for the fiscal years ended June 30, 2004 and 2003. Direct-to-consumer net sales remained consistent due to a reduction in our media spending investment in new television markets for the Dr. Cherry Pathway to Healing^TM product line, as the investment did not produce what we considered to be adequate results. Additionally, we experienced a reduction in new customer acquisitions from our primary television market, while the average order value remained consistent. We have identified opportunities to improve the content and style of the television programs and anticipate introducing the upgraded television programs in the third quarter of fiscal 2005.

Gross profit margin remained consistent despite a 1.4 percentage point increase in material cost as a percentage of net sales, due to a 1.5 percentage point decrease in labor and overhead as a percentage of net sales.

Our material cost as a percentage of net sales was $39.2 million (four customers) and $34.4 million (six customers)54.4% ($42.7 million) for fiscal years 20022004 and 2001, respectively, an53.0% ($29.6 million) in the prior year. The increase in material cost as a percentage of $4.8 million. Thenet sales increase was primarily due to new productan increase in inventory reserves of $854,000 for specific inventory realization risks and $111,000 for products as a result of terminating the Jennifer O’Neill Signature Line^TM brand. The inventory allowance as a percentage of gross inventory at June 30, 2004 remained consistent with June 30, 2003. Additionally, 0.5 percentage points of the increase related to a shift in our sales combined with increasedmix to higher volume, of established products to the first and second largest customers of $2.1 million and $6.2 million, respectively. These increases were partially offset by decreased orders from smaller customers.

In June 2004, we began the lossbuild out of three customers, which represented combined net salestenant improvements for approximately 46,000 square feet at our Vista facility. We anticipate the build out will be completed by the end of $9.9 millionour second quarter in fiscal 2000 versus $238,000 for fiscal 2001. Loss of these three customers reflects the risk associated with our core business where price/cost is a prime driver. Sales2005. We anticipate being able to our second largest customer declined in 2001 by 53% to $4.2 million from $9.0 million for fiscal 2000. Fiscal 2000 sales were higher as this customer purchased large quantities of product from the Company to support a major product introduction, while fiscal 2001 sales volumes have stabilized at lower levels. The sales decreases associated with these customers were offset by increases with other existing customers. Sales to our largest customer during fiscal 2001 increased by $1.1 million to $21.9 million as a result of increased product shipped. Sales increased by $1.1 million in 2001 to our third largest customer as a result of increased volume of established products coupled with additional new products introduced during the 2001 fiscal year.

Selling, general and 36% for our core and DTC businesses, respectively.

During fiscal 2004, we made significant investments in our insurance carriersresearch and development initiatives primarily in the areas of $312,000.

Other expense increased over the prior year primarily due to a $1.7 million$61,000 charge for loss on leased facility. Fiscal 2001 operating expenses includedin conjunction with refinancing our credit facility in May 2004. The charge related to a charge of $1.5 million reflectingprepayment penalty and the write downoff of intangible assets acquiredcapitalized issuance costs and additional expenses associated with the attempted commercializationis included in interest expense in our consolidated statements of the underlying software obtainedincome. Additionally, we received proceeds from the FitnessAge and Custom Nutrition ventures.

At June 30, 2004, we reduced our valuation allowance on our deferred tax assets based on historical operating profits. The effective tax rate for fiscal 2004 was 1% compared to 4% in fiscal 2003. NAIE operates under a five-year Swiss federal and cantonal income tax holiday that ends June 30, 2005. Following the expiration of $2.3 million. Atour tax holiday, we anticipate NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes will be approximately 23% compared to our current effective rate of approximately 5%.

Our net income was $3.0 million ($0.48 per diluted share) in fiscal 2004 and $1.1 million ($0.18 per diluted share) in fiscal 2003. Excluding the endeffect of fiscal 2001, changes in underlying estimates and assumptions as to the ultimate recoverylitigation settlement proceeds of these assets required management to establish a valuation reserve of $2.3 million thereon, resulting$225,000 in the charge toprior year, net income taxes, for the current year, of the same amount.

Liquidity and Capital Resources

Our primary sources of $4.5 million ($0.78 per share) for fiscal 2000. The change in net loss from fiscal 2000 to fiscal 2001 reflected a favorable change in operations offsetliquidity and capital resources are cash flows provided by operating activities and the significant charge to income taxes as described above.

On May 13, 2005, we purchased seven option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions denominated in Euros. The seven options expire monthly beginning June 2005 and ending December 2005. The option contracts had a notional amount of $4.2 million, a weighted average strike price of $1.19, and a purchase price of $21,000. The risk of loss associated with the options is limited to bepremium amounts paid upon expirationfor the option contracts. As of June 30, 2005, we had not exercised any of the agreementoptions and one of the options had expired.

On July 7, 2005, we purchased 12 option contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted transactions denominated in Euros. The 12 options expire monthly beginning January 2006 and ending December 2006. The option contracts had a notional amount of $7.0 million, a weighted average strike price of $1.16, and a purchase price of $152,000. The risk of loss associated with the options is limited to premium amounts paid for the option contracts.

There are no other derivative financial instruments at June 30, 2005.

As of June 30, 2005, we had $1.9 million in cash and cash equivalents. We plan on October 31, 2002. The Company is working with prospective lenders to replace thefunding our current working capital line of credit facility.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet debt nor do we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital requirements will depend on many factors, including but not limited to: continued profitability from operations, the ability to seek additional financing; the effectivenessexpenditures, capital resources, or significant components of the Company’s diversified growth strategy; the effectiveness of the expansion of European operations and the ability to establish additional customersrevenue or changes to existing customer’s business.

This table summarizes the Company’sour known contractual obligations and estimated cash requirements as ofcommercial commitments at June 30, 2002. This table should be read in conjunction with the footnotes in the accompanying consolidated financial statements2005 (dollars in thousands):

We do not believe that inflation or changing prices have had a material impact on our historical operations or profitability.

Recent Accounting Pronouncements

In August 2001,November 2004, the Financial Accounting Standards Board (the “FASB”)FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” This statement addresses financial accounting151, “Inventory Costs, an amendment of APB No. 43, Chapter 4” (SFAS 151). SFAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and reporting for obligations associated with the retirementhandling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of tangible long-lived assets and the associated asset retirement costs. It applies to (a) all entities and (b) legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of long-lived assets, except for certain obligations of lessees. This statement isSFAS 151 are effective for financial statements issued forour fiscal yearsyear beginning after June 15, 2002. The Company doesJuly 1, 2006. We do not believeexpect that the adoption of this statementSFAS 151 will have a material impact on itsour consolidated financial position or results of operations.

On December 16, 2004, the FASB finalized SFAS 123R, “Share Based Payment” (SFAS 123R), which will be effective for our interim and annual reporting periods beginning after June 15, 2005. SFAS 123R will require that we expense stock options and employee stock purchase plan shares using a binomial lattice valuation model that the FASB believes is capable of more fully reflecting certain characteristics of employee stock options. The effect of expensing stock options and employee stock purchase plan shares on our reported results of operations using the Black-Scholes model is presented in August 2001,the notes to our consolidated financial statements under Item 8 of this report.

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (SFAS 154). SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of154 replaces APB Opinion No. 30,20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the Resultsnew accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a correction of Operations—Reporting the Effects of Disposal oferrors in previously issued financial statements should be termed a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” for the disposal of a segment of a business (as previously defined in that Opinion).“restatement.” The provisions of SFAS No. 144 arenew standard is effective for financial statements issued for fiscal yearsaccounting changes and correction of errors beginning after December 15, 2001. TheJuly 1, 2005. We do not expect that the adoption of SFAS No. 144 had no154 will have a material impact on the Company’sour consolidated financial position or results of operations.

Risks

You should carefully consider the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt” and an amendment of that Statement, and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS No. 145 also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company does not expect the adoption of this statement will have a material impact on its results of operations or financial position.

Our future growth and stability depends, in part, on our ability to diversify our net sales. Our efforts to establish new products, brands, markets and customers could require significant initial investments, which may or may not result in higher net sales and improved financial results.

Our business strategy depends in large part on our ability to develop new products, marketing strategies, brands and customer relationships. These activities often require a significant up-front investment including, among others, customized formulations, regulatory compliance, product registrations, package design, product testing, pilot production runs, marketing and the build up of initial inventory. We may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time we generate net sales from new products or customers, and it is possible that we may never generate any revenue from new products or customers after incurring such expenditures. If we incur significant expenses and investments in inventory that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected.

Our operating results will vary and there is no guarantee that we will earn a profit. Fluctuations in our operating results may adversely affect the share price of our common stock.

While our net sales and income from operations have both improved during the past three fiscal years, there can be no assurance that they will continue. The Company expectscontinue to improve, or that we will earn a profit in any given year. We have experienced losses in the past and may incur losses in the future. Our operating results may further fluctuate from periodyear to period as a resultyear due to various factors including differences related to the timing of differencesrevenues and expenses for financial reporting purposes and other factors described in when it incurs expenses and recognizes revenues from product sales. Some ofthis report. At times, these fluctuations may be significant.

Our results of operations are affected by the level of business activity of our customers, which in turn is affected by the level of consumer demand for their products. A significant or prolonged economic downturn may adversely affect the disposable income of many consumers and may lower demand for the products we produce for our private label contract manufacturing customers, as well as for our direct-to-consumer products. A decline in consumer demand and the level of business activity of our customers due to economic conditions could have a material adverse effect on our revenues and profit margins.

Because our direct-to-consumer sales rely on the marketability of key personalities, the inability of a key personality to perform his or her role or the existence of negative publicity surrounding a key personality may adversely affect our revenues.

For the fiscal year ended June 30, 2002, the Company had two major customers, which together2005, our direct-to-consumer products accounted for approximately 69%9% of the Company’sour net sales. The loss of any of these major customers, or any substantial reduction of their purchases from the Company, would have a material adverse impact on the business, operations and financial condition of the Company.

Our industry is highly competitive and we may be unable to compete effectively. Increased competition could adversely affect our financial condition.

The market for our products is highly competitive. Many of our competitors are substantially larger and have greater financial resources and broader name recognition than we do. Our larger competitors may be able to devote greater resources to research and development, marketing and other activities that could provide them with a competitive advantage. Our market has relatively low entry barriers and is highly sensitive to the introduction of new products that may rapidly capture a significant market share. Increased competition could result in price reductions, reduced gross profit margins or loss of market share, any of which could have a material adverse impacteffect on the business, operations andour financial condition and results of the Company.

We may not be able to raise additional capital or obtain additional financing if needed.

Our cash from operations may not be sufficient to meet our working capital needs and/or to implement our business strategies. Although we obtained an $8.0 million line of credit in May 2004, there can be no assurance that this line of credit will be sufficient to meet our needs. Furthermore, if we fail to maintain certain loan covenants we will no longer have access to the current lender will extend the existingcredit line. The credit line has a 2.5 year term and will terminate in November 2006. As a result, we may need to raise additional capital or obtain additional financing.

In recent years, it has been difficult for companies to raise capital due to a variety of factors including the Companyoverall poor performance of the stock markets and the economic slowdown in the United States and other countries. Thus, there is no assurance we would be able to raise additional capital if needed. To the extent we do raise additional capital, the ownership position of existing stockholders could be diluted. Similarly, there can be no assurance that additional financing will obtain a replacement credit facilitybe available if needed or ifthat it does, thatwill be available on favorable terms. Under the terms of our

credit facility, we may not create, incur or assume additional indebtedness without the new facility will be as favorableapproval of our lender. Our inability to raise additional capital or better than those of the current credit line. Failure to obtain a new line of credit could materially impair the Company’sadditional financing if needed would negatively affect our ability to fund growthimplement our business strategies and meet our goals. This, in operations or meet other working capital needsturn, would adversely affect our financial condition and results of operations.

The failure of our suppliers to supply quality materials in sufficient quantities, at a favorable price, and in a timely fashion could adversely affect the future.