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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



(Mark One)

|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2002



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



Commission File No.: 33-20323



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Royal BodyCare, Inc.

(Exact name of registrant
as specified in its charter)



|Nevada                                                         |  | 91-2015186                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)
|                                                              
|2301 Crown Court Irving, Texas                                 |  | 75038                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants telephone number, including area code: 972-893-4000



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



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



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ



On March 27, 2003, the closing price of Registrants
common stock sold was $0.08 per share. On such date, 6,498,106 shares of Registrants Common Stock were held by non-affiliates. Based upon the price on such date, the aggregate market value of Registrants voting stock held by
non-affiliates on that date was $519,848 (6,478,106 shares times $0.08 per share).



As of March 27, 2003, 17,956,294 shares of the registrants Common Stock were outstanding.



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FORWARD
LOOKING STATEMENTS



The statements, other
than statements of historical facts included in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements
of historical or present facts, that address activities, events, outcomes and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may
occur in the future are forward looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend,
estimate, anticipate or believe. These forward-looking statements are based on managements current belief, based on currently available information, as to the outcome and time of future events. We believe
that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur. Our actual future performance could differ materially from such statement. When considering
forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. Factors that could cause or contribute to such differences include, but are not limited to:



| |  | general economic conditions
|- |  | ---------------------------



| |  | general market acceptance of our products and distribution methods
|- |  | ------------------------------------------------------------------



| |  | introduction of competitive products
|- |  | ------------------------------------



| |  | pricing of directly and indirectly competitive products
|- |  | -------------------------------------------------------



| |  | legislative and regulatory actions effecting the market of our products and distribution methods
|- |  | ------------------------------------------------------------------------------------------------



| |  | reduction in demand for our products or the rate at which new distributors are recruited to join us or an increased rate of attrition of our distributors
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the Companys ability to obtain future financing to fund internal growth and the Companys future capital requirements
|- |  | ----------------------------------------------------------------------------------------------------------------------



| |  | the market acceptance of the Companys newly developed proprietary versions of silica hydride powder and other raw materials heretofore supplied by Flanagan
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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ROYAL BODYCARE, INC.



FORM
10-K

YEAR ENDED DECEMBER 31, 2002



TABLE OF CONTENTS



|                                                   |  |                                                                                       |  | PAGE
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                                                  
|PART I                                             |  | 2                                                                                    
|Item 1.                                            |  | Business                                                                              |  | 2   
|Item 2.                                            |  | Properties                                                                            |  | 6   
|Item 3.                                            |  | Legal Proceedings                                                                     |  | 6   
|Item 4.                                            |  | Submission of Matters to a Vote of Securities Holders                                 |  | 7   
|                                                  
|PART II                                            |  | 8                                                                                    
|Item 5.                                            |  | Market for the Companys Common Equity and Related Stockholder Matters                |  | 8   
|Item 6.                                            |  | Selected Financial Data                                                               |  | 8   
|Item 7.                                            |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 9   
|Item 7A.                                           |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | 15  
|Item 8.                                            |  | Financial Statements and Supplemental Data                                            |  | 15  
|Item 9.                                            |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 15  
|                                                  
|PART III                                           |  | 16                                                                                   
|Item 10.                                           |  | Directors and Executive Officers                                                      |  | 16  
|Item 11.                                           |  | Executive Compensation                                                                |  | 17  
|Item 12.                                           |  | Security Ownership and Certain Beneficial Owners and Management                       |  | 19  
|Item 13.                                           |  | Certain Relationships and Related Transactions                                        |  | 20  
|                                                  
|PART IV                                            |  | 21                                                                                   
|Item 14.                                           |  | Controls and Procedures                                                               |  | 21  
|Item 15.                                           |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 21  
|                                                  
|SIGNATURES                                         |  | 23                                                                                   
|                                                  
|CERTIFICATIONS                                     |  | 24                                                                                   
|                                                  
|Report of Independent Certified Public Accountants |  | F-2                                                                                  



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PART I



Item 1.    Business



General/History



We are a
Nevada corporation engaged in marketing products through an international network of independent distributors. Our core product line is marketed under the Royal BodyCare®brand name in three broad categories: (i) wellness products, (ii) weight loss products, and (iii) sports and fitness products. Our products include
the following:



|    herbal formulas |  |     antioxidants               
|-------------------- |  | --------------------------------
|    vitamins        |  |     hair and skin care products
|    minerals        |  |                                 



We
market these products in countries outside of the United States, Canada and Japan through exclusive licensing agreements.



Our principal offices are located at 2301 Crown Court, Irving, Texas 75038. We can be reached by phone at 972-893-4000, by fax at
972-893-4111 and by e-mail at webmaster@royalbodycare.org. Our web site address is www.royalbodycare.com. The Company makes available on its website, as soon as reasonably practicable after such material is electronically filed with the Securities
and Exchange Commission, its annual report on 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. Our Chief Executive Officer is Clinton H. Howard and our Chief Financial Officer is Steven E.
Brown. Both of them can be reached at our principal offices.



Mr. Howard formed our United States subsidiary in 1991 to market a line of aloe vera based personal care products and an aloe drink in the United States through a multi-level network of independent distributors. In 1992 we expanded
our product line to include nutritional supplements. Mr. Howard formed our Canadian subsidiary in 1992 to market our products through a network of independent distributors in Canada. Shortly after its formation, our Canadian subsidiary acquired Pure
Life International Products Inc., then a 12-year old company which distributed its Pure Life brand of nutritional products in Canada. After this acquisition, we introduced the Pure Life line of products to the United States market. In June 1995,
GlobeNet Inc. was incorporated to serve as a holding company for our United States and Canadian subsidiaries as well as certain other corporations affiliated with Mr. Howard, which were subsequently discontinued. In 1996, we acquired Light Force,
Inc. Light Force distributed a line of nutritional supplements featuring certain proprietary formulations, with spirulina as the main ingredient. The Light Force distributor network was merged into our distributor network.



On April 1, 1997, Mighty Power USA, Inc., a corporation whose
stock at that time was publicly traded on the NASDAQ Bulletin Board, merged with GlobeNet. In connection with the merger, Mighty Power USA effected a one-for-seven reverse stock split. All share figures in this report have been adjusted to
reflect this reverse split. Mighty Power USA then issued 7,886,415 new shares to the shareholders of GlobeNet in exchange for 100% of the outstanding stock of GlobeNet. In addition, under the terms of the merger agreement, certain shareholders of
Mighty Power USA transferred an additional 2,541,427 shares of common stock to the GlobeNet shareholders. As a result, the shareholders of GlobeNet obtained 86% of the then outstanding common stock of Mighty Power USA. In connection with these
transactions, Mighty Power USA changed its name to GlobeNet International I, Inc. The merger was accounted for as a purchase and as a reverse merger, with GlobeNet being the acquirer. Therefore, GlobeNets historical financial statements are
now our historical financial statements. In October 1999, we changed our name from GlobeNet International I, Inc. to Royal BodyCare, Inc. In conjunction with the name change, we also redomesticated to the State of Nevada.



In December 2000, we introduced a selection of Internet
products that we marketed under the brand name BizAdigmTM. The BizAdigmTMproducts were marketed through a network of independent distributors similar in approach to how our nutritional and personal care products are marketed. Due
to low sales volume, we discontinued BizAdigmTMoperations in the second quarter of 2002.



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In August
2001, we purchased substantially all of the assets of MPM Medical, Inc., a distributor of wound care and oncology products. Unlike our core Royal BodyCare®products, MPM Medicals products are distributed directly by us and not through an independent distributor network.



Restatement of Financial Statements



As a result of a review of our accounting records in the normal course of business during 2002, we have
restated our previously reported audited financial statements for the years ended December 31, 2001 and 2000, and recorded a prior period adjustment to our beginning accumulated deficit as of January 1, 2000. The restated financial statements for
2001 and 2000 are contained in this report, and the components of the restatement along with the related effect on previously issued financial statements are set forth in Note D to the consolidated financial statements.



Plant and Equipment



We purchase Royal BodyCare and MPM products from
manufacturers and suppliers that we do not control. Many of these products can be obtained from a number of sources at competitive prices. However, we manufacture certain essential product ingredients, most notably nanoclusters, silica hydride
powder, and HydraCel concentrate, that are used in many Royal BodyCare products. We began manufacturing these raw materials in June 2002 to replace raw materials that were formerly purchased under a license agreement with a third party supplier.
These raw materials are manufactured according to proprietary formulations and processes developed by us for our exclusive use. We outsource the production of our finished products, many of which incorporate our proprietary raw materials. Our
manufacturing operations are conducted at our headquarters located in Irving, Texas. We own the machinery and equipment necessary to produce our proprietary raw materials. Other than normal office furniture and computer equipment, the only other
property or equipment that we own or use is laboratory equipment owned and maintained for internal quality control testing of our products and distribution of our products to our customers.



In 2001, we purchased our headquarters facility in Irving,
Texas. The total cost of this facility was approximately $3.7 million. Financing for this purchase was provided by a $3 million mortgage note, a $300,000 note from the seller and a $350,000 note from a bank.



Employees



We currently have 80 employees, of whom 7 are executive officers or management employees, 10 are department
heads, 15 are warehouse or manufacturing employees, 21 are in customer service or order entry, 3 are in financial or accounting and the remaining employees are clerical or administrative. We do not foresee any significant increase being necessary
for our workforce in 2003. None of our employees are represented by labor unions, and we have not experienced work stoppages or other labor strife with our employees.



Independent Distributor Network



We attempt to recruit people who can effectively explain our line of products, demonstrate their uses and
applications and effectively utilize our direct marketing techniques to sell our products and sponsor other distributors. This type of direct marketing strategy is commonly referred to as multi-level or network marketing.



We had approximately 40,000 active independent distributors at
December 31, 2002, of whom approximately 30,000 are located in the United States, 9,500 are located in Canada and 500 are located in Japan. We consider an independent distributor active if he/she has placed an order within the previous twelve
months. We compensate distributors who market the Royal BodyCare®product line through a Stair Step
compensation plan, consistent with other industry recognized compensation programs. Under this compensation program we pay sales commissions to our distributors. These commissions are based on the amount of purchases by the distributor and his/her
sales group. Distributor compensation is paid monthly.



Except for sales meetings and certain promotional activities that we sponsor, our distributors are responsible for all expenses incurred by them in their sales programs.



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We use the
Internet to support our marketing efforts and enhance communication with our distributors. Through our websites, distributors can obtain information about us and our products, and other current information such as new product announcements and
descriptions of product specials and other sales promotions. Through our Royal BodyCare website, we provide our distributors the ability to enroll new Royal BodyCare distributors and to place orders. To help our distributors better manage their
business, we allow them to obtain information related to their sales groups directly from our database, which can be accessed through the Internet.



Overseas Distributors



We have entered into exclusive license agreements with overseas licensee groups for marketing the Royal BodyCare®line of products. Three of these licensees provide for the shipping of Royal BodyCare®products into the following nations:



|    New Zealand |  |     Australia  |  |     Indonesia         
|---------------- |  | --------------- |  | -----------------------
|    Ukraine     |  |     Kazakhstan |  |     Russian Federation
|    Kyrgyzstan  |  |     Singapore  |  |     Latvia            
|    Moldova     |  |     Belarus    |  |      Lithuania        
|    Estonia     |  |                 |  |                        



Pursuant
to these agreements, these overseas licensees (who are unaffiliated third parties) are granted exclusive rights to sell our products in their respective territories through office/warehouse facilities. The independent distributors in these
territories are compensated through the same or a similar compensation plan as that used by us for our distributors in the United States, Canada and Japan.



Products



With the purchase of MPM Medical in August 2001, we now market our products through two divisions. Royal BodyCare markets nutritional
supplements and personal care products. MPM markets wound care and oncology products.



Royal BodyCare.    We currently market a line of over 100 nutritional supplements and personal care products, including herbs, vitamins and minerals, as well as natural skin,
hair and body care products. These products are marketed in three broad categories, wellness products, weight loss products and sports and fitness products, under our Royal BodyCare®trade name. We procure the finished products from manufacturers and suppliers that we do not control and have them made or processed according to
our specifications or formulas.



During fiscal
year 2001, our purchases of raw materials did not reach certain minimum requirements outlined in our license agreement with Flanagan Technologies, Inc., (Flanagan Technologies). These raw materials were main ingredients in our principal
products, including Microhydrin, our largest selling product. Under our agreement with Flanagan Technologies, it had the right to terminate our exclusivity and supply us products on a nonexclusive basis if such minimum purchases were not met. In May
2002, contrary to the terms of our license agreement, Flanagan announced that he had entered into an exclusive network marketing contract with an Arizona company, and that he would no longer supply to us the raw materials, including silica hydride
powder, the principle ingredient in Microhydrin. Because we could no longer purchase these raw materials from Flanagan Technologies, who was the sole supplier of these materials, we established a manufacturing facility in June 2002 to produce raw
materials using our own proprietary process. We began shipping Microhydrin made with our proprietary silica hydride powder on July 31, 2002.



Our product line now features certain ingredients manufactured according to proprietary formulations and processes developed by us for our
exclusive use. These raw materials include nanoclusters, a mineral catalyst that increases absorption, silica hydride, a nutritional form of hydrogen with antioxidant and other beneficial properties, and HydraCel concentrate, a liquid form of
nanoclusters. Our product line also features spirulina as a main ingredient in nutritional supplements and aloe vera as a main ingredient in our skin and personal care products. We maintain quality control of our products through our in-house
laboratory facilities and operations.



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Our primary
products are Microhydrin and Microhydrin Plus, which accounted for 38% of our sales in 2002. The principal
ingredient in these products is silica hydride powder which we now produce in our own manufacturing facility. No other product accounted for more than 10% of our sales.



MPM Medical.    Through MPM Medical, we market a line of approximately 25 wound
care and oncology products. The wound care products are for the treatment and healing of wounds such as pressure ulcers, leg ulcers, cuts, burns and abrasions. These products include wound and skin cleansers, wound dressings, a moisture barrier
cream and a unique hydrogel wound dressing with Lidocaine. The wound care products are distributed directly to hospitals, nursing homes and home health care agencies throughout the United States through a traditional, unaffiliated nationwide network
of medical/surgical supply dealers. The oncology products are designed to reduce destruction to skin and tissue caused by radiation, and to reduce pain caused by radiation reactions in the skin and the internal mucosa. The oncology products are
distributed to hospitals, cancer treatment clinics and pharmacies through a traditional, unaffiliated nationwide network of pharmaceutical distributors. Our MPM sales force consists of one full time sales representative and approximately 12
manufacturer representatives assigned to specific geographic territories within the United States.



Industry/Competitors



We are in a highly competitive industry both domestically and internationally. We compete against companies that sell heavily advertised products through retail stores as well as other network
marketing companies. Many of our competitors are significantly larger than we are and have far greater financial resources. Our competition includes network marketing companies close to our size such as Reliv International and Nutrition for Life,
and much larger companies such as Amway, Nu Skin and Herbalife. At a consumer level, we compete with large health food chains such as GNC, small independently-owned health food stores, as well as drug stores, department stores and supermarkets that
sell nutritional supplements and personal care products.



In December 2001, Flanagan Technologies, the sole supplier of certain raw materials that were the main ingredients in our principal products, including Microhydrin, which is our largest selling product, began offering on its own and
through third parties, a product that directly competes with Microhydrin®. In May 2002, contrary to the terms of
our license agreement, G. Patrick Flanagan, the individual who controls Flanagan Technologies and a former director, announced that he had entered into an exclusive network marketing contract with an Arizona company. (See Item 3. Legal Proceedings,
below). Shortly thereafter, the Arizona company began marketing products supplied by Flanagan that were directly competitive to certain of our products, including Microhydrin. Initially, we developed Microhydrin Plus to compete against products
offered by Flanagan Technologies. We then developed our own proprietary raw material formulations to replace raw materials formerly supplied under our license agreement with Flanagan Technologies.



We offer a wide selection of products with a reputation for
high quality. We believe that our products possess features and provide benefits that are desired by consumers looking for natural health products. We place a high degree of emphasis on new product development to insure our product line remains
current with developing trends in our industry and new scientific evidence. We generally do not attempt to compete based on price, although price is a consideration. Prices are justified through product quality and benefits and, to the extent
possible, the proprietary ingredients and unique formulations.



Our MPM products also face heavy competition. In the wound care product market, we compete against companies that are significantly larger and have far greater financial resources such as 3M, Convatec (a subsidiary of Squibb) and
Johnson & Johnson. We also compete against smaller companies such as Gentell and Dermasciences. The oncology products market in which we compete is highly fragmented and largely undefined with the principle competition being a line of products
marketed by Medline Industries.



Capital Stock



We have authorized 50 million shares of
common stock. As of March 27, 2003, we had issued and outstanding 17,956,294 shares of common stock.



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Reports to Security Holders



We are subject to the continuous disclosure
requirements of the Securities and Exchange Commission because we have had previous offerings registered pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended. Because we are a Section 15(d) company, we are not required to
distribute an annual report to our shareholders. However, all of our filings with the Securities and Exchange Commission are available on-line for all shareholders to access at www.sec.gov. In addition, we distribute quarterly news releases to our
shareholders as well as a year-end news release that includes operating results from our audited financial statements.



Inventory Requirements, Backlogs



Our independent distributors do not maintain large inventories of our products. They depend on us to maintain our inventory at a level
that will allow us to fill their orders and the orders of their customers as they are placed. We generally ship orders within 48 hours after we receive them so there is no significant backlog of orders.



Research and Development



We have contracted with scientists at universities, medical
colleges, and private research organizations to conduct a series of studies over the past few years to evaluate the safety and functions of our dietary supplements, primarily Microhydrin®. In October 2000, one study was published in the Journal of Medicinal Food.



Trademarks, Patents or Other Intellectual Property



We own trademarks on the name Royal BodyCare®and the names of certain key products such as Microhydrin®.



During 2002, we developed proprietary formulations and manufacturing processes to produce raw materials that we formerly purchased under a license agreement with a supplier that was the sole source of these materials. Through our
proprietary processes, we now manufacture nanoclusters, silica hydride, and HydraCel concentrate. Silica hydride is the principal ingredient in our leading product, Microhydrin®. We have not filed for patent protection related to our proprietary formulations or manufacturing processes.



Governmental Regulations



One or more of the following agencies regulates the
formulation, labeling and advertising of our products: the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission and various agencies of the states and foreign countries into which our products are
shipped or sold. In addition, our distribution and sales program is, like that of other companies operating in interstate commerce, subject to the jurisdiction of the Federal Trade Commission and a number of other federal agencies. Various state
agencies regulate our multi-level distribution activities.



Item 2.    Properties



In March 2001, we purchased the approximately 119,000 square foot facility that houses our executive offices, manufacturing and warehouse space for approximately $3.7 million. Prior to then, we leased that facility. We also
lease distribution facilities in Vancouver, British Columbia and Toronto, Ontario for our sales operations in Canada at an aggregate annual rental of $125,000.



Item 3.    Legal Proceedings



ROYAL BODYCARE, INC. v. G. PATRICK FLANAGAN, Individually and as authorized agent on behalf of FLANAGAN TECHNOLOGIES, INC., FLANAGAN TECHNOLOGIES, INC. a/k/a and d/b/a FLANTECH and/or FLANTECH GROUP and JOHN LLOYD, Cause Number
DV02-04797, Dallas County, Texas, District Court.



On May 29, 2002, we filed suit against a former supplier and member of our Board of Directors (G. Patrick Flanagan), and certain others (Defendants) requesting injunctive and monetary relief and alleging, among other
causes of action, breach of contract, conspiracy, fraud, breach of fiduciary duty, disparagement, tortuous



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interference and unlawful restraint of trade. On July 26, 2002, the Court granted an Agreed Injunction
that enjoined the Defendants and other parties acting in concert with them from, among other things, refusing to sell certain raw materials to us and disparaging Royal BodyCare, Inc. and its officers, directors, employees or its products. In
connection with this suit, on August 16, 2002, the Defendants filed a counter claim against us alleging, among other causes of action, unfair competition, breach of contract and conspiracy.



On February 18, 2003, the parties entered into an agreement to
settle all claims and causes of actions that existed between them, including those arising out of the transactions that formed the basis of the lawsuit. Under the terms of this settlement, G. Patrick Flanagan and/or Flantech Group, defendants in the
original suit, agreed to pay to us an aggregate of $250,000, payable in monthly installments beginning in February 2003, calculated as a percentage of gross revenues, as defined, generated by G. Patrick Flanagan or certain entities to which he is
related. In addition, the parties agreed not to disparage the other, its products, its directors, officers or employees, and not to send unsolicited communications to any known customer of the other. (For additional details, see the Companys
Form 10-Q for the quarter ended June 30, 2002, and Form 8-Ks dated August 30, 2002 and March 6, 2003.)



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



None.



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PART II



Item 5.    Market for the Companys Common Equity and Related Stockholder Matters



Our Common Stock is traded on the Nasdaq over-the-counter Bulletin Board published by the National Quotation Bureau, Inc. The
following reflects the range of high and low bid quotes for each calendar quarter during each of the past two years:



|QUARTER ENDED |  | 3/31/02 |  | 6/30/02 |  | 9/30/02 |  | 12/31/02
|------------- |  | ------- |  | ------- |  | ------- |  | --------
|HIGH          |  | .29     |  | .25     |  | .230    |  | .18     
|LOW           |  | .15     |  | .10     |  | .045    |  | .06     
|             
|QUARTER ENDED |  | 3/31/01 |  | 6/30/01 |  | 9/30/01 |  | 12/31/01
|HIGH          |  | .47     |  | .45     |  | .43     |  | .25     
|LOW           |  | .29     |  | .25     |  | .17     |  | .14     



As of
March 7, 2003 there were approximately 492 holders of our common stock. Since our inception, we have paid no dividends on our stock. We do not anticipate that we will pay dividends in the foreseeable future.



Sales of Unregistered Securities



On March 27, 2003, we sold 4,000,000 shares of our common
stock at an aggregate price of $400,000 to our licensee in the former Soviet Union. The president of our licensee, Coral Club International, Inc., is a member of our Board of Directors. In March 2001, in connection with the acquisition of our
current headquarters, we issued 40,000 shares of our common stock to an individual investor. These issuances were not registered with the Securities and Exchange Commission under the Securities Act of 1933, or any state securities commissioner.
Exemption from registration of each of the issuances is claimed by us under Section 4(2) of the Federal Securities Act of 1933 as a transaction by an issuer which does not involve a public offering and comparable limited offering exemptions under
the state securities laws.



Our convertible
notes, and the shares of our common stock issued upon conversion of these notes, are subject to certain restrictions upon the sale or transfer thereof which are denoted prominently upon the certificates of these securities as required by the
applicable federal and state securities laws. We have further instructed our transfer agent to not transfer these securities in the absence of registration or satisfactory evidence that the transfer would be in compliance with the applicable
securities laws pertaining thereto. Exemption from registration of the sale of these securities under the applicable federal and state securities laws is claimed by us under Section 4(2) of the Federal Securities Act of 1933 as a transaction by an
issuer which does not involve a public offering and comparable limited offering exemptions under the state securities laws.



Item 6.    Selected Financial Data



The financial data included in the table shown below has been selected by us and has been derived from the financial statements for the periods indicated.



|                                         |  | Years Ended December 31 |           
|---------------------------------------- |  | ----------------------- | ----------
|                                         |  | 2002                    |           
|Statement of Operations Data:            |  |                         |           
|Total Revenue                            |  | $                       | 26,284,907
|Income (Loss) from Continuing Operations |  |                         | (428,972  
|Net Income (Loss)                        |  |                         | (403,572  
|Balance Sheet Data:                      |  |                         |           
|Cash and Cash Equivalents                |  |                         | 626,933   
|Working Capital (Deficit)                |  |                         | (1,368,891
|Total Assets                             |  |                         | 10,881,698
|Long Term Debt                           |  |                         | 4,424,005 
|Shareholders Equity                     |  |                         | 3,341,593 

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|(1) |  | The financial statements for each of the periods indicated have been restated to reflect the adjustments described in Note D to the consolidated financial
statements.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



As a result of a review of our accounting records in the normal course of business during 2002, we have restated our previously reported
audited financial statements for the years ended December 31, 2001 and 2000, and recorded a prior period adjustment to our beginning accumulated deficit as of January 1, 2000. The restated financial statements for fiscal years 2001 and 2000 are
contained in this report, and the components of the restatement, along with the related effect on previously issued financial statements, are set forth in Note D to the consolidated financial statements. Managements discussion and analysis of
financial condition and results of operations incorporates the restated amounts for 2001 and 2000.



Liquidity and Capital Resources; Material Changes in Financial Condition



During the year ended December 31, 2002, we had a net increase in cash of $26,000. This increase resulted primarily from net cash provided
by operating activities of $1,240,000, which, for the most part, was offset by cash used to repay borrowings and purchase property and equipment totaling $807,000 and $288,000, respectively. We generated $1,240,000 of cash from operating activities
in spite of our net loss of $404,000. This was mainly attributable to depreciation and amortization expenses of $625,000, as well as cash provided from the reduction of our investment in accounts receivable and inventory during the year of $529,000
and $541,000, respectively.



During 2002 and
2001, we incurred net losses and a decline in working capital. At December 31, 2002, we had cash and cash equivalents of $627,000 and a working capital deficiency of $1,400,000. To improve our working capital position, on March 27, 2003, we sold
4,000,000 shares of our common stock at an aggregate price of $400,000 to our licensee in the former Soviet Union. The president of this licensee, Coral Club International, Inc., is a member of our Board of Directors. Additionally, our founder and
Chairman has committed to purchase up to $200,000 of our common stock during the month of April 2003. We have also taken certain actions that we believe will help improve future operating results. During 2002, we began manufacturing the key raw
materials used in products that account for more than 50% of our sales. Our cost to manufacture these raw materials is less than we paid to our former supplier for these materials. In addition, we have undertaken other cost cutting measures that
will reduce our administrative expenses in 2003, while implementing marketing strategies and programs we believe will improve retention of our distributor base and reverse the declining sales trend we have experienced during the past three years.
However, there can be no assurances that these efforts will be successful to allow us to avoid a further decline in its sales.



Consistent with industry practice, most of our sales are paid by our distributors at the time of order. Because our sales are generated
through independent distributors who do not maintain a significant inventory, it is necessary for us to have products on hand when the distributors place their orders. During periods of sales growth we must purchase inventory in anticipation of
sales, thereby creating the need for additional working capital.



We believe that we will be able to fund moderate sales increases through our operations. Should sales growth increase beyond our ability to finance our growth internally, or should we require additional working capital before
returning to profitability, we may again seek outside sources of capital including bank borrowings, other types of debt or equity financings. There is no assurance, however, that we would be able to obtain any additional outside financing or obtain
financing on terms we would find acceptable. We have no plans or requirements for any other significant capital expenditures during the next twelve months.



Other than those factors already described, we are not aware of any trends or uncertainties that would significantly effect our liquidity
or capital resources in the future.



Critical Estimates,
Uncertainties or Assessments in Our Financial Statements



The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In applying our accounting principles, we must often make individual estimates and
assumptions regarding expected outcomes or uncertainties. As you might expect, the actual results or outcomes are generally different than the estimated or assumed amounts. These differences are



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usually minor and are included in our consolidated financial statements as soon as they are known. Our
estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.



We periodically review the carrying value of our
goodwill and other intangible assets when events and circumstances warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value of our goodwill or other intangible assets is
considered impaired, an impairment charge is recorded for the amount by which the carrying value of the goodwill or intangible assets exceeds its fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes
in estimates of such cash flows and fair value, however, could affect the evaluation.



We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset
would be charged to income in the period such determination was made.



Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements provide a meaningful and
fair perspective of our company.



Contractual Cash Commitments



The table below summarizes minimum cash
obligations outstanding as of December 31, 2002:



|                                           |  | Payments Due
|------------------------------------------ |  | ------------
|Contractual Cash Obligations               |  | Total       
|Long-term debt (including current portion) |  | $           
|Lines of credit                            |  |             
|Operating leases                           |  |             



Results of Continuing
Operations2002 Compared with 2001



Our
sales for the year ended December 31, 2002 were $26,285,000 compared with sales for the prior year of $33,819,000, a decrease of $7,534,000 or 22%. This decline in sales resulted mainly from sales declines of our traditional nutritional and personal
care products in the U.S. and Canadian markets of $7,236,000 and $2,028,000, respectively. Declines in these markets were partially offset by a net sales increase in our other international markets of $963,000 and in our MPM Medical products market
of $767,000.



We believe one of the principal
factors affecting our sales has been the dispute with G. Patrick Flanagan, formerly a member of our Board of Directors, and the related entities through which his proprietary products are marketed (collectively Flanagan). We entered into
a supply contract with Flanagan in 1998 that gave us the unfettered right to purchase silica hydride powder, the principal ingredient in our top selling product, Microhydrin®, and certain other proprietary raw materials. Sales of products containing Flanagans proprietary ingredients increased to a level that
represented in excess of 50% of our sales volume. We were effectively the exclusive distributor of products containing his proprietary ingredients until December 2001 when Flanagan began marketing a product competitive with Microhydrin on his web
site and, on a limited basis, through certain health food stores. Flanagans actions had a negative impact on the marketing efforts of our network of independent distributors. To improve our competitive position, we developed a proprietary,
broad-based blend of antioxidants, including Microhydrin. This new product, Microhydrin Plus, was introduced in late April 2002 and the acceptance of this product has been positive.



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In
contravention of our written unlimited supply agreement, on May 24, 2002, Flanagan informed us that he had signed an agreement with an Arizona-based company granting it exclusive rights for the distribution of his products through network marketing,
and that he would no longer supply us his products. Concurrent with his announcement on May 24, Flanagan and two former RBC distributors launched an aggressive negative campaign to entice our distributors to leave us and join the Arizona-based
company. In addition, in breach of its license agreement with us, our European licensee announced it was doing business with Flanagan and discontinued purchasing products from us in May 2002. Sales to the European licensee were $291,000 in 2002
compared with $1,100,000 in 2001.



In response to
Flanagans actions, on May 29, 2002, we filed suit against Flanagan and one former RBC distributor in the Dallas County, Texas District Court. As described elsewhere in this report, we settled this litigation in February 2003. In addition,
since Flanagans announcement, we refined and completed the development of our proprietary version of silica hydride powder and other raw materials formerly supplied by Flanagan. We began shipping Microhydrin made with our silica hydride powder
on July 31, 2002, and other products made with our proprietary raw materials as existing supplies of products made with Flanagans raw materials were exhausted.



We believe that the actions we have taken along with our present marketing strategies and programs, will
allow us, for the most part, to improve retention of our present distributor base, stabilize our present sales volume and provide a base from which we can begin to grow our business. However, there can be no assurances that these efforts will be
successful or that the introduction of products that directly compete with our Microhydrin will not cause a further decline in sales.



Our cost of goods sold for the year ended December 31, 2002 was $8,430,000 compared with cost of goods sold in the prior year of
$10,318,000, a decrease of $1,888,000 or 18%. As a percentage of sales, cost of goods sold was 32% in 2002 compared with 31% in 2001. This percentage increase was mainly related to the increase in sales to our international licensees. Cost of goods
sold as a percentage of sales is higher for products sold to international licensees because we do not pay distributor commissions on sales of these products.



Our distributor commissions for the year ended December 31, 2002 were $8,661,000 compared with distributor commissions in 2001 of
$12,157,000, a decrease of $3,496,000 or 29%. As a percentage of sales, distributor commissions in 2002 were 33% compared with 36% in 2001. This percentage decline was mainly related to the increase in sales to our international licensees and sales
of MPM Medical products because we do not pay distributor commissions on sales to our international licensees and commissions paid on sales of MPM Medical products are approximately 2%.



Our general and administrative expenses for the year ended December 31, 2002, were $8,441,000 compared with
such expenses in 2001 of $9,706,000, a decrease of $1,265,000 or 13%. This decrease was mainly related to managements efforts to reduce operating expenses in light of the decline in sales. As a percentage of sales, general and administrative
expenses were 32% in 2002 compared with 29% in 2001.



Our depreciation and amortization expenses for the year ended December 31, 2002, were $625,000 compared with such expenses in 2001 of $883,000, a decrease of $258,000 or 29%. In 2001, we recorded goodwill amortization expense of
$156,000. As described in Note G to the consolidated financial statements, we recorded no goodwill amortization expense in 2002. Also contributing to the decrease in depreciation and amortization expense in 2002 was the disposition of property and
equipment in 2001, which is more fully described below.



We recorded a loss on disposition of assets in 2002 of $158,000. This was mainly the result of an inventory write-off of $110,000 related to the disposal of packaging components and promotional material associated with products
formerly supplied by Flanagan. This inventory became obsolete when Flanagan ceased to supply his products to us.



We recorded a loss on disposition of assets in 2001 of $703,000. The principal components of this loss are described below:



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Web Site
SoftwareIn December 2000, we entered into a contract with a software development company to design, program, maintain and host a new web site for us. We wrote off our investment of $253,000 when the software development company became
insolvent.



Japan assetsIn June
2001, we entered into an agreement to reacquire the license we had previously granted to a third party to market our products in Japan. As part of this agreement, we acquired assets, mainly computer software, used in the Japan operations. In
connection with a restructuring of operations in Japan in December 2001, we determined that we no longer had use for certain of these assets resulting in a write off of $160,000.



Other AssetsIn December 2001, we identified certain ineffective marketing programs that we
decided to eliminate or change. In connection with this effort, we wrote off inventories and other assets associated with these programs in the amount of $277,000.



Earnings from discontinued operations of $25,000 for year ended December 31, 2002 represent the net result of
activities associated with BizAdigm and activities associated with Great Xpectations Marketing, Inc. (GXI), our wholly-owned subsidiary that discontinued its operations in 1999. BizAdigms operations were discontinued during the second quarter
of 2002. BizAdigm had recognized sales of $45,000 during 2002, and recognized a loss of approximately $75,000. This loss represented the excess of selling, general and administrative expenses plus cost of cost of goods sold and distributor
commissions over recognized sales. Also during 2002, we recorded earnings from discontinued operations of $100,000 due to the reversal of an accrual related to certain contingent liabilities of GXI that we have now determined will not have to be
paid. The loss from discontinued operations in 2001 relates solely to the operations of BizAdigm. The loss represents the excess of selling, general and administrative expenses plus cost of goods sold and distributor commissions over recognized
sales of $799,000, net of income tax benefits. BizAdigms loss in 2001 includes the write-off of our investment in BizAdigms assets of $490,000.



Our net loss for the year ended December 31, 2002 was $404,000, or $0.03 per share, compared with a net loss in the prior year of
$1,115,000 or $0.08 per share, an improvement of $711,000. Our losses in 2002 and 2001 resulted from the factors described above.



Other than those previously described, we are not aware of any economic trends or uncertainties that would have a material impact on our
future sales or operating results. We believe that we have purchased our products at the best price available and that any price increases in the foreseeable future will be small. Any such price increases would be passed through to our distributors.
In addition, we do not believe at this time that inflation will have a material impact on our operating results.



Results of Continuing Operations2001 Compared with 2000



Our sales for the year ended December 31, 2001 were $33,819,000 compared with sales for the prior year of $39,984,000, a decrease of
$6,165,000 or 15%. This decline was due primarily to declines in sales of our traditional nutritional and personal care products in the U.S. and Canadian markets of $5,668,000 and $1,603,000, respectively. Declines in these markets were partially
offset by a sales increase in our international licensee markets, principally Europe and Russia, of $703,000 and sales of MPM Medical products of $403,000.



While sales outside of North America have continued to grow, North American sales have not. Sales in the first six months of 2000
benefited from certain promotional programs and changes that were made to the plan by which our independent distributors are compensated. Sales declined in 2001 because we were unable to sustain this momentum. We introduced enhancements to our
marketing program in the second quarter of 2001 that we believed would stimulate increased sales and recruiting activities among our North American independent distributors. However, during the third quarter, there were events that offset the
effectiveness of these new programs. On July 1, 2001, our U.S. headquarters facility was damaged when a portion of the warehouse roof collapsed during a heavy rainstorm. We set up remote offices within 24 hours of the collapse, which allowed to us
to continue to accept distributor orders with only a slight service disruption. However, because we were unable to resume shipping activities until July 10 and clear the backlog of shipments until July 17, July sales were significantly affected. Our
sales and recruiting activity improved in August 2001, but declined again in September. We attribute this decline to the terrorist attacks on September 11.



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Another factor
affecting our sales was Flanagan Technologies decision during the latter half of 2001 to begin supplying its products to us on a non-exclusive basis. In December 2001, Flanagan Technologies began marketing a product competitive with our
leading product, Microhydrin®, on its website and, on a limited basis, through certain health food stores. To
improve our competitive position, we developed a new product that is a proprietary, broad-based blend of antioxidants, including Microhydrin®. This new product, Microhydrin PlusTM, will be introduced in the
second quarter of 2002. Although no assurance can be given, we believe that the introduction of this new product, along with our present marketing strategies and programs, will allow us to retain our distributor base and reverse the declining sales
trend experienced during 2001.



Our cost of goods
sold for the year ended December 31, 2001 was $10,318,000 compared with cost of goods sold in the prior year of $11,540,000, a decrease of $1,222,000 or 11%. As a percentage of sales, cost of goods sold was 31% in 2001 compared with 29% in 2000.
This increase was mainly attributable to the increase in sales to our international licensees. The cost of products sold to our international licensees as a percentage of sales is higher than for products sold to our independent distributors because
the licensee is responsible for payment of the distributor commissions earned on sales in their respective territories as well as other operating expenses. This increase in the cost of goods sold percentage is offset by a reduction in distributor
commissions.



Our distributor commissions for the
year ended December 31, 2001 were $12,157,000 compared with distributor commissions in 2000 of $15,262,000, a decrease of $3,105,000 or 20%. As a percentage of sales, distributor commissions in 2001 were 36% compared with 38% in 2000. As described
above, this percentage decline was mainly related to the increase in sales to our international licensees. A portion of this percentage decrease was also attributable to a restructuring of our distributor compensation plan that became fully
effective June 1, 2000. We expect this percentage to increase over time as distributors qualify for the highest commission levels in the plan.



Our general and administrative expenses for the year ended December 31, 2001, were $9,706,000 compared with such expenses in 2000 of
$11,415,000, a decrease of 1,709,000 or 15%. This decrease was mainly related to decreased operating expenses associated with the decline in sales. This expense decrease was partially offset by expenses incurred in connection with the enhancement
and support of our information technology systems and increased expenses incurred in support of our international licensees. As a percentage of sales, general and administrative expenses were 29% in both 2001 and 2000.



Depreciation and amortization for the year ended December 31,
2001 was $883,000 compared to $692,000 in 2000, an increase of $191,000 or 28%. This increase was mainly due to depreciation associated with the capital investments that we made during 2001 and 2000, the most significant of which was the purchase of
our headquarters facility in March 2001.



Our
interest expense for the year ended December 31, 2001 was $396,000 compared with interest expense in 2000 of $177,000, an increase of $219,000 or 124%. This increase was due to additional borrowings made during 2001. The additional borrowings were
mainly associated with the purchase of our headquarters facility in Irving, Texas in March 2001 and, to a lesser extent, the debt assumed in connection with the acquisition of MPM Medical in August 2001.



During the fourth quarter of 2001, we recorded a loss on
disposition of assets of $703,000. The principal components of this loss are described below:



Web Site SoftwareIn December 2000, we entered into a contract with a software development company to design, program, maintain and host a new web site for us. We wrote off our investment
of $253,000 when the software development company became insolvent.



Japan assetsIn June 2001, we entered into an agreement to reacquire the license we had previously granted to a third party to market our products in Japan. As part of this agreement, we acquired assets, mainly
computer software, used in the Japan operations. In connection with a restructuring of operations in Japan in December 2001, we determined that we no longer had use for certain of these assets resulting in a write off of $160,000.



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Other
AssetsIn December 2001, we identified certain ineffective marketing programs that we decided to eliminate or change. In connection with this effort, we wrote off inventories and other assets associated with these programs in the amount of
$277,000.



Our loss from discontinued operations
in 2001 was $874,000, compared with earnings from discontinued operations of $46,000 in 2000. The loss in 2001 relates to the operations of BizAdigm. BizAdigms loss in 2001 represents the excess of selling, general and administrative expenses
plus cost of goods sold and distributor commissions over recognized sales of $799,000, net of income tax benefits. BizAdigms loss in 2001 includes the write-off of our investment in BizAdigms assets of $490,000 since we were uncertain
that the asset value would be realized through future operations. Earnings from discontinued operations in 2000 resulted from the reversal of certain liabilities recorded on the books of Great Xpectations that were settled for less than the original
contractual amount, net of income taxes. Great Xpectations was a subsidiary of ours which conducted operations that were discontinued in 1999.



Our net loss for the year ended December 31, 2001 was $1,115,000, or $.08 per share, compared with net earnings in the prior year of
$531,000 or $.04 per share. This decline resulted from the factors described above, primarily the decline in North American sales, the adjustments we recorded in the fourth quarter and the loss associated with BizAdigm operations.



Recent Accounting Pronouncements



Accounting for Costs Associated with Exit or Disposal Activities



In June 2002, the FASB issued Statement
146, Accountingfor Costs Associated with Exit or Disposal Activities. This statement requires entities to recognize costs associated with exit or disposal activities when liabilities are incurred rather than when the entity commits to
an exit or disposal plan, as currently required. Examples of costs covered by this guidance include one-time employee termination benefits, costs to terminate contracts other than capital leases, costs to consolidate facilities or relocate
employees, and certain other exit or disposal activities. This statement is effective for fiscal years beginning after December 31, 2002, and will impact any exit or disposal activities we initiate after that date.



Stock-Based Employee Compensation



In December 2002, the FASB issued Statement 148,
Accounting for Stock-Based CompensationTransition and Disclosure: an amendment of FASB Statement 123 (SFAS 123), to provide alternative transition methods for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in annual financial statements about the method of accounting for stock-based employee compensation and the pro
forma effect on reported results of applying the fair value based method for entities that use the intrinsic value method of accounting. The pro forma effect disclosures are also required to be prominently disclosed in interim period financial
statements. This statement is effective for financial statements for fiscal years ending after December 15, 2002 and is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002,
with earlier application permitted. We do not plan to change to the fair value based method of accounting for stock-based employee compensation at this time and have included the disclosure requirements of SFAS 148 in the accompanying financial
statements.



Accounting for Guarantees



In November 2002, FASB Interpretation 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees we issue or modify subsequent to December 31, 2002, but has certain disclosure requirements
effective for interim and annual periods ending after December 15, 2002. We have not historically issued guarantees and do not anticipate FIN 45 will have a material effect on our 2003 financial statements.



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Consolidation of Variable
Interest Entities



In January 2003, the FASB
issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (variable
interest entities). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a
majority of the entitys expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. We are
in the process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon our financial condition or results of operations.



Item 7A.    Quantitative and Qualitative Disclosure about Market Risk



The following discussion about our market risk includes forward-looking statements that involve risks and uncertainties.
Actual results could differ materially from those projected in the forward-looking statements. We do not use derivative financial instruments for speculative or trading purposes. We are exposed to market risk from changes in foreign currency
exchange rates and interest rates which could affect our future results of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities.



Foreign exchange



We have foreign-based operations in Canada which accounted
for 14% of 2002 net sales. We make advances to our foreign subsidiary denominated in U.S. dollars, exposing the foreign subsidiary to the effect of changes in spot exchange rates of the Canadian dollar relative to the U.S. dollar. We do not
regularly use forward-exchange contracts to hedge these exposures. Based on our foreign currency exchange rate exposure for intercompany advances of approximately $41,000 at December 31, 2002, a 10% adverse change in the currency rate would reduce
earnings before tax by approximately $4,100.



Interest rates



Our credit arrangements expose it to
fluctuations in interest rates. At December 31, 2002, we had approximately $755,000 outstanding in indebtedness, which provided for interest to be paid monthly based on a variable rate. Thus, interest rate changes would result in a change in the
amount of interest to be paid each month. Based upon the interest rates and borrowings at December 31, 2002, a 10% increase in interest rates would adversely affect our financial position, annual results of operations, or cash flows by approximately
$5,400.



Item 8.    Financial Statements and Supplemental Data



The financial statements and supplementary data are listed in the Index to Financial Statements appearing on Page F-1 and the Financial
Schedule appearing on Page S-2 of this Form 10-K.



Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



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PART II



Item 10.    Directors and Executive Officers



The following table sets forth, as of March 14, 2003, the name, age, and position of each of our Executive Officers and Directors and the month in which such Director or Officer began his term
of office.



|Name                |  | Age |  | Position                                                  |  | Director or Officer since
|------------------- |  | --- |  | --------------------------------------------------------- |  | -------------------------
|                   
|Clinton H. Howard   |  | 74  |  | Chairman of the Board and CEO                             |  | May 1991                 
|                   
|Wayne R. Holbrook   |  | 48  |  | Director, President                                       |  | November 2001            
|                   
|Steven E. Brown     |  | 47  |  | Director, Vice President-Finance, Chief Financial Officer |  | May 1994                 
|                   
|Kenneth Sabot       |  | 57  |  | Director, Senior Vice President-Operations                |  | February 1998            
|                   
|Joseph S. Schuchert |  | 73  |  | Director                                                  |  | June 2000                
|                   
|Leonid Lapp         |  | 49  |  | Director                                                  |  | December 2002            



Term of Office



Each of our directors serves for a term of
one year, and thereafter until his or her successor is elected at our annual shareholders meeting, and is qualified, subject to removal by our shareholders. Each officer serves, subject to the discretion of our Board of Directors, for a term
of one year.



Family Relationships



Katherine M. Howard, our Secretary, is the wife of Clinton H.
Howard, our Chairman and Chief Executive Officer.



Biographical Information



Set forth below is certain biographical information regarding each of our Directors and Executive Officers.



Clinton H. Howard.  Mr. Clinton Howard is our Chairman of the Board and Chief Executive Officer. He also served as
President until the appointment of Wayne R. Holbrook to that position in February 2003. He graduated from Rice University with a BA degree and from Southwestern Medical School with an MA degree, after which he studied graduate business courses at
S.M.U. and the University of Dallas and medical arts courses at Johns Hopkins Medical School. Mr. Howard founded American Biomedical Corporation in 1958, and built it into a chain of 40 medical testing laboratories. He took American Biomedical
public in 1969. In 1974, American Biomedical was merged with National Health Laboratories, then one of the nations largest medical laboratory chains. In 1974, Mr. Howard founded Carrington Laboratories, Inc., originally named Avacare, Inc., a
personal care products, direct sales marketing firm. In 1981, he established a research division which isolated an active medicinal compound in aloe vera, acemannan. He then sold the skin care business and converted Carrington to a pharmaceutical
company. Mr. Howard retired from Carrington in 1990. The following year he founded Royal BodyCare.



Wayne R. Holbrook.  Mr. Holbrook joined us as Vice President  Marketing in November 2001 and was appointed
President in February 2003. Prior to joining us, Mr. Holbrook served as President of One World Online, Inc., a publicly-traded company based in Utah from December 1998 until joining us. Prior to joining One World, Mr. Holbrook served as Executive
Vice President of Global Connections, Inc. from January 1996 to December 1998.



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Steven E.
Brown.  Mr. Steven Brown is a Director and Vice President-Chief Financial Officer and has held the same positions since joining us in May 1994. Prior to joining us, Mr. Brown was the Vice President, Finance and Chief Financial Officer
of Carrington Laboratories, Inc. from 1980 through April 1994. Mr. Brown was treasurer of Carrington from 1982 through 1994 and served as a director from 1981 until August 1987. Mr. Brown is a Certified Public Accountant and was previously
associated with the international accounting firm of Arthur Andersen & Co. from 1977 to 1980.



Kenneth Sabot.  Mr. Kenneth Sabot became the Senior Vice President of Operations in February 1998. Prior to joining us,
Mr. Sabot was the Vice-President-Operations of To Life! L.L.C., a start up network marketing company, from August 1996 until February 1998. Prior to joining To Life, he was employed by Light Force, Inc. from 1981 through January 1996. Mr. Sabot
joined Light Force as the Controller in 1981 and served as Chief Operating Officer from 1986 until leaving Light Force in January 1996. Mr. Sabot became a Certified Public Accountant in 1969.



Joseph S. Schuchert.  Mr. Joseph S. Schuchert
was elected to the Board of Directors in June 2000. Mr. Schuchert is the Chairman of Kelso & Company, a merchant banking firm. Mr. Schuchert co-founded Kelso & Company in 1971 and has been employed with it since that time.



Leonid Lapp.  Mr. Leonid Lapp was elected to
the Board of Directors in December 2002. Mr. Lapp is currently President and Chief Executive Officer of Coral Club International, Inc. and has held these positions for more than five years. Coral Club International, Inc. holds the license for
distribution of our products in the former Soviet Union.



Item 11.    Executive Compensation



SUMMARY COMPENSATION TABLE



|                                                                 |  | Fiscal Year    |            | Annual Compensation |                         | Long-Term Compensation
|---------------------------------------------------------------- |  | -------------- | ---------- | ------------------- | ----------------------- | ----------------------
|Name/Title                                                       |  |                | Salary ($) |                     | Bonus($)                |                       
|Clinton H. Howard(2) Chief Executive
Officer                     |  | 2002 2001 2000 |            | $                   | 264,000 264,000 264,000 |                       
|Wayne R. Holbrook(3) President                                   |  | 2002 2001 2000 |            | $                   | 190,900 27,300 -0-      |                       
|Steven E. Brown Vice President  Finance Chief Financial Officer |  | 2002 2001 2000 |            | $                   | 144,000 100,000 100,000 |                       
|Kenneth L. Sabot Senior Vice President Operations                |  | 2002 2001 2000 |            | $                   | 173,400 166,000 149,350 |                       
|Nelson J. Rogers(4) Vice President 
International               |  | 2002 2001 2000 |            | $                   | 106,900 105,000 101,800 |                       
|Richard A. Howard(5) Vice President  Sales
& Marketing          |  | 2002 2001 2000 |            | $                   | -0- 162,470 192,010     |                       



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|(1) |  | Clinton Howard has use of a company car with an aggregate annual cost to us of $10,000. We also pay his country club dues of $1,100. We provide a split-dollar life
insurance to Mr. Howard in the face amount of $1,000,000. The annual premiums are $36,000 per year. No other Named Executive Officers received any annual compensation not properly categorized as salary or bonus, except for certain perquisites or
other benefits the aggregate incremental cost of which to us for each officer did not exceed the lesser of $50,000, or 10% of the total of annual salary and bonus reported for each such officer
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Clinton Howard also served as President until the appointment of Wayne R. Holbrook to that position in February 2003
|--- |  | --------------------------------------------------------------------------------------------------------------------

|(3) |  | Wayne Holbrook joined us in November 2001 as Vice President  Marketing and was appointed President in February 2003
|--- |  | --------------------------------------------------------------------------------------------------------------------

|(4) |  | Nelson Rogers joined us in November 1994 and ceased to act as Vice President  International on March 14, 2003
|--- |  | --------------------------------------------------------------------------------------------------------------

|(5) |  | Richard Howard joined us in December 1999, ceased to act as our Vice President  Sales and Marketing in June 2001 and left in October, 2001.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------



Stock Options.    We
did not issue any stock options to our executive officers during the fiscal year ending on December 31, 2002.



Stock Option Exercises.    The following table presents certain information concerning options exercised during the fiscal year ending December 31, 2002 by each of our
executive officers. The table also includes the value of unexercised options held by our named executive officers at December 31, 2002.



AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES (1)



|                     |  | Shares Acquired on Exercise (#) |  | Value Realized |  | Number of Unexercised Options at Fiscal Year-End |  | Value of Unexercised In-the-Money Options at Fiscal
Year-End(1)
|-------------------- |  | ------------------------------- |  | -------------- |  | ------------------------------------------------ |  | ---------------------------------------------------------------
|Name                 |  |                                 |  | Exercisable    |  | Unexercisable                                    |  | Exercisable                                                    
|Clinton H. Howard    |  | -0-                             |  | -0-            |  | 400,000                                          |  | -0-                                                            
|Wayne R. Holbrook(2) |  | -0-                             |  | -0-            |  | -0-                                              |  | -0-                                                            
|Steven E. Brown      |  | -0-                             |  | -0-            |  | 12,500                                           |  | 7,500                                                          
|Kenneth L. Sabot     |  | -0-                             |  | -0-            |  | 12,500                                           |  | 7,500                                                          
|Nelson J. Rogers(3)  |  | -0-                             |  | -0-            |  | 5,000                                            |  | 5,000                                                          
|Richard A. Howard(4) |  | -0-                             |  | -0-            |  | -0-                                              |  | -0-                                                            

---

|(1) |  | The December 31, 2002 closing market price of $0.07 is used in the calculation to determine the value of unexercised options
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|(2) |  | Wayne Holbrook joined us in November 2001 as Vice PresidentMarketing and was appointed President in February 2003
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(3) |  | Nelson Rogers ceased to act as Vice PresidentInternational as of March 14, 2003
|--- |  | --------------------------------------------------------------------------------

|(4) |  | Richard Howard ceased to act as Vice PresidentSales and Marketing in June 2001 and resigned his position as director and Vice President  Sales and
Marketing in October 2001. Upon the termination of his employment, Mr. Howards options terminated.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employment Contracts and Termination of Employment

And Changes in Control Arrangements



There are no compensatory plans or arrangements, including payments to be received from us, with respect to any person named above which would in any way result in payments to any such person because of his resignation, retirement,
or other termination of such persons employment by us or our subsidiaries, or any change in control of us, or a change in the persons responsibilities following a changing in control of us.



In connection with the appointment of Wayne R. Holbrook as
President, we entered into an employment agreement with him effective February 1, 2003. This employment agreement is for a two-year period and is annually renewable thereafter. It provides that Mr. Holbrook will receive a monthly salary of $20,800
with bonuses and salary increases based on attaining specified performance objectives set forth in the agreement. Mr. Holbrook is also entitled to receive a nine-year option to acquire 500,000 shares of our common stock, at $0.086 per share. This
option, which has not yet been granted, is to become exercisable during the first four years of the nine-year option period. Under the terms of this agreement, if we terminate the agreement other than for cause, Mr. Holbrook will be entitled to
receive severance pay equal to three months of his then current salary. Exhibit 11.1 is a copy of Mr. Holbrooks employment agreement with the Company.



18



---

##### Table of Contents



We entered
into an employment letter agreement with Richard Howard on December 1, 1999. In October, 2001, Mr. Howard resigned his position as director and Vice President  Sales and Marketing, and terminated his employment agreement. Exhibit 11.2 is a
copy of Mr. Richard Howards employment agreement with the Company.



Item 12.    Security Ownership and Certain Beneficial Owners and Management



The following tables set forth as of December 31, 2002, the address, and the number of shares of our common stock held of record or
beneficially by each person who held of record, or was known by us to own beneficially, more than 5% of the then 13,956,294 issued and outstanding shares of our Common Stock, and the name and share holdings of each director and of all officers and
directors as a group. As a result of us not being registered under Section 12(g) of the Securities Exchange Act of 1934, beneficial owners of more than 5% are not required to file Schedule 13Ds or 13Gs with the Securities and Exchange Commission.
Therefore, there may be additional persons who have beneficially acquired more than 5% of our common stock.



|                                                                    |  | As of December 31, 2002(1)                                                                        |     |           |      |  
|------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- | --- | --------- | ---- | -
|Class                                                               |  | Beneficial Owner                                                                                  |     | Amount    |      |  
|Security Ownership of Certain Beneficial Owners                     |  |                                                                                                   |     |           |      |  
|                                                                   
|Common                                                              |  | Clinton H. Howard 2301 Crown Court Irving, Texas 75038                                            |     | 7,858,188 | (2)  |  
|                                                                   
|Common                                                              |  | Dr. M. G. Robertson 977 Centerville Turnpike Virginia Beach, Virginia 23463                       |     | 1,000,000 |      |  
|                                                                   
|Common                                                              |  | Penny Slinger Hills Hills 1998 Living Trust 910 Herman Gulch Road Boulder Creek, California 95006 |     | 479,560   |      |  
|                                                                   
|Common                                                              |  | My Garden, L.P. 2301 Crown Court Irving, Texas 75038                                              |     | 7,440,139 |      |  
|Security Ownership of Management                                    |  |                                                                                                   |     |           |      |  
|                                                                   
|Common                                                              |  | Clinton H. Howard                                                                                 |     | 7,858,188 | (2)  |  
|                                                                   
|Common                                                              |  | Steven E. Brown                                                                                   |     | 15,000    | (3)  |  
|                                                                   
|Common                                                              |  | Kenneth Sabot                                                                                     |     | 15,000    | (3)  |  
|                                                                   
|Common                                                              |  | Nelson J. Rogers                                                                                  |     | 5,000     | (3)  |  
|                                                                   
|ALL OFFICERS, DIRECTORS & BENEFICIAL PERSONS AS A GROUP (8
PERSONS) |  | 7,893,188                                                                                         | (4) |           | 54.8 | %

---

|* |  | less than 1%
|- |  | ------------



|(1) |  | The information included in this table is as of December 31, 2002 and, as such, does not reflect the issuance by us of 4,000,000 shares of common stock to our
licensee in the former Soviet Union on March 27, 2003 as described in Part II, Item 5. Market for the Companys Common Equity and Related Stockholder Matters
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 400,000 shares that may be acquired by presently exercisable common stock options; includes 7,440,139 shares held by a limited partnership, My Garden, L.P.,
the general partners of which are The Clinton H. Howard Family Trust and The Katherine M. Howard Family Trust and also includes 8,049 shares owned of record by Mr. Howards spouse. Mr. Clinton H. Howard disclaims beneficial ownership of the
shares held by his spouse except to the extent of his pecuniary interest.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Represents shares that may be acquired by presently exercisable common stock options. Nelson Rogers ceased to act as Vice President  International as of March
14, 2003
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 435,000 shares that may be acquired by presently exercisable common stock options and the shares referred to in footnote (2).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------



19



---

##### Table of Contents



Item 13.    Certain Relationships and Related Transactions



Transactions with and Indebtedness of Management and Others



Mr. Clinton Howard has guaranteed our obligations with respect to the loan relating to our acquisition of our corporate headquarters and
the debt assumed in connection with our purchase of MPM Medical. We have undertaken certain obligations to indemnify him and secure our obligations to him in the event we default on our loan.



Flanagan Technologies, Inc., a company controlled by G.
Patrick Flanagan, one of our former directors, formerly granted us a license with respect to the rights to sell certain proprietary raw materials including silica hydride powder, the principal ingredient in our most successful product,
Microhydrin®. This license agreement was entered into in December 1998. Contrary to the terms of the agreement,
Flanagan ceased to supply his raw materials to us under this agreement in May 2002. As a result we developed our own proprietary processes to manufacture the materials we formerly purchased under this agreement. Flanagan joined our board of
directors in June 2000 and resigned effective March 14, 2002. We paid Flanagan Technologies, Inc. approximately $913,000 in 2002.



20



---

##### Table of Contents



PART III



Item 14.    Controls and Procedures



An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days before the filing of this quarterly report. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our
disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.



Item 15.    
Exhibits, Financial Statement Schedules and Reports on Form 8-K



|(a) |  | Financial Statements.  The following financial statements are filed as part of this 10-K
|--- |  | ----------------------------------------------------------------------------------------



Title of Document



Report of Grant Thornton LLP, Independent Certified Public Accountants



Consolidated Balance Sheets as
of December 31, 2002 and 2001.



Consolidated Statements of Operations for the Years December 31, 2002, 2001 and 2000.



Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2002, 2001 and 2000.



Consolidated Statements of Cash Flows for the
Years Ended December 31, 2002, 2001 and 2000.



Notes to Consolidated Financial Statements



|(a)(2) |  | Financial Statement Schedules.  None.
|------ |  | -------------------------------------



|(a)(3) |  | Exhibits.  The following exhibits are included as part of this report:
|------ |  | ----------------------------------------------------------------------





|Ex. No. |  | Description                                                                    
|------- |  | -------------------------------------------------------------------------------
|       
|3.1     |  | Articles of Incorporation(1)                                                   
|       
|3.2     |  | By-Laws(1)                                                                     
|       
|4.1     |  | Specimen copy of Certificate for Common Stock(1)                               
|       
|4.2     |  | Specimen copy of 10% Convertible Notes issued in 1997(2)                       
|       
|4.3     |  | The 1998 Stock Option Plan for our Directors, Employees and Consultants(2)     
|       
|10.1    |  | Exclusive License Agreement with Flanagan Technologies for its
Microclusters(2)
|       
|10.2    |  | Form of Member Agreement and Policies with Distributors(2)                     
|       
|10.3    |  | Form of Indemnification Agreement(1)                                           
|       
|10.4    |  | Real Estate Purchase Agreement(3)                                              
|       
|11.1    |  | Employment Agreement with Wayne R. Holbrook*                                   
|       
|11.2    |  | Employment Agreement with Richard Howard(4)                                    
|       
|16.1    |  | Letter regarding change in accountant(5)                                       
|       
|21.1    |  | List of company subsidiaries*                                                  



21



---

##### Table of Contents

|    
|----
|99.1
|    
|99.2

---

|* |  | Filed herewith
|- |  | --------------



|(1) |  | Incorporated by reference to the Annual Report on Form 10-K filed April 26, 2000
|--- |  | --------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to the Annual Report on Form 10-K/A filed May 7, 1999
|--- |  | -------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Quarterly Report on Form 10-Q filed November 13, 2000
|--- |  | --------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the Annual Report on Form 10-K filed April 2, 2001.
|--- |  | --------------------------------------------------------------------------------

|(5) |  | Incorporated by reference to the Current Report on Form 8-K/A filed January 10, 2001
|--- |  | ------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



We filed no reports on Form 8-K during the quarter ending December 31, 2002.





22



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##### Table of Contents



SIGNATURES



Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|      |  | ROYAL BODYCARE, INC., a Nevada corporation
|----- |  | ------------------------------------------
|     
|Date: |  | March 31, 2003                            
|      |  |                                           



Pursuant to the
requirements to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.



|Signature                                   |  | Title                                                          |  | Date          
|------------------------------------------- |  | -------------------------------------------------------------- |  | --------------
|                                           
|/s/  Clinton H. HowardClinton H. Howard     |  | Chairman of the Board of Directors and Chief Executive Officer |  | March 31, 2003
|                                           
|/s/  Steven E. BrownSteven E. Brown         |  | Director, Vice President- Chief Financial Officer              |  | March 31, 2003
|                                           
|/s/  Wayne R. HolbrookWayne R. Holbrook     |  | Director, President                                            |  | March 31, 2003
|                                           
|/s/  Kenneth L. SabotKenneth L. Sabot       |  | Director, Senior Vice President- Operations                    |  | March 31, 2003
|                                           
|/s/  Joseph S. SchuchertJoseph S. Schuchert |  | Director                                                       |  | March 31, 2003
|                                           
|/s/  Leonid LappLeonid Lapp                 |  | Director                                                       |  | March 31, 2003



23



---

##### Table of Contents



ROYAL BODYCARE, INC.



CERTIFICATIONS PURSUANT TO



SECTION 302 OF



THE SARBANES-OXLEY
ACT OF 2002



CERTIFICATION



I, Clinton H. Howard, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Royal BodyCare, Inc.;
| | -- |  | ------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:  March 31, 2003



/s/  Clinton H. Howard

Clinton H. Howard

Chairman of the Board

and Chief Executive Officer



25



---

##### Table of Contents



ROYAL
BODYCARE, INC.



CERTIFICATIONS PURSUANT TO



SECTION 302 OF



THE SARBANES-OXLEY ACT OF 2002



CERTIFICATION



I, Steven E. Brown, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Royal BodyCare, Inc.;
| | -- |  | ------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



26



---

##### Table of Contents



| | 6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:  March 31, 2003



/s/  Steven E. Brown

Steven E. Brown

Vice President  Finance and

Chief Financial Officer



27



---

##### Table of Contents



INDEX TO
FINANCIAL PAGES





|                                                                        |  | Page
|----------------------------------------------------------------------- |  | ----
|                                                                       
|Report of Independent Certified Public Accountants  Grant Thornton LLP |  | F-2 
|                                                                       
|Consolidated Financial Statements                                       |  |     
|                                                                       
|Balance Sheets                                                          |  | F-3 
|                                                                       
|Statements of Operations                                                |  | F-4 
|                                                                       
|Statement of Shareholders Equity                                       |  | F-5 
|                                                                       
|Statements of Cash Flows                                                |  | F-6 
|                                                                       
|Notes to Consolidated Financial Statements                              |  | F-7 





F-1



---

##### Table of Contents



Report of Independent Certified Public Accountants



Board of Directors and Stockholders

Royal BodyCare, Inc. and Subsidiaries



We have audited the accompanying consolidated balance sheets of Royal
BodyCare, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders equity, and cash flows for the three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of Royal BodyCare, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for the three
years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.



As discussed in Note D to the consolidated financial statements, the consolidated balance sheet as of December 31, 2001 and the related consolidated
statements of operations and cash flows for the years ended December 31, 2001 and 2000 have been restated.



As discussed in Note G to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS
142) on January 1, 2002.



GRANT THORNTON LLP



Dallas, Texas

March 21, 2003 (except for Note C,

as to which the date is March 27,
2003)



F-2



---

##### Table of Contents



Royal
BodyCare, Inc. and Subsidiaries



CONSOLIDATED
BALANCE SHEETS



December 31,



|ASSETS                                                                                                                 |  | 2002 |            |   | 2001              |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ----------------- | -
|                                                                                                                       |  |      |            |   | (RestatedNote D) |  
|Current assets                                                                                                         |  |      |            |   |                   |  
|Cash and cash equivalents                                                                                              |  | $    | 626,933    |   |                   | $
|Interest bearing deposit                                                                                               |  |      |           |   |                   |  
|Accounts receivable, net of allowance for doubtful accounts of $100,279 and $102,849,
respectively                     |  |      | 169,993    |   |                   |  
|Inventories                                                                                                            |  |      | 1,757,088  |   |                   |  
|Deferred income taxes                                                                                                  |  |      | 13,312     |   |                   |  
|Prepaid expenses                                                                                                       |  |      | 135,804    |   |                   |  
|Assets of discontinued operations                                                                                      |  |      |           |   |                   |  
|                                                                                                                       |  |      |            |   |                   |  
|                                                                                                                      
|Total current assets                                                                                                   |  |      | 2,703,130  |   |                   |  
|                                                                                                                      
|Property and equipment, net of accumulated depreciation                                                                |  |      | 5,450,766  |   |                   |  
|                                                                                                                      
|Intangible assets, net of accumulated amortization                                                                     |  |      | 2,458,855  |   |                   |  
|                                                                                                                      
|Other assets                                                                                                           |  |      | 268,947    |   |                   |  
|                                                                                                                       |  |      |            |   |                   |  
|                                                                                                                      
|                                                                                                                       |  | $    | 10,881,698 |   |                   | $
|                                                                                                                       |  |      |            |   |                   |  
|                                                                                                                      
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                   |  |      |            |   |                   |  
|                                                                                                                      
|Current liabilities                                                                                                    |  |      |            |   |                   |  
|Accounts payable, trade                                                                                                |  | $    | 1,124,837  |   |                   | $
|Accrued liabilities                                                                                                    |  |      | 1,745,678  |   |                   |  
|Current maturities of long-term debt                                                                                   |  |      | 872,059    |   |                   |  
|Lines of credit                                                                                                        |  |      | 245,585    |   |                   |  
|Liabilities of discontinued operations                                                                                 |  |      | 83,862     |   |                   |  
|                                                                                                                       |  |      |            |   |                   |  
|Total current liabilities                                                                                              |  |      | 4,072,021  |   |                   |  
|                                                                                                                      
|Long-term debt, less current maturities                                                                                |  |      | 3,205,658  |   |                   |  
|Long-term debt of discontinued operations, less current maturities                                                     |  |      | 262,426    |   |                   |  
|                                                                                                                      
|Shareholders equity                                                                                                   |  |      |            |   |                   |  
|Preferred stock, $.10 par value; authorized 20,000,000 shares; none
outstanding                                        |  |      |           |   |                   |  
|Common stock, $.001 par value; authorized 50,000,000 shares; 13,956,294 shares issued
and outstanding in 2002 and 2001 |  |      | 13,956     |   |                   |  
|Additional paid-in capital                                                                                             |  |      | 12,179,078 |   |                   |  
|Accumulated deficit                                                                                                    |  |      | (8,719,452 | ) |                   |  
|Accumulated other comprehensive loss                                                                                   |  |      | (131,989   | ) |                   |  
|                                                                                                                       |  |      |            |   |                   |  
|                                                                                                                       |  |      | 3,341,593  |   |                   |  
|                                                                                                                       |  |      |            |   |                   |  
|                                                                                                                      
|                                                                                                                       |  | $    | 10,881,698 |   |                   | $
|                                                                                                                       |  |      |            |   |                   |  



The
accompanying notes are an integral part of these financial statements.



F-3



---

##### Table of Contents



Royal
BodyCare, Inc. and Subsidiaries



CONSOLIDATED
STATEMENTS OF OPERATIONS



Years ended December
31,



|                                                               |  | 2002 |            |   | 2001                |   |            | 2000               
|-------------------------------------------------------------- |  | ---- | ---------- | - | ------------------- | - | ---------- | -------------------
|                                                               |  |      |            |   | (Restated  Note D) |   |            | (Restated  Note D)
|                                                              
|Sales                                                          |  | $    | 26,284,907 |   |                     | $ | 33,818,747 |                    
|Cost of sales                                                  |  |      | 8,430,009  |   |                     |   | 10,318,164 |                    
|                                                               |  |      |            |   |                     |   |            |                    
|Gross profit                                                   |  |      | 17,854,898 |   |                     |   | 23,500,583 |                    
|                                                              
|Operating expenses                                             |  |      |            |   |                     |   |            |                    
|General and administrative                                     |  |      | 8,440,567  |   |                     |   | 9,705,559  |                    
|Distributor commissions                                        |  |      | 8,661,324  |   |                     |   | 12,157,479 |                    
|Depreciation and amortization                                  |  |      | 625,034    |   |                     |   | 882,863    |                    
|                                                               |  |      |            |   |                     |   |            |                    
|Total operating expenses                                       |  |      | 17,726,925 |   |                     |   | 22,745,901 |                    
|                                                               |  |      |            |   |                     |   |            |                    
|Operating profit                                               |  |      | 127,973    |   |                     |   | 754,682    |                    
|                                                              
|Interest expense                                               |  |      | 388,483    |   |                     |   | 396,330    |                    
|Loss on disposition of assets                                  |  |      | 158,352    |   |                     |   | 702,949    |                    
|                                                               |  |      |            |   |                     |   |            |                    
|                                                               |  |      | 546,835    |   |                     |   | 1,099,279  |                    
|                                                               |  |      |            |   |                     |   |            |                    
|                                                              
|Earnings (loss) from continuing operations before income taxes |  |      | (418,862   | ) |                     |   | (344,597   | )                  
|                                                              
|Income tax expense (benefit)                                   |  |      | 10,110     |   |                     |   | (103,828   | )                  
|                                                               |  |      |            |   |                     |   |            |                    
|                                                              
|Earnings (loss) from continuing operations                     |  |      | (428,972   | ) |                     |   | (240,769   | )                  
|                                                              
|Earnings (loss) from discontinued operations, net of tax       |  |      | 25,400     |   |                     |   | (873,866   | )                  
|                                                               |  |      |            |   |                     |   |            |                    
|Net earnings (loss)                                            |  | $    | (403,572   | ) |                     | $ | (1,114,635 | )                  
|                                                               |  |      |            |   |                     |   |            |                    
|                                                              
|Basic and diluted earnings (loss) per share:                   |  |      |            |   |                     |   |            |                    
|Earnings (loss) from continuing operations                     |  | $    | (0.03      | ) |                     | $ | (0.02      | )                  
|Earnings (loss) from discontinued operations                   |  |      |           |   |                     |   | (0.06      | )                  
|                                                               |  |      |            |   |                     |   |            |                    
|                                                              
|Basic and diluted earnings (loss) per share                    |  | $    | (0.03      | ) |                     | $ | (0.08      | )                  
|                                                               |  |      |            |   |                     |   |            |                    
|                                                              
|Basic and diluted weighted average shares outstanding          |  |      | 13,956,294 |   |                     |   | 13,949,627 |                    
|                                                               |  |      |            |   |                     |   |            |                    



The
accompanying notes are an integral part of these financial statements.



F-4



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##### Table of Contents



Royal
BodyCare, Inc. and Subsidiaries



CONSOLIDATED
STATEMENT OF SHAREHOLDERS EQUITY



|                                                       |  | Common stock |  | Additional paid-in capital |        | Accumulated deficit |   |            | Accumulated other comprehensive income (loss) |   |            | Total shareholders equity | 
|------------------------------------------------------ |  | ------------ |  | -------------------------- | ------ | ------------------- | - | ---------- | --------------------------------------------- | - | ---------- | -------------------------- | 
|                                                       |  | Shares       |  | Amount                     |        |                     |   |           
|Balance at January 1, 2000, as previously reported     |  | 13,916,294   |  | $                          | 13,916 |                     | $ | 12,147,818 |                                               | $ | (7,785,407 | )                          | 
|                                                      
|Cumulative effect of prior period adjustments (Note D) |  |             |  |                            |       |                     |   |           |                                               |   | 53,436     |                            | 
|                                                       |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|                                                      
|Balance at January 1, 2000, as restated                |  | 13,916,294   |  |                            | 13,916 |                     |   | 12,147,818 |                                               |   | (7,731,971 | )                          | 
|                                                      
|Other comprehensive income                             |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|Net earnings (restated  Note D)                       |  |             |  |                            |       |                     |   |           |                                               |   | 530,726    |                            | 
|Foreign currency translation adjustment                |  |             |  |                            |       |                     |   |           |                                               |   |           |                            | 
|                                                       |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|Total comprehensive income, as restated                |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|                                                      
|Issuance of stock options for services                 |  |             |  |                            |       |                     |   | 11,300     |                                               |   |           |                            | 
|                                                       |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|Balance at December 31, 2000, as restated              |  | 13,916,294   |  |                            | 13,916 |                     |   | 12,159,118 |                                               |   | (7,201,245 | )                          | 
|                                                      
|Other comprehensive loss                               |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|Net loss (restated  Note D)                           |  |             |  |                            |       |                     |   |           |                                               |   | (1,114,635 | )                          | 
|Foreign currency translation adjustment                |  |             |  |                            |       |                     |   |           |                                               |   |           |                            | 
|                                                       |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|Total comprehensive loss, as restated                  |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|                                                      
|Issuance of stock for services                         |  | 40,000       |  |                            | 40     |                     |   | 19,960     |                                               |   |           |                            | 
|                                                       |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|                                                      
|Balance at December 31, 2001, as restated              |  | 13,956,294   |  |                            | 13,956 |                     |   | 12,179,078 |                                               |   | (8,315,880 | )                          | 
|                                                      
|Other comprehensive income                             |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|Net loss                                               |  |             |  |                            |       |                     |   |           |                                               |   | (403,572   | )                          | 
|Foreign currency translation adjustment                |  |             |  |                            |       |                     |   |           |                                               |   |           |                            | 
|                                                       |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|Total comprehensive loss                               |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|                                                       |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 
|Balance at December 31, 2002                           |  | 13,956,294   |  | $                          | 13,956 |                     | $ | 12,179,078 |                                               | $ | (8,719,452 | )                          | 
|                                                       |  |              |  |                            |        |                     |   |            |                                               |   |            |                            | 



The
accompanying notes are an integral part of these financial statements.





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##### Table of Contents



Royal
BodyCare, Inc. and Subsidiaries



CONSOLIDATED
STATEMENTS OF CASH FLOWS



For the years ended
December 31,



|                                                                                                                      |  | 2002 |           |   | 2001                |   |            | 2000                | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ------------------- | - | ---------- | ------------------- | 
|                                                                                                                      |  |      |           |   | (Restated  Note D) |   |            | (Restated  Note D) | 
|Cash flows from operating activities                                                                                  |  |      |           |   |                     |   |            |                     | 
|Net earnings (loss)                                                                                                   |  | $    | (403,572  | ) |                     | $ | (1,114,635 | )                   | 
|Less earnings (loss) from discontinued operations                                                                     |  |      | 25,400    |   |                     |   | (873,866   | )                   | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|Net earnings (loss) from continuing operations                                                                        |  |      | (428,972  | ) |                     |   | (240,769   | )                   | 
|                                                                                                                     
|Adjustments to reconcile net earnings (loss) from continuing operations to net cash
provided by continuing operations |  |      |           |   |                     |   |            |                     | 
|Depreciation and amortization                                                                                         |  |      | 625,034   |   |                     |   | 882,863    |                     | 
|Loss on disposition of assets                                                                                         |  |      | 158,352   |   |                     |   | 702,949    |                     | 
|Deferred income taxes                                                                                                 |  |      | (8,528    | ) |                     |   | (150,132   | )                   | 
|Issuance of stock or stock options for services                                                                       |  |      |          |   |                     |   | 20,000     |                     | 
|Change in operating assets and liabilities                                                                            |  |      |           |   |                     |   |            |                     | 
|Accounts receivable                                                                                                   |  |      | 529,327   |   |                     |   | (208,733   | )                   | 
|Interest bearing deposit                                                                                              |  |      | 125,000   |   |                     |   |           |                     | 
|Prepaid expenses                                                                                                      |  |      | 25,304    |   |                     |   | 166,839    |                     | 
|Inventories                                                                                                           |  |      | 541,287   |   |                     |   | 746,035    |                     | 
|Other assets                                                                                                          |  |      | (30,291   | ) |                     |   | 115,385    |                     | 
|Accounts payable, trade                                                                                               |  |      | 80,129    |   |                     |   | (479,604   | )                   | 
|Accrued liabilities                                                                                                   |  |      | (269,324  | ) |                     |   | (206,823   | )                   | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|Net cash provided by operating activities of continuing operations                                                    |  |      | 1,347,318 |   |                     |   | 1,348,010  |                     | 
|Net cash used in discontinued operations                                                                              |  |      | (106,832  | ) |                     |   | (329,265   | )                   | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|Net cash provided by operating activities                                                                             |  |      | 1,240,486 |   |                     |   | 1,018,745  |                     | 
|                                                                                                                     
|Cash flows from investing activities                                                                                  |  |      |           |   |                     |   |            |                     | 
|Purchase of property and equipment                                                                                    |  |      | (287,543  | ) |                     |   | (4,104,096 | )                   | 
|Proceeds from sale of property and equipment                                                                          |  |      | 20,580    |   |                     |   |           |                     | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|Net cash used in investing activities of continuing operations                                                        |  |      | (266,963  | ) |                     |   | (4,104,096 | )                   | 
|Net cash used in discontinued operations                                                                              |  |      |          |   |                     |   | (205,000   | )                   | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|Net cash used in investing activities                                                                                 |  |      | (266,963  | ) |                     |   | (4,309,096 | )                   | 
|                                                                                                                     
|Cash flows from financing activities                                                                                  |  |      |           |   |                     |   |            |                     | 
|Net proceeds from (payments against) lines of credit                                                                  |  |      | (95,270   | ) |                     |   | (71,734    | )                   | 
|Proceeds from long-term debt                                                                                          |  |      | 58,804    |   |                     |   | 3,791,094  |                     | 
|Payments of long-term debt                                                                                            |  |      | (806,709  | ) |                     |   | (580,639   | )                   | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|Net cash (used in) provided by financing activities of continuing
operations                                          |  |      | (843,175  | ) |                     |   | 3,138,721  |                     | 
|Net cash (used in) provided by discontinued operations                                                                |  |      | (101,948  | ) |                     |   | 301,388    |                     | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|Net cash (used in) provided by financing activities                                                                   |  |      | (945,123  | ) |                     |   | 3,440,109  |                     | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|                                                                                                                     
|Effect of exchange rate changes on cash flows                                                                         |  |      | (2,295    | ) |                     |   | 20,182     |                     | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|                                                                                                                     
|Net increase in cash                                                                                                  |  |      | 26,105    |   |                     |   | 169,940    |                     | 
|                                                                                                                     
|Cash and cash equivalents at beginning of year                                                                        |  |      | 600,828   |   |                     |   | 430,888    |                     | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|                                                                                                                     
|Cash and cash equivalents at end of year                                                                              |  |      | 626,933   |   |                     | $ | 600,828    |                     | 
|                                                                                                                      |  |      |           |   |                     |   |            |                     | 
|                                                                                                                     
|Supplemental cash flow disclosures                                                                                    |  |      |           |   |                     |   |            |                     | 
|Income taxes                                                                                                          |  | $    |          |   |                     | $ |           |                     | 
|Interest                                                                                                              |  |      | 396,841   |   |                     |   | 408,703    |                     | 



The
accompanying notes are an integral part of these financial statements.





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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE A  NATURE OF OPERATIONS AND ORGANIZATION



Royal BodyCare, Inc. (RBC or the Company) is engaged in the marketing of nutritional supplements and personal care products in the United States, Canada and Japan. The Companys products are
marketed through a network marketing system in which distributors, who are independent contractors, purchase products for resale to retail customers or for personal use.



RBC has also entered into agreements to license the exclusive rights to sell its nutritional and personal
care products in other international markets through third party licensees in the respective countries. RBC has entered into three such arrangements to market its products. Under these agreements, distributors in these countries are compensated by
the third party licensees according to the same or a similar compensation plan as the one used by RBC for its independent distributors in the United States, Canada and Japan.



In August 2001, RBC, through a newly formed subsidiary, purchased substantially all of the assets of MPM
Medical, Inc., a Texas corporation (MPM Medical). MPM Medical distributes wound care and oncology products throughout the United States. The acquisition of MPM Medical enhances RBCs ability to market products through broadened
distribution channels. RBC acquired the assets of MPM Medical for $10,000 and the assumption of certain of MPM Medicals liabilities including a Small Business Administration guaranteed note, which the principal amount outstanding was
approximately $290,000. The acquisition of MPM Medical was not significant to RBCs financial statements.



NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Principles of ConsolidationThe consolidated financial statements include the accounts of
RBC, and its wholly-owned subsidiaries; Royal BodyCare USA, Inc., Royal BodyCare Canada, Inc., Pure Life International Products, Inc., BizAdigm, Inc. and MPM Medical, Inc. (collectively the Company). All significant intercompany accounts
and transactions have been eliminated.



Translation of Foreign CurrenciesAll assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenue and expense accounts are
translated at weighted average exchange rates. Translation gains and losses are reflected as a component of other comprehensive income in shareholders equity. Gains and losses on foreign currency transactions are included in the consolidated
statements of operations.



Revenue
Recognition and Deferred RevenueSales are recorded when the product is shipped and title passes to the distributor and/or customer. Payments received for unshipped products are recorded as deferred revenue and are included in other
current liabilities. The Company generally requires cash or credit payment at the point of sale for nutritional products and personal care products.



InventoriesInventories consisting of raw materials and bulk products, packaging materials and finished goods are
stated at the lower of cost of market. The cost of inventories is determined using the first in, first out method.



Cash EquivalentsFor purposes of the statements of cash flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents.



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEScontinued



Property and EquipmentProperty and equipment are recorded at cost. Depreciation and amortization are provided over the
estimated useful lives of the related assets, principally on the straight-line method, ranging from three to twenty-five years.



Intangible Assets and AmortizationThe Company adopted SFAS No. 142 Goodwill and Other Intangible Assets
effective January 1, 2002. In accordance with SFAS 142, the Company discontinued recording goodwill amortization effective January 1, 2002. Distribution contracts, copywrites, trademarks, registrations and other intangibles are amortized over
average lives of 8, 19 and 11 years, respectively.



Accounting for Impairment of Long-Lived AssetsThe Company evaluates all long-lived assets, including all intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying
amounts may not be recoverable. Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted net cash flows they will generate.



Income TaxesThe Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statement and tax bases of assets and liabilities as measured by the currently enacted tax rates in effect for the
years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities. An allowance against deferred tax assets is recorded in whole or in part when it is more
likely than not that such tax benefits will not be realized.



Earnings (Loss) Per ShareBasic earnings (loss) per common share is based upon the weighted average number of common shares outstanding during each period presented. Diluted earnings (loss) per share is based upon
the weighted average number of common shares outstanding and, when dilutive, common shares issuable for stock options, warrants and convertible debt.



Credit RiskTrade accounts receivable arise in the normal course of business and primarily
relate to sales of products to the distributor network throughout the United States, Canada and its overseas licensees. Such receivables are unsecured. Ongoing credit evaluations are performed on the entities from whom such accounts are receivable.



Accounting EstimatesIn
preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that effect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and revenues during the reporting period. Actual results could differ from those estimates.



Financial InstrumentsThe carrying value of cash, interest-bearing deposits, accounts
receivable and payable, accrued liabilities and lines of credit approximate fair value due to the short-term maturities of these assets and liabilities. Fair value of long-term debt is estimated based on interest rates for the same or similar debt
offered having the same or similar maturities and collateral requirements. At December 31, 2002, fair value of the long-term debt was $3,377,000 which is $252,000 above the carrying value of $3,125,000.



F-8



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEScontinued



Segment InformationThe Companys operations involve two operating segments: the Nutritional Products segment and
the Medical Products segment. Nutritional products are developed and distributed to a network of independent distributors operating primarily in North America and to licensees operating in certain other countries outside of North America. Medical
products are developed and sold throughout the United States through medical/surgical supply dealers and pharmaceutical distributors to medical institutions such as hospitals, nursing homes and pharmacies.



Internal Software Development
CostsSoftware development costs for internally used software are capitalized when technological feasibility for the project is established up to the time the product is ready for use. Amortization of capitalized costs begins when the
software is ready for its intended use and after substantially all tests to determine whether the software is operational have been completed. Internally developed software is amortized over 3-5 years.



Product Return PolicyReturned product
that is unused and resalable is refunded up to one year from the date of purchase at 100% percent of the sales price to the distributor less a ten percent restocking fee and commissions paid. Returned product damaged during shipment to the
distributor is replaced by the Company. Return of product other than that which was damaged at the time of receipt by a distributor constitutes potential cancellation of the distributorship.



AdvertisingAdvertising expense is charged
to operations when incurred. Advertising expense has not been significant for 2002, 2001 or 2000.



Other Comprehensive Income (Loss)Other comprehensive income (loss) refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive income (loss) but are excluded from net income (loss) as the amounts are recorded directly as an adjustment to shareholders equity. The Companys other
comprehensive income (loss) is attributed to translation gains or losses of foreign currencies.



Stock-Based CompensationAt December 31, 2002, the Company has a long-term incentive plan for the benefit of certain key employees, officers and directors, which is described more
fully in Note K. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is
reflected in net earnings (loss), as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings (loss) and
earnings (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



F-9



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEScontinued



|                                                                                                                                            |  | Year Ended December 31, |         
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                                                                                            |  | 2002                    |         
|                                                                                                                                            |  |                         |         
|Net earnings (loss), as reported                                                                                                            |  | $                       | (403,572
|Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax expense |  |                         | (66,761 
|                                                                                                                                            |  |                         |         
|Pro forma net earnings (loss)                                                                                                               |  | $                       | (470,333
|                                                                                                                                            |  |                         |         
|Earnings (loss) per share  basic and diluted                                                                                               |  |                         |         
|As reported                                                                                                                                 |  | $                       | (0.03   
|Pro forma                                                                                                                                   |  |                         | (0.03   



The fair
value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions; expected volatility of 145 percent for 2000; average risk-free interest rate of 5.19 percent for
2000; average expected life of 4.5 years for 2000; no dividend yield. There were no options granted in 2002 or 2001. The weighted-average fair value of options granted in 2000 was $0.78.



Option pricing models require the input of highly subjective assumptions including the expected stock price
volatility. Also, our employee stock options have characteristics significantly different from those of traded options including long-vesting schedules, and changes in the subjective input assumptions can materially affect the fair value estimate.
The Company believes that the best assumptions available were used to value the options.



New Accounting Pronouncements 



Accounting for Costs Associated with Exit or Disposal Activities



In June 2002, the FASB issued Statement 146, Accountingfor Costs Associated with Exit or Disposal
Activities. This statement requires entities to recognize costs associated with exit or disposal activities when liabilities are incurred rather than when the entity commits to an exit or disposal plan, as currently required. Examples of costs
covered by this guidance include one-time employee termination benefits, costs to terminate contracts other than capital leases, costs to consolidate facilities or relocate employees, and certain other exit or disposal activities. This statement is
effective for fiscal years beginning after December 31, 2002, and will impact any exit or disposal activities the Company initiates after that date.



Stock-Based Employee Compensation



In December 2002, the FASB issued Statement 148, Accounting for Stock-Based Compensation  Transition and Disclosure: an amendment
of FASB Statement 123 (SFAS 123), to provide alternative transition methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of
SFAS 123 to require prominent disclosures in annual financial statements about the method of accounting for stock-based employee compensation and the pro forma effect on reported results of applying the fair value based method for entities that use
the intrinsic value method of accounting. The pro forma effect disclosures are also required to be prominently disclosed in interim period financial statements. This statement is effective



F-10



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIEScontinued



for financial statements for fiscal years ending after December 15, 2002 and is effective for financial reports containing condensed financial statements for interim periods beginning after December
15, 2002, with earlier application permitted. The Company does not plan to change to the fair value based method of accounting for stock-based employee compensation at this time and has included the disclosure requirements of SFAS 148 in the
accompanying financial statements.



Accounting for Guarantees



In November 2002, FASB Interpretation 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees the
Company issues or modifies subsequent to December 31, 2002, but has certain disclosure requirements effective for interim and annual periods ending after December 15, 2002. The Company has not historically issued guarantees and does not anticipate
FIN 45 will have a material effect on its 2003 financial statements.



Consolidation of Variable Interest Entities



In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51,
Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do
not have the characteristics of a controlling financial interest (variable interest entities). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entitys expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is in the process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of
operations.



ReclassificationsCertain amounts in 2001 and 2000 have been reclassified to conform with the 2002 presentation.



NOTE C  LIQUIDITY



During 2002 and 2001, the Company incurred net losses and a decline in working capital. At December 31, 2002, the Company had cash and
cash equivalents of $627,000 and a working capital deficiency of $1,400,000. To improve its working capital position, on March 27, 2003, the Company sold 4,000,000 shares of its common stock at an aggregate price of $400,000 to its licensee in the
former Soviet Union. The president of this licensee, Coral Club International, Inc., is a member of the Companys Board of Directors. Additionally, the Companys founder and Chairman has committed to purchase up to $200,000 of the
Companys common stock during the month of April 2003. Management of the Company has also



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE C  LIQUIDITYcontinued



taken certain actions that it believes will help improve future operating results. During 2002, the Company began manufacturing the key raw materials used in products that account for more than 50% of consolidated sales. The
Companys cost to manufacture these raw materials is less than it paid the former supplier for these materials. In addition, the Company has undertaken other cost cutting measures that will reduce its administrative expenses in 2003, while
implementing marketing strategies and programs it believes will improve retention of its distributor base and reverse the declining sales trend the Company has experienced during the past three years. However, there can be no assurances that these
efforts will be successful to allow the Company to avoid a further decline in its sales.



NOTE D  RESTATEMENT OF FINANCIAL STATEMENTS



As a result of a review of its accounting records in the normal course of business during 2002, the Company
has restated its previously reported audited financial statements for the years ended December 31, 2001 and 2000, and recorded a prior period adjustment to its beginning accumulated deficit as of January 1, 2000.



In its review, the Company determined that it had recorded
excess distributor commission expense of $36,964 and $31,037 in 2001 and 2000, respectively, and that it should have reversed in 1999 an $80,436 reserve that was on its books related to litigation that was settled in 1999. The Company previously
reported net earnings (loss) of $(1,189,199), or $(0.09) per share, and $510,289, or $0.04 per share, in 2001 and 2000, respectively. The restatement resulted in the Company reporting net earnings (loss) of $(1,114,635), or $(0.08) per share, and
$530,726, or $0.04 per share, in 2001 and 2000, respectively. Also as a result of the restatement, the Company reduced its beginning accumulated deficit as of January 1, 2000 from $7,785,407 to $7,731,971.



A summary of the significant effects of the restatement is
set forth below:



|                                                               |  | December 31, 2001         |            |   | December 31, 2000 |  
|-------------------------------------------------------------- |  | ------------------------- | ---------- | - | ----------------- | -
|                                                               |  | As Previously Reported(1) |            |   | As Restated       |  
|Consolidated statements of operations data for the year ended: |  |                           |            |   |                   |  
|                                                              
|Distributor commissions                                        |  | $                         | 12,194,443 |   |                   | $
|Earnings (loss) from continuing operations before income taxes |  |                           | (381,561   | ) |                   |  
|Income tax expense (benefit)                                   |  |                           | (66,228    | ) |                   |  
|Earnings (loss) from continuing operations                     |  |                           | (315,333   | ) |                   |  
|Net earnings (loss)                                            |  |                           | (1,189,199 | ) |                   |  
|                                                              
|Consolidated balance sheet data as of:                         |  |                           |            |   |                   |  
|Cash                                                           |  |                           | 452,391    |   |                   |  
|Deferred tax asset                                             |  |                           | 4,784      |   |                   |  
|Current assets                                                 |  |                           | 3,904,698  |   |                   |  
|Total assets                                                   |  |                           | 12,440,727 |   |                   |  
|Accumulated deficit                                            |  |                           | (8,464,317 | ) |                   |  
|Shareholders equity                                           |  |                           | 3,593,491  |   |                   |  

---

|(1) |  | Amounts include the effect of certain reclassifications made to conform to 2002 presentation primarily associated with the discontinued operations of BizAdigm, Inc.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE E  INVENTORIES



At
December 31, 2002 and 2001, inventories consist of the following:



|                                |  | 2002 |           | 2001
|------------------------------- |  | ---- | --------- | ----
|Raw materials and bulk products |  | $    | 410,886   |     
|Packaging materials             |  |      | 304,019   |     
|Finished goods                  |  |      | 1,042,183 |     
|                                |  |      |           |     
|                               
|                                |  | $    | 1,757,088 |     
|                                |  |      |           |     



NOTE F  PROPERTY AND EQUIPMENT



At December 31, 2002 and 2001, property and equipment consist of the following:



|                                               |  | 2002 |           | 2001
|---------------------------------------------- |  | ---- | --------- | ----
|Building and improvements                      |  | $    | 2,729,984 |     
|Computer software and office equipment         |  |      | 3,144,067 |     
|Warehouse equipment                            |  |      | 262,525   |     
|Automotive equipment                           |  |      | 73,848    |     
|Leasehold improvements                         |  |      | 41,255    |     
|                                               |  |      |           |     
|                                               |  |      | 6,251,679 |     
|Less accumulated depreciation and amortization |  |      | 1,942,086 |     
|                                               |  |      |           |     
|                                               |  |      | 4,309,593 |     
|Land                                           |  |      | 1,141,173 |     
|                                               |  |      |           |     
|                                               |  | $    | 5,450,766 |     
|                                               |  |      |           |     



NOTE G  INTANGIBLE ASSETS



The Company amortized goodwill and intangible assets acquired prior to July 1, 2001 until December 31, 2001. Beginning January 1, 2002, annual goodwill amortization of approximately $156,000 is no longer being recognized. The Company
completed a transitional impairment test of all intangible assets by March 31, 2002, and a transitional fair value based impairment test of goodwill as of January 1, 2002 by June 30, 2002. No impairment losses were recognized as a result of this
testing or throughout the remainder of 2002.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE G  INTANGIBLE ASSETScontinued



Intangible assets consist of the following:



|                                               |  | Average life (years) |                      | December 31, 2002 |                          |  | December 31, 2001 |                     
|---------------------------------------------- |  | -------------------- | -------------------- | ----------------- | ------------------------ |  | ----------------- | --------------------
|                                               |  |                      | Gross carrying value |                   | Accumulated amortization |  |                   | Gross carrying value
|Amortizable intangible assets                  |  |                      |                      |                   |                          |  |                   |                     
|Distribution contracts                         |  | 8                    |                      | $                 | 277,369                  |  | $                 | (46,827             
|Copywrites, trademarks and other registrations |  | 19                   |                      |                   | 99,100                   |  |                   | (7,267              
|Other                                          |  | 11                   |                      |                   | 47,600                   |  |                   | (6,174              
|                                               |  |                      |                      |                   |                          |  |                   |                     
|Total amortizable intangible assets            |  |                      |                      |                   | 424,069                  |  |                   | (60,268             
|                                              
|Intangible assets not subject to amortization: |  |                      |                      |                   |                          |  |                   |                     
|Goodwill                                       |  |                      |                      |                   | 3,222,349                |  |                   | (1,127,295          
|                                               |  |                      |                      |                   |                          |  |                   |                     
|                                              
|Total intangible assets                        |  |                      |                      | $                 | 3,646,418                |  | $                 | (1,187,563          
|                                               |  |                      |                      |                   |                          |  |                   |                     



Amortization expense related to intangible assets, excluding goodwill, totaled $42,407 and $17,861 for the years ended December 31, 2002 and 2001, respectively. The aggregate estimated amortization expense for intangible assets
remaining as of December 31, 2002 is as follows:



|2003       |  | $ | 42,407 
|---------- |  | - | -------
|2004       |  |   | 42,407 
|2005       |  |   | 42,407 
|2006       |  |   | 42,407 
|2007       |  |   | 42,407 
|Thereafter |  |   | 151,766
|           |  |   |        
|Total      |  | $ | 363,801
|           |  |   |        



In
contrast to accounting standards in effect during 2001 and 2000, SFAS 142, Goodwill and Other Intangible Assets, which became effective beginning in 2002, provides that goodwill should not be amortized. Accordingly, with the adoption of SFAS
142 in 2002, the Company discontinued the amortization of goodwill. The information presented below reflects adjustments to information reported in 2001 and 2000 as if SFAS 142 had been applied in those years. The adjustments include the effects of
not amortizing goodwill.



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Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE G  INTANGIBLE ASSETScontinued



|                                                                          |  | Year Ended December 31,
|------------------------------------------------------------------------- |  | -----------------------
|                                                                          |  | 2002                   
|Earnings (loss) from continuing operations:                               |  |                        
|As reported                                                               |  | $                      
|Goodwill amortization, net of income tax                                  |  |                        
|                                                                          |  |                        
|As adjusted                                                               |  | $                      
|                                                                          |  |                        
|                                                                         
|Earnings (loss) from continuing operations per share  basic and
diluted: |  |                        
|As reported                                                               |  | $                      
|Goodwill amortization, net of income tax                                  |  |                        
|                                                                          |  |                        
|As adjusted                                                               |  | $                      
|                                                                          |  |                        



NOTE H  ACCRUED LIABILITIES



At December 31, 2002 and 2001 accrued liabilities consist of the following:



|                                      |  | 2002 |           | 2001
|------------------------------------- |  | ---- | --------- | ----
|Distributor commissions               |  | $    | 936,300   |     
|Deferred revenue for unshipped orders |  |      | 354,509   |     
|Salaries and wages                    |  |      | 296,953   |     
|Sales and other taxes                 |  |      | 61,993    |     
|Interest                              |  |      | 28,640    |     
|Other                                 |  |      | 67,283    |     
|                                      |  |      |           |     
|                                     
|Total                                 |  | $    | 1,745,678 |     
|                                      |  |      |           |     



NOTE I  LINES OF CREDIT



At December 31, 2002 and 2001 lines of credit consist of the following:



|                                                      |  | 2002 |         | 2001
|----------------------------------------------------- |  | ---- | ------- | ----
|Line of credit ($250,000 maximum) at prime plus 1.0%  |  | $    |        |     
|Line of credit ($100,000 maximum) at prime plus 3.25% |  |      | 100,000 |     
|Line of credit ($50,000 maximum) at prime plus 4.0%   |  |      | 35,042  |     
|Line of credit ($155,000) at prime plus 1.0%          |  |      | 110,543 |     
|                                                      |  |      |         |     
|                                                     
|Total                                                 |  | $    | 245,585 |     
|                                                      |  |      |         |     



The
prime rate was 4.25% at December 31, 2002. The lines of credit are collateralized by the Companys accounts receivable and inventories. The lines generally mature over a 12-month period.



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE J  LONG-TERM OBLIGATIONS



At December 31, 2002 and 2001 long-term obligations consist of the following:



|                                                                                                                                                                                                                                                                                                                               |  | 2002 |           | 2001
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | ----
|Mortgage note payable bearing interest at7.75%, payable in monthly installments
of$25,797 through April 2019, collateralizedby land and building                                                                                                                                                                               |  | $    | 2,863,363 |     
|Note payable to previous owner of theCompanys headquarters facility
bearinginterest at 7%, payable in monthlyinstallments of $3,483 through March 2003at which time a final installment of $255,000is due                                                                                                                     |  |      | 261,398   |     
|Note payable to bank bearing interest at primeplus .5% due in monthly installments
of$7,474 through March 2006                                                                                                                                                                                                                 |  |      | 265,842   |     
|U. S. Small Business Administration notebearing interest at prime plus 2.75% due
inmonthly installments of approximately $4,700through July 2008                                                                                                                                                                               |  |      | 243,422   |     
|Notes payable to banks bearing interest at ratesranging from 4.9% to 10.4%,
payablethrough 2005, collateralized by automobiles                                                                                                                                                                                                 |  |      | 31,519    |     
|Note payable to bank bearing interest at 9%,due in monthly installments of $2,146,
paidin full during 2002                                                                                                                                                                                                                     |  |      |          |     
|Convertible notes (original amount $730,000)bearing interest at 10% payable
quarterly,originally due two years from the date ofissuance, notes are convertible into commonstock any time prior to maturity at the optionof the holder based on a per share conversionprice of $1.32 (there were no conversions
in2002 or 2001) |  |      | 128,000   |     
|Settlement to former marketing consultant anddistributor, payable $5,000 per month
throughApril 2004, settlement is without interest andhas been discounted at 10%                                                                                                                                                             |  |      | 74,606    |     
|                                                                                                                                                                                                                                                                                                                              
|Capital Lease Obligations                                                                                                                                                                                                                                                                                                      |  |      | 199,567   |     
|Other                                                                                                                                                                                                                                                                                                                          |  |      | 10,000    |     
|                                                                                                                                                                                                                                                                                                                               |  |      |           |     
|                                                                                                                                                                                                                                                                                                                               |  |      | 4,077,717 |     
|                                                                                                                                                                                                                                                                                                                              
|Less  current maturities                                                                                                                                                                                                                                                                                                      |  |      | 872,059   |     
|                                                                                                                                                                                                                                                                                                                               |  |      |           |     
|                                                                                                                                                                                                                                                                                                                               |  | $    | 3,205,658 |     
|                                                                                                                                                                                                                                                                                                                               |  |      |           |     



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE J  LONG-TERM OBLIGATIONScontinued



Certain purchases of equipment have been financed through capital leases. Such leases have terms ending in 2004 and have various interest rates approximating 15%.



Long-term obligation payments payable in the next five years are as follows:



|December 31,                      |  | Debt |           | Capital leases
|--------------------------------- |  | ---- | --------- | --------------
|2003                              |  | $    | 711,540   |               
|2004                              |  |      | 292,092   |               
|2005                              |  |      | 181,019   |               
|2006                              |  |      | 160,237   |               
|2007                              |  |      | 172,984   |               
|Thereafter                        |  |      | 2,360,278 |               
|                                  |  |      |           |               
|                                  |  |      | 3,878,150 |               
|Less amount representing interest |  |      |          |               
|Less current maturities           |  |      | 711,540   |               
|                                  |  |      |           |               
|                                 
|                                  |  | $    | 3,166,610 |               
|                                  |  |      |           |               



NOTE K  CAPITAL TRANSACTIONS



Issuance of Common Stock



In 2001, the Company issued 40,000 shares of common stock to an individual in consideration of services rendered in connection with the acquisition of the Companys headquarters in March 2001.



Private Placements



In 1998, the Company sold 255,449 shares of unregistered
common stock at prices ranging from $1.35 to $1.66 per share. In addition, the Company granted warrants to purchase 216,932 shares of common stock, exercisable through October 2003 at an exercise price of $2.00 per share. Each of the warrants are
outstanding at December 31, 2002. The offering raised $389,476.



Stock Options



The
Company has a stock option plan (The 1998 Stock Option Plan). The Plan reserves 500,000 shares under the Plan.



As of December 31, 2002, directors, officers and key employees have been granted options to acquire 62,000 shares of common stock that
vest periodically through 2004. The options have been granted at prices ranging from $.50 to $.91 per share, which were the market prices of the shares on the dates granted. The options expire at various dates through 2005.



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE K  CAPITAL TRANSACTIONScontinued



The Company has entered into stock option agreements outside of the Plan. As of December 31, 2002, individuals have been granted options to acquire 728,840 shares of common stock. These options, which were fully vested at
December 31, 2000, were granted at prices ranging from $.50 to $1.55 per share, which were the market prices of the shares on the dates granted. These options expire at various dates through 2018.



Changes in our stock options are as follows:



|                                 |  | Shares    |   |  | Exercise price |               | Weighted- average exercise price
|-------------------------------- |  | --------- | - |  | -------------- | ------------- | --------------------------------
|Outstanding at January 1, 2000   |  | 1,113,120 |   |  | $              | 0.73  $2.40  |                                 
|Granted                          |  | 172,000   |   |  |                | 0.50    1.06 |                                 
|Exercised                        |  |          |   |  |                |              |                                 
|Canceled or expired              |  | (122,600  | ) |  |                | 0.73    2.00 |                                 
|                                 |  |           |   |  |                |               |                                 
|                                
|Outstanding at December 31, 2000 |  | 1,162,520 |   |  |                | 0.50    2.40 |                                 
|Granted                          |  |          |   |  |                |              |                                 
|Exercised                        |  |          |   |  |                |              |                                 
|Canceled or expired              |  | (150,820  | ) |  |                | 0.77    1.54 |                                 
|                                 |  |           |   |  |                |               |                                 
|                                
|Outstanding at December 31, 2001 |  | 1,011,700 |   |  |                | 0.50    2.40 |                                 
|Granted                          |  |          |   |  |                |              |                                 
|Exercised                        |  |          |   |  |                |              |                                 
|Canceled or expired              |  | (220,860  | ) |  |                | 1.06    2.40 |                                 
|                                 |  |           |   |  |                |               |                                 
|                                
|Outstanding at December 31, 2002 |  | 790,840   |   |  |                | 0.50    1.55 |                                 
|                                 |  |           |   |  |                |               |                                 
|                                
|Exercisable at December 31, 2002 |  | 764,840   |   |  |                |               |                                 
|                                 |  |           |   |  |                |               |                                 
|                                
|Exercisable at December 31, 2001 |  | 970,200   |   |  |                |               |                                 
|                                 |  |           |   |  |                |               |                                 
|                                
|Exercisable at December 31, 2000 |  | 1,051,770 |   |  |                |               |                                 
|                                 |  |           |   |  |                |               |                                 



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE K  CAPITAL TRANSACTIONScontinued



Stock options outstanding and exercisable at December 31, 2002 are summarized as follows:



|Range of exercise price |  | Number outstanding |  | Weighted- average remaining contractual life |  | Weighted- average exercise price |  | Number exercisable |  | Weighted- average exercise price
|----------------------- |  | ------------------ |  | -------------------------------------------- |  | -------------------------------- |  | ------------------ |  | --------------------------------
|$0.50  $0.78           |  | 152,000            |  | 5.0 years                                    |  | $0.59                            |  | 131,000            |  | $0.56                           
|0.81                    |  | 300,000            |  | 15.8 years                                   |  | 0.81                             |  | 300,000            |  | 0.81                            
|0.88    1.22           |  | 157,080            |  | .8 years                                     |  | 0.96                             |  | 152,080            |  | 0.96                            
|1.24    1.55           |  | 181,760            |  | .6 years                                     |  | 1.36                             |  | 181,760            |  | 1.36                            
|                        |  |                    |  |                                              |  |                                  |  |                    |  |                                 
|                       
|                        |  | 790,840            |  |                                              |  |                                  |  | 764,840            |  |                                 
|                        |  |                    |  |                                              |  |                                  |  |                    |  |                                 



NOTE L  INCOME TAXES



The
income tax provision reconciled to the tax computed at the statutory Federal rate of 34% follows:



|                                                         |  | Year Ended December 31,
|-------------------------------------------------------- |  | -----------------------
|                                                         |  | 2002                   
|                                                         |  |                        
|Federal income tax expense (benefit) at statutory rate   |  | $                      
|                                                        
|State income taxes, net of federal benefit               |  |                        
|Non-deductible expenses and other                        |  |                        
|NOL utilized by discontinued operations                  |  |                        
|Change in valuation allowance                            |  |                        
|Effect of foreign operations, net of foreign tax credits |  |                        
|                                                         |  |                        
|                                                        
|Income tax expense (benefit)                             |  | $                      
|                                                         |  |                        



The
valuation allowance in 2001 represents a reserve against net operating losses from discontinued operations which is an asset of continuing operations, but it is more likely than not that this asset will not be realized in future years.



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE L  INCOME TAXEScontinued



Deferred tax assets and liabilities at December 31, 2002 and 2001 are comprised of the following:



|                                     |  | December 31, |          
|------------------------------------ |  | ------------ | ---------
|                                     |  | 2002         |          
|                                     |  |              |          
|Deferred tax assets                  |  |              |          
|Accrued liabilities                  |  | $            | 54,334   
|Accounts receivable and other assets |  |              | 27,604   
|Deferred revenue                     |  |              |         
|Net operating loss carryforward      |  |              | 1,072,557
|Other                                |  |              | 13,534   
|                                     |  |              |          
|                                     |  |              | 1,168,029
|Valuation allowance                  |  |              | (417,374 
|                                     |  |              |          
|Net deferred tax assets              |  |              | 750,655  
|                                     |  |              |          
|                                    
|Deferred tax liabilities             |  |              |          
|Property and equipment               |  |              | (612,667 
|Intangible assets                    |  |              | (124,676 
|Other                                |  |              |         
|                                     |  |              |          
|Deferred tax liabilities             |  |              | (737,343 
|                                     |  |              |          
|                                    
|Net deferred tax assets              |  | $            | 13,312   
|                                     |  |              |          



The
Company has net operating loss carryforwards of approximately $2,899,000 that expire from 2016 to 2022.



Income tax expense (benefit) for continuing operations consists of the following:



|                                                   |  | Year Ended December 31, |       
|-------------------------------------------------- |  | ----------------------- | ------
|                                                   |  | 2002                    |       
|                                                   |  |                         |       
|Current                                            |  |                         |       
|Federal                                            |  | $                       |      
|Foreign                                            |  |                         | 18,638
|Deferred                                           |  |                         |       
|Federal                                            |  |                         |      
|Foreign                                            |  |                         | (8,528
|                                                   |  |                         |       
|                                                  
|Income tax expense (benefit)continuing operations |  | $                       | 10,110
|                                                   |  |                         |       



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE M  COMMITMENTS AND CONTINGENCIES



Leases



The Company
leases office and warehouse space and certain equipment using operating leases for various periods through 2005. Rental expense under non-cancelable operating leases totaled $478,000, $577,000 and $856,000 in 2002, 2001 and 2000, respectively.
Future minimum payments under non-cancelable operating leases are as follows:



|December 31, |  |  
|------------ |  | -
|2003         |  | $
|2004         |  |  
|2005         |  |  
|             |  |  
|             |  | $
|             |  |  



Employee Benefit Plan



The Companys employees can participate in an employee benefit plan under Section 401(k) of the Internal Revenue Code offered through its Professional Employer Organization. This plan covers employees who are at least 18 years
of age and have been employed by the Company longer than two months. The Company does not make matching contributions.



Lightforce Acquisition



In connection with the acquisition of Lightforce, Inc. in 1996, the seller received a lifetime 5% commission on all sales of Lightforce
products. This commission amounted to $103,000, $107,000 and $117,000 in 2002, 2001 and 2000, respectively.



Contingencies



On May 29, 2002, the Company filed suit against a former supplier and member of its Board of Directors (G. Patrick Flanagan), and certain
others (Defendants) requesting injunctive and monetary relief and alleging, among other causes of action, breach of contract, conspiracy, fraud, breach of fiduciary duty, disparagement, tortuous interference and unlawful restraint of
trade. On July 26, 2002, the Court granted an Agreed Injunction that enjoined the Defendants and other parties acting in concert with them from, among other things, refusing to sell certain raw materials to the Company and disparaging Royal
BodyCare, Inc. and its officers, directors, employees or its products. In connection with this suit, on August 16, 2002, the Defendants filed a counter claim against the Company alleging, among other causes of action, unfair competition, breach of
contract and conspiracy.



On February 18, 2003,
the parties entered into an agreement to settle all claims and causes of actions that existed between them, including those arising out of the transactions that formed the basis of the lawsuit. Under the terms of this settlement, G. Patrick Flanagan
and/or Flantech Group, defendants in the original suit, agreed to pay to the Company an aggregate of $250,000, payable in monthly installments beginning in February 2003, calculated as a percentage of gross revenues, as defined, generated by G.
Patrick Flanagan



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE M  COMMITMENTS AND CONTINGENCIEScontinued



or certain entities to which he is related. In addition, the parties agreed not to disparage the other, its products, its directors, officers or employees, and not to send unsolicited communications to
any known customer of the other.



Apart from the
litigation described above, the Company is from time to time engaged in routine litigation. The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate by management for these
litigation matters.



NOTE N
 DISCONTINUED OPERATIONS



In December
2000, RBC created a new subsidiary named BizAdigm, Inc. (BizAdigm) to offer various internet products through a network of independent distributors similar in approach to the marketing of RBCs nutritional and personal care products. Due to low
sales volume, RBC discontinued the operations of BizAdigm during the second quarter of 2002.



In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment of Long-Lived Assets, which requires a single accounting model
to be used for long-lived assets to be sold and broadens the presentation of discontinued operations to include a component of an entity (rather than a segment of a business). A component of an entity comprises operations and cash flows
that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity that is classified as held for sale, or has been disposed of, is presented as a discontinued operation if
the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component.



Consequently, the operating results of BizAdigm, which was
discontinued in the second quarter of 2002, are classified as discontinued operations. Assets and liabilities of BizAdigm are included in Assets of Discontinued Operations, Liabilities of Discontinued Operations and
Long Term Debt of Discontinued Operations, at December 31, 2002 and 2001, respectively.



In 1998, the Company discontinued the operations of Great Xpectations Marketing, Inc. (GXI). GXI had no assets at December 31, 2002 or
2001 and no liabilities at December 31, 2002. Its liabilities of $100,000 at December 31, 2001 are included in Liabilities of Discontinued Operations.



The assets of discontinued operations represent prepaid expenses; liabilities of discontinued operations
represent accounts payable, accrued commissions and other expenses, and the current portion of long-term debt. The long-term debt of discontinued operations are capital lease and other long-term borrowing arrangements that mature at various dates
through 2004.



Earnings (loss) from discontinued
operations represent the net result of activities associated with BizAdigm and activities associated with GXI. Included in earnings (loss) from discontinued operations in 2002 are earnings of $100,000 due to the reversal of an accrual related to
certain contingent liabilities of GXI that the Company has now determined will not have to be paid. Also included in earnings (loss) from discontinued operations are recognized losses of $74,600 and $873,866, net of income tax benefits, in 2002 and
2001, respectively, related to BizAdigm operations. BizAdigms losses represented the excess of selling,



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE N  DISCONTINUED OPERATIONS  continued



general and administrative expenses plus cost of goods sold and distributor commissions over recognized sales of $45,000 and $799,000 in 2002 and 2001, respectively. BizAdigms loss in 2001 includes the write-off of the
Companys investment in BizAdigms assets of $490,000. Earnings (loss) from discontinued operations in 2000 are earnings of GXI resulting from the settlement of liabilities at less than recorded amounts, net of income taxes.



NOTE O  NON-CASH INVESTING AND
FINANCING ACTIVITIES



The Company had the
following non-cash investing and financing activities:



|                                        |  | 2002 |   | 2001 |   | 2000   
|--------------------------------------- |  | ---- | - | ---- | - | -------
|Fixed asset purchases by capital leases |  | $    |  |      | $ | 575,256



NOTE P  SEGMENTS AND GEOGRAPHIC AREA



The Companys segments are based on the organization structure that is used by management for making operating and investment decisions and for assessing performance. Based on this management approach, the Company has two
operating segments: Nutritional Products and Medical Products. The Nutritional Products segment manufactures and distributes a line of over 100 nutritional supplements and personal care products, including herbs, vitamins and minerals, as well as
natural skin, hair and body care products. These products are marketed under the Royal BodyCare®trade name and
are distributed by a network of independent distributors operating primarily in North America and by licensees operating in certain other countries outside of North America. The Medical Products segment markets a line of approximately 25 wound care
and oncology products under the MPM Medical trade name. The wound care products are distributed directly to hospitals, nursing homes and home health care agencies throughout the United States through a network of medical/surgical supply dealers. The
oncology products are distributed to hospitals, cancer treatment clinics and pharmacies through a nationwide network of pharmaceutical distributors. The Medical Products segment was not disclosed separately in the prior year, the year MPM Medical
was acquired, because its operations did not meet the criteria for separate segment disclosure. The operating results of the Medical Products segment in 2001 have been reclassified from the Nutritional Products segment.



The accounting policies of the segments are the same as those
described in Note A. The Company evaluates the performance of its segments primarily based on operating profit. All intercompany transactions have been eliminated, and intersegment revenues are not significant. In calculating operating profit for
these two segments, administrative expenses incurred that are common to the two segments are allocated on a usage basis.



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Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE P  SEGMENTS AND GEOGRAPHIC AREAcontinued



Segment information is as follows (in thousands):



|Year ended December 31, 2002            |  |                      |        |                  |   |       |              |  |   |       
|--------------------------------------- |  | -------------------- | ------ | ---------------- | - | ----- | ------------ |  | - | ------
|                                        |  | Nutritional Products |        | Medical Products |   |       | Consolidated
|Sales to external customers             |  | $                    | 25,115 |                  | $ | 1,170 |              |  | $ | 26,285
|Depreciation and amortization           |  |                      | 595    |                  |   | 30    |              |  |   | 625   
|Operating profit (loss)                 |  |                      | 294    |                  |   | (166  | )            |  |   | 128   
|Capital expenditures                    |  |                      | 288    |                  |   |      |              |  |   | 288   
|Total assets                            |  |                      | 10,284 |                  |   | 598   |              |  |   | 10,882
|                                       
|Year ended December 31, 2001 (Restated) |  |                      |        |                  |   |       |              |  |   |       
|                                        |  | Nutritional Products |        | Medical Products |   |       | Consolidated
|Sales to external customers             |  | $                    | 33,416 |                  | $ | 403   |              |  | $ | 33,819
|Depreciation and amortization           |  |                      | 872    |                  |   | 11    |              |  |   | 883   
|Operating profit (loss)                 |  |                      | 781    |                  |   | (26   | )            |  |   | 755   
|Capital expenditures                    |  |                      | 4,104  |                  |   |      |              |  |   | 4,104 
|Total assets                            |  |                      | 12,063 |                  |   | 526   |              |  |   | 12,589



Financial information summarized geographically for the years ended December 31, 2002, 2001 and 2000 is listed below (in thousands):



|                                        |  | Sales to external customers |        | Long-Lived assets
|--------------------------------------- |  | --------------------------- | ------ | -----------------
|Year ended December 31, 2002            |  |                             |        |                  
|Domestic                                |  | $                           | 18,619 |                  
|Canada                                  |  |                             | 3,752  |                  
|All others                              |  |                             | 3,914  |                  
|                                        |  |                             |        |                  
|Totals                                  |  | $                           | 26,285 |                  
|                                        |  |                             |        |                  
|                                       
|Year ended December 31, 2001 (Restated) |  |                             |        |                  
|Domestic                                |  | $                           | 25,087 |                  
|Canada                                  |  |                             | 5,781  |                  
|All others                              |  |                             | 2,951  |                  
|                                        |  |                             |        |                  
|Totals                                  |  | $                           | 33,819 |                  
|                                        |  |                             |        |                  
|                                       
|Year ended December 31, 2000 (Restated) |  |                             |        |                  
|Domestic                                |  | $                           | 30,353 |                  
|Canada                                  |  |                             | 7,384  |                  
|All others                              |  |                             | 2,247  |                  
|                                        |  |                             |        |                  
|Totals                                  |  | $                           | 39,984 |                  
|                                        |  |                             |        |                  



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE P  SEGMENTS AND GEOGRAPHIC AREA  continued



The Company recorded sales in the amount of $2,674,000 to its licensee in the former Soviet Union in the year ended December 31, 2002. In no other case did a customer of the Company account for more
than ten percent of net sales for the years ended December 31, 2002, 2001 or 2000.



NOTE Q  EARNINGS (LOSS) PER SHARE



|                                                                               |  | Year Ended December 31,
|------------------------------------------------------------------------------ |  | -----------------------
|                                                                               |  | 2002                   
|                                                                               |  |                        
|                                                                              
|Earnings (loss) from continuing operations                                     |  | $                      
|                                                                              
|Basic EPS                                                                      |  |                        
|                                                                              
|Weighted average common sharesoutstanding during period  basic and
diluted    |  |                        
|                                                                              
|Earnings (loss) per common share from continuingoperations  basic and
diluted |  | $                      
|                                                                               |  |                        



The
assumed conversion of the convertible notes would have an anti-dilutive effect on diluted earnings per common share for 2002, 2001 and 2000 and accordingly have been excluded from the computation.



For 2002, 2001 and 2000 all stock options and warrants
outstanding in the respective periods were not included in the computation of diluted earnings per common share because their exercise price was greater than the average market price of the common stock and, therefore, anti-dilutive.



NOTE R  FOURTH QUARTER ADJUSTMENTS IN
2001



The Company recorded significant
adjustments totaling $933,000 during the fourth quarter of 2001. Following are descriptions of these adjustments.



Web Site SoftwareIn December 2000, the Company entered into a contract with a software development company to design,
program, maintain and host a new web site for the Company. The Company wrote off its investment of $253,000 when the software development company became insolvent.



Japan assetsIn June 2001, the Company entered into an agreement to reacquire the license it had
previously granted to a third party to market its products in Japan. As part of this agreement, the Company acquired assets, mainly computer software, used in the Japan operations. In connection with a restructuring of operations in Japan in
December 2001, the Company determined that it no longer had use for certain of these assets resulting in a write off of $160,000.



Other AssetsIn December 2001, the Company identified certain ineffective marketing programs that it decided to eliminate or
change. In connection with this effort, the Company wrote off inventories and other assets associated with these programs in the amount of $277,000.



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##### Table of Contents

Royal BodyCare, Inc. and Subsidiaries



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED



December 31, 2002, 2001 and 2000





NOTE R  FOURTH QUARTER ADJUSTMENTS IN 2001continued



Insurance RecoveryOn July 1, 2001, the Companys U. S. headquarters facility was damaged when a portion of the warehouse roof collapsed during a heavy rainstorm. This loss was fully
insured. In December 2001 the amount of damages was determined by the insurance company and the Company recorded the proceeds of $247,000 related to its claim for lost profits and property damage.



BizAdigmBased on BizAdigms 2001 operating
results, the Company concluded that it may not be able to realize its investment in the assets of BizAdigm through future operations. As a result, the Company wrote off its investment in the assets of BizAdigm in the amount of $490,000. As a result
of the Companys decision to discontinue the operations of BizAdigm in the second quarter of 2002, this write-off is included in earnings (loss) from discontinued operations in the accompanying financial statements.



NOTE S  RELATED PARTY TRANSACTIONS



Until May 2002, the Company had been granted a
license to sell certain products by Flanagan Technologies, a company controlled by a former director. This director was appointed in June 2000 and resigned in March 2002. During 2002, 2001 and 2000, the Company paid $913,000, $2,500,000 and
$3,800,000, respectively, to the former directors company for products purchased under the license agreement.



The Chief Executive Officer of the Company has guaranteed the mortgage note relating to the acquisition of the corporate headquarters
facility and the debt assumed in connection with the acquisition of MPM Medical amounting to $2,863,000 and $243,000, respectively, at December 31, 2002.





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