UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549

                                 Form 10-K

                Annual Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934

                 For the fiscal year ended December 31, 1996
                        Commission File Number 0-11997

                     Carrington Laboratories, Inc.
         (Exact name of Registrant as specified in its charter)      

   Texas                                                75-1435663
   (State of Incorporation)                        (IRS Employer ID No.)

                  2001 Walnut Hill Lane, Irving, Texas 75038
                   (Address of principal executive offices)

     Registrant's telephone number, including area code:  (972) 518-1300

         Securities registered pursuant to Section 12(b) of the Act:

   Title of each class               Name of exchange on which registered
   None

         Securities registered pursuant to Section 12(g) of the Act:
           
                        Common Stock ($.01 par value)
                               (Title of class)
                                                                           
                       Preferred Share Purchase Rights
                               (Title of class)

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

      Indicate  by  check mark 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 the 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.  [ ]

      The  aggregate  market  value  of  the  voting  stock  held  by non-
   affiliates of the Registrant on March 14, 1997, was $51,179,297.  (This
   figure  was computed on the basis of the closing price of such stock on
   the NASDAQ National Market on March 14, 1997 using the aggregate number
   of  shares  held  on that date by, or in nominee name for, shareholders
   who are not officers, directors or record holders of 10% or more of the
   Registrant's  outstanding  voting  stock.  The characterization of such
   officers,  directors and 10% shareholders as affiliates is for purposes
   of  this  computation  only and should not be construed as an admission
   for any other purpose that any of such persons are, in fact, affiliates
   of the Registrant.)
   <PAGE>
      Indicate the number of shares outstanding of each of the
   Registrant's  classes of Common Stock, as of the latest practicable
   date:    
      8,873,639  shares  of  Common  Stock, par value $.01 per share, were
   outstanding on March  14, 1997.

                     DOCUMENTS INCORPORATED BY REFERENCE

      Portions  of the Registrant's proxy statement for its annual meeting
   of  shareholders  to  be  held  on  May  22, 1997  are incorporated by
   reference into Part III hereof, to the extent indicated herein.
   

                                    PART I

   ITEM 1.  BUSINESS.

                                   General

   Carrington Laboratories, Inc. ("Carrington" or the "Company") is a
   research-based pharmaceutical and medical device company engaged in the
   development, manufacturing and marketing of naturally derived complex
   carbohydrate and other natural product therapeutics for the treatment
   of major illnesses and the dressing and management of wounds.  The
   Company comprises three business divisions.  See Note Sixteen to the
   consolidated financial statements in this annual report for financial
   information about these business divisions.  The Company sells, using a
   network of distributors, nonprescription products through its Wound and
   Skin Care Division, veterinary medical devices and pharmaceutical
   through its Veterinary Medical Division and consumer products through
   its consumer products subsidiary, Caraloe, Inc.  The Company's research
   and product portfolio are based primarily on complex carbohydrate
   technology derived from the Aloe vera plant.

   The Company was incorporated in Texas in 1973, as Ava Cosmetics, Inc. 
   In 1986, the Company sold the direct sales business it was then
   operating and changed its name to Carrington Laboratories, Inc.

                         Wound and Skin Care Division

   Carrington's Wound and Skin Care Division markets a comprehensive line
   of wound management products to hospitals, alternative care facilities
   and the home health care market.  The Company's products are designed
   to maintain a moist wound environment which aids the healing process
   and to maintain the integrity of contiguous healthy skin.  Carrington
   products are used in a wide range of acute and chronic wound and skin
   conditions and for incontinence and ostomy care.

   The Company is committing significant resources to its wound and skin
   care business.  Primary marketing emphasis is directed toward
   hospitals, managed care organizations, alternate care facilities and
   home health care providers, with wound and skin care products being
   promoted primarily to physicians and specialty nurses, e.g.
   enterostomal therapists.  Opportunities in the growing alternate care
   and home health care markets are also addressed through a telemarketing
   sales team and a National Accounts Department.
<PAGE>
   The Company's hospital field sales force currently employs 31 sales
   representatives, each assigned to a specific geographic area in the
   United States, four regional sales managers and a representative in
   Puerto Rico.  The Company also uses three independent sales company
   employing eight sales representatives to sell its products on a
   commission basis and an independent sales representative in Canada.  In
   addition to this field sales force, the Wound and Skin Care Division
   employs five telemarketers who focus on alternative care facilities and
   the home health care market, and three persons in its National Accounts
   Department.

   The Company's products are primarily sold through a network of
   distributors.  Three of the Company's largest distributors in the
   hospital market for the last several years have been Allegiance
   Healthcare Corporation ("Allegiance", formerly Baxter Healthcare
   Corporation), Owens & Minor and Bergen Brunswig, which acquired Durr
   Medical and Colonial Healthcare in December 1996.  During fiscal 1994,
   1995 and 1996, sales of wound and skin care products to Allegiance
   represented 11%, 10% and 9%, respectively, of the Company's total net
   sales.  Sales to Owens & Minor represented 7%, 14%, and 11%,
   respectively, of total net sales over the same period.  Sales to Bergen
   Brunswig represented 8%, 10%, and 12%, respectively, of total net sales
   over the same period.

   In November 1995, the Company signed a Sales Distribution Agreement
   with Laboratories PiSA S.A., a Mexican corporation, for the exclusive
   distribution rights to sell the Company's wound care products in
   Mexico, Guatemala, Nicaragua, Panama, El Salvador, and the Dominican
   Republic for a period of five years.

   In May 1996, the Company entered into an agreement with Trudell Medical
   Group ("Trudell") granting Trudell exclusive Canadian distribution
   rights for the Company's wound care products. 

   In May 1996, the Company granted Ching Hwa Pharmaceutical Company, Ltd.
   ("CHP"), exclusive distribution rights to market the Comapny's wound care
   products in the Republic of China.  CHP is required to register the Company's
   products for sale in Taiwan within a specified time.

   In October 1996, the Company signed an exclusive contract with Faulding
   Pharmaceuticals to market the Company's wound care products in Australia
   and New Zealand.  In December 1996, the Company entered into an agreement
   with Suco International Corp. ("Suco") whereby the Company appointed Suco as
   exclusive distributor of certain of the Company's products in Haiti,
   Columbia, Venezuela, Uruguay, Bolivia, Peru, Paraguay, and Ecuador for
   a five-year term, subject to early termination under certain
   circumstances.  The agreement requires Suco to register the products
   covered by the agreement in each of those countries.

   In December 1996, the Company and Darrow Laboratorios S/A ("Darrow")
   entered into a Sales Distribution Agreement whereby the Company
   appointed Darrow as a marketer and distributor of certain of the
   Company's wound care products for a term of 10 years (subject to early
   termination under certain circumstances) in Brazil, with a limited right
   of first refusal to distribute those products in Argentina, Uruguay,
   Paraguay, and Chile.  The agreement requires Darrow to register such of
   the Company's products as the Company directs, at the Company's
   expense, in Brazil and each other country where Darrow is authorized to
   distribute such products.
<PAGE>
   
   In December 1996, the Company and its Belgian subsidiary entered into
   an agreement with Recordati Industria Chimica & Farmaceutica S.P.A.
   ("Recordati") whereby the Company and its subsidiary jointly granted
   exclusive distribution rights to Recordati for certain of the Company's
   products in Italy, Vatican City and San Marino for a term of 10 years,
   subject to automatic renewal for an additional two years unless
   either party elects to terminate the agreement at the end of the
   initial term, and subject to early termination under certain
   circumstances.  In return for the grant of the distribution rights,
   Recordati made an initial payment to the Company and is obligated to
   make two additional payments contingent on the occurrence of certain
   events.  Under the agreement, the Company is obligated to apply for a
   CE mark for the products covered by the agreement in the United Kingdom
   or another member of the European Economic Community, and Recordati is
   obligated to register those products in each area covered by the
   agreement.

   In 1996, sales of the Company related to the above mentioned
   international agreements were less than $100,000.  The Company can not
   estimate what sales associated with these agreements will be in 1997.

                               Consumer Health

   Caraloe, Inc., a separate subsidiary of the Company ("Caraloe"),
   markets or licenses consumer products and bulk ingredients utilizing
   the Company's patented complex carbohydrate technology.  Attention has
   been focused on three goals, the first of which is to sell Caraloe's
   Aloe Nutritional[R] brand products through the health food store market. 
   The second goal has been to develop private label aloe products for
   entrepreneurs seeking a high quality line of aloe products.  The third
   goal has been to become a supplier of bulk Aloe vera raw materials to
   commercial companies incorporating Aloe vera mucilaginous
   polysaccharides into their established product lines.  

   In May 1994, Caraloe signed an agreement with Mannatech, Inc., formerly
   Emprise International, Inc., to supply it a product known as bulk
   Manapol[R] powder.  In February 1996, an agreement was signed with
   Mannatech granting it an exclusive license in the United States for
   Manapol[R] powder.  During fiscal 1994, 1995, and 1996, sales of Manapol
   [R] powder to Mannatech represented 4%, 10%, and 15%, respectively, of the
   Company's total net sales.  In January 1997, the Company received
   notification from Mannatech that the current supply agreement for
   Manapol[R] powder would be terminated effective March 31, 1997.  As the
   supply agreement between Caraloe and Mannatech will not be renewed, the
   exclusive license agreement for the Manapol[R] trade name will also
   terminate and the Company will then be able to sell Manapol[R] powder
   and/or license the trademark to other third parties as well as use
   Manapol[R] powder in the Company's products.  The Company plans to
   reintroduce its Manapol[R] capsules in April 1997.

   In October 1996, Caraloe made a $200,000 investment in Aloe Commodities
   International, Inc. ("ACI").  In February, 1997 Caraloe entered into a
   Supply Agreement with ACI for a term of 10 years (subject to early
   termination under certain circumstances).  The agreement contemplates
   that ACI will purchase from Caraloe all of certain bulk raw materials
   that ACI needs for drinks and other consumer products.
<PAGE>
   In February 1997, Caraloe entered into a Supply Agreement with Light
   Resources Unlimited ("LRU"), and effective March 1, 1997, Carrington
   entered into a related Trademark License Agreement with LRU.  The terms
   of the Supply Agreement and the Trademark License Agreement end on May
   12, 2002 and May 4, 2002, respectively, and the term of each agreement
   is subject to early termination under certain circumstances.  The
   Supply Agreement provides that during the first three months of the
   term, LRU will purchase from Caraloe quantities of AVMP[R] Powder and/or
   Manapol[R] Gold[TM] Powder ("Product") to be mutually agreed upon, and
   beginning May 12, 1997, LRU will purchase from Caraloe annually at
   least the minimum quantities of Product specified in the agreement. 
   The Supply Agreement also contemplates that LRU will be Caraloe's sole
   distributor of Product to natural health care practitioners in the
   United States and Canada, subject to Caraloe's right to sell  simple
   purchase bulk Product  to natural health care practitioners in
   quantities exceeding certain specified limits.  The Trademark License
   Agreement grants LRU a non-exclusive license to use the trademarks AVMP[R] 
   Powder and Manapol[R] Gold[TM] Powder in connection with the advertising and
   sale of Product.

                         Veterinary Medical Division

   The Carrington Veterinary Medical Division ("CVMD") markets Acemannan
   Immunostimulant, a vaccine adjuvant, and several wound and skin care
   products to the veterinary market.  Acemannan Immunostimulant was
   conditionally approved by the United States Department of Agriculture
   ("USDA") in November 1991, for use as an aid in the treatment of canine
   and feline fibrosarcoma, a form of soft tissue cancer that affects dogs
   and cats.  A conditional approval means that efficacy and potency tests
   are required, and the product's label must specify that these studies
   are in progress.  The "conditional" aspect of the approval is renewed
   on an annual basis and will be removed upon completion and acceptance
   by the USDA of additional potency testing.  However, there can be no
   assurance that these tests will result in the removal of the
   conditional restriction on the USDA s approval of Acemannan
   Immunostimulant.

   In September 1990, the Company granted Solvay Animal Health, Inc.
   ("Solvay") an exclusive, worldwide license to use and sell a bulk
   pharmaceutical mannan adjuvant for poultry disease.  In January 1992,
   Solvay received approval from the USDA to market the bulk
   pharmaceutical mannan as an adjuvant to a vaccine for Marek's disease,
   a virus infection that kills chickens or renders them unfit for human
   consumption.  Solvay sells the product under the trademark ACM I.

   In March 1996, the Company signed an agreement with Farnam Companies,
   Inc., a leading veterinary marketing company, to promote and sell the
   CarraVet[R] product line, including Acemannan Immunostimulant.  The
   CarraVet[R] product line currently consist of nine products.

   
                           Research and Development

                                   General

   In 1984, the Company isolated and identified a polymeric compound with
   a molecular weight between one and two million Daltons from the Aloe
   vera plant.  This compound has been given the generic name "acemannan"
   by the United States Adopted Names Council.  The Company intends to
<PAGE>
   seek approval of the Food and Drug Administration (the "FDA") and other
   regulatory agencies to sell products based on a family of complex
   carbohydrates in the United States and in foreign countries:  (i) to
   treat various forms of cancer; (ii) to treat inflammatory bowel
   diseases, including ulcerative colitis, a widespread, chronic,
   inflammatory disease of the colon; (iii) to treat non-healing and other
   wounds; and (iv) for use as an adjuvant to various vaccines.  For a
   more comprehensive listing of the type, indication and status of
   products currently under development by the Company, see "Research and
   Development -- Summary" below.  The regulatory approval process, both
   domestically and internationally, can be protracted and expensive, and
   there is no assurance that the Company will obtain approval to sell its
   products for any treatment or use (see "Governmental Regulation"
   below).

   The Company is marketing or developing several products which in the
   past were given the general name of acemannan, suggesting the products
   were identical.  This is not correct because there are ten products in
   development or being marketed that are derived from 3 basic extracts of
   the Aloe vera plant.  The basic freeze-dried Aloe vera extract is
   reconstituted to produce Manapol[R] and AVMP[R] powders for both food grade
   and cosmetic grade products.  Further refinement produces Bulk
   Pharmaceutical Mannans ("BAM's") that are used to produce hydrogels;
   the Carrington[TM] Patch, an oral care product; Carra Sorb[T]) M, a freeze-
   dried wound dressing; adjuvants, ACM I marketed by Solvay, and CARN 500
   which is being developed as an adjuvant for various vaccines; and
   Aliminase[TM] capsules (formerly CARN 1000) which were being developed for
   the ulcerative colitis program.  Finally, Bulk Injectable Mannans ("BIM's")
   are marketed as Acemannan Immunostimulant (CARN 700), and a product has
   been developed for the treatment of cancer, CarraVex[TM] injectable
   (formerly CARN 750).

   The Company expended approximately $5,334,000, $5,370,000, and
   $5,927,000 on research and development in fiscal 1994, 1995, and 1996,
   respectively.  The Company estimates that in fiscal 1997 it will spend
   substantially less on research and development than in 1996. 
   Currently, the Company's research staff comprises eight full-time
   employees as compared to 13 full-time employees at the end of 1995.

                             Preclinical Research

   The Company identified the characteristics of its naturally occurring
   complex carbohydrates by a series of studies in the Company's
   laboratories and in several contract laboratories.  Based on toxicology
   tests sponsored by the Company on different animal species with dosages
   up to 40 times the proposed intravenous human dosage, in vitro and in
   vivo tests for mutagenicity, dermal sensitization tests, results of a
   Phase I safety study of an oral product in humans and a Phase I safety
   study of an intravenously administered preparation in humans, no
   clinically significant toxicity of the Company s products has been
   noted.  Further safety studies may be required by the FDA prior to the
   approval of any applications of complex carbohydrates.

   Other preclinical studies conducted in the Company's laboratories and
   in outside laboratories have shown that certain of the Company's
   complex carbohydrates stimulate macrophages and other white blood cells
   to produce cytokines, including interleukin-1, interleukin-6, tumor
   necrosis factor alpha ("TNFA") and nitric oxide ("NO"), that regulate
   other cells.  Interleukin-1 stimulates fibroblasts, which are essential
<PAGE>
   to wound healing and NO is involved in blood vessel regeneration. 
   Tumor necrosis factor alpha acts against tumors in the body.  In
   addition, laboratory experiments conducted by the Company have shown
   that some Aloe vera components have both pro- and anti-inflammatory
   actions and some products bind to and extend the life of growth
   factors.

   The Company believes that its products' pharmacological actions and
   lack of toxicity make them excellent candidates for further development
   as therapeutic agents for the treatments and uses for which the Company
   intends to seek regulatory approvals (see "Research and Development --
   General" above).  There is no assurance, however, that the Company will
   be successful in its efforts.

   The Company operates a research and development laboratory at the Texas
   A&M University Research Park to expand preclinical research in various
   wound healing applications and mechanisms of action.  Pursuant to this
   arrangement, the Company has access to leading authorities in
   immunology, as well as facilities and equipment to engage in
   experimentation and analysis at the basic research level.

                                  Animal Studies

   The Company has pursued a strategy of developing products for certain
   animal indications, clinical testing of which may have application to
   studies for treatment of human diseases.  Animal clinical testing
   necessary to obtain eventual approval of a product for treatment of
   human diseases may also provide data sufficient to obtain approval for
   the related veterinary indication.  This approach enables the Company
   to obtain revenues from its research efforts at an earlier date and
   also expands data available from actual use of the product in animals. 
   The Company's clinical research efforts to date have focused on the
   indications described below.

   Vaccine Adjuvants.  An adjuvant is a substance that enhances the
   antibody response to an antigen.  The ability to generate a vigorous
   immune response to an antigen is critical to the effectiveness of a
   vaccine.  The Company's studies indicate that acetylated mannans, when
   used as a vaccine adjuvant, produce marked stimulation of the immune
   system.

   In 1990, the Company received approval from the USDA to sell an
   adjuvant to licensed manufacturers for use in combination with animal
   vaccines.  This use as a vaccine adjuvant for certain poultry diseases
   was licensed to Solvay pursuant to an agreement between Solvay and the
   Company entered into in September 1990.  In January 1992, Solvay
   received approval from the USDA to market an adjuvant to its vaccine
   for Marek's disease (see "Veterinary Medical Division" above).

   The Company has conducted or sponsored studies of CARN 500 adjuvants
   with other vaccines for animals.  Based on these studies, the Company,
   either directly or through third party licensees, intends to pursue
   development of adjuvants for other animal vaccines.  In 1993, a program
   was begun to develop adjuvants for mammalian vaccines and for vaccines
   for marine animals under licenses with one European company.  There can
   be no assurance however, that such development will be successful or
   that the Company will be able to develop, or to enter into any
   licensing agreements for the development of, any additional adjuvants.
<PAGE>
   Evaluation of Anti-Tumor Activity.  Acetylated mannans, including
   CarraVex[TM] injectable (formerly CARN 750), are immunomodulating agents
   that increase circulating levels of interleukin-1 and tumor necrosis
   factor alpha.  A series of studies conducted at Texas A&M University in
   1988 and 1989 on mice with highly malignant tumors indicated that a
   single intraperitoneal dose caused significant tumor reduction in a
   statistically significant percentage of mice.  This effect in many
   instances was dramatic, with complete regression of the tumor and with
   continuing immunity.  Recovered animals were resistant to syngeneic
   tumor reimplantation for up to six months after initial tumor
   regression.

   In 1991, the USDA granted the Company conditional approval to market an
   injectable form of a complex carbohydrate as an aid in the treatment of
   canine and feline fibrosarcoma, a form of soft tissue cancer, under the
   name Acemannan Immunostimulant.  The Company believes, based on
   discussions with the USDA in 1996, that the USDA's remaining requirements
   to remove the conditional restriction can be completed in 1997
   (see "Veterinary Medical Division" above).  Of course, there can be no
   assurance as to whether or when the USDA will remove the conditional
   restriction on its approval of this product.

                                Human Studies

   Evaluation of Aliminase[TM] (formerly CARN 1000) oral capsules in the
   Treatment of Inflammatory Bowel Diseases.  In October 1991, the Company
   filed an investigational new drug ("IND") application requesting
   approval to conduct human clinical trials on the efficacy of Aliminase[TM]
   capsules in the treatment of ulcerative colitis.  In November 1991, the
   Company received notice that the FDA was withholding approval of the
   study, pending submission of additional information.  Additional
   studies requested by the FDA were completed, and the results were
   submitted in October 1992.  In December 1992, the Company received
   authorization from the FDA to commence human clinical trials under the
   IND application.  In early 1993, the Company began a pilot safety and
   efficacy study with oral Aliminase[TM] capsules in the treatment of
   ulcerative colitis patients who are experiencing an acute flare-up of
   the disease.  This study, completed in May 1994, was conducted by
   treating 54 patients with 400 or 800 milligram doses twice daily for
   two or four weeks.  After four weeks, the disease activity index and
   the signs and symptoms of the disease were significantly improved, and
   the safety of the oral product continued to be confirmed.  A large
   controlled trial of Aliminase[TM] capsules in patients with ulcerative
   colitis began in September 1995.  Over 300 patients were enrolled in
   four groups comparing a placebo with three doses of Aliminase[TM] capsules
   (150, 300 and 600 mg dosage levels, administered twice daily for six
   weeks).  Results were assessed in October 1996 and failed to show a
   therapeutic effect of Aliminase[TM] capsules as compared with the placebo. 
   The program was placed on hold pending an in-depth evaluation of dosage
   form, timing of dosing, frequency of dosing and route of
   administration.  (See "Management's Discussion and Analysis of
   Financial Condition and Results of Operations -- Liquidity and Capital
   Resources.")

   Evaluation of CarraVex[TM] injectable (formerly CARN 750) in the Treatment
   of Solid Tumors in Humans.  The Company believes that CarraVex[TM]
   injecttible may be broadly useful in cancer therapy, with potential
   application in the treatment of major solid tumors, including melanoma,
<PAGE>
   breast carcinoma, prostate carcinoma, colon carcinoma, hypernephroma
   and soft tissue sarcoma.  The Company initiated a Phase I human
   clinical trial of CarraVex[TM] injectable in certain solid tumor
   indications.  The trial began in the United States in late 1995.  As a
   result of the success of Acemannan Immunostimulant in treating dogs and
   cats, the Company has reason to believe that CarraVex[TM] injectable may
   play a significant role in the treatment of cancer in humans.

   Evaluation of the Carrington[TM] Patch in the Treatment of Aphthous
   Ulcers. Carrington's efforts to broaden the claims for wound care
   products containing Carrasyn[R] Hydrogel were expanded to include an
   application within the oral health care field.  Two studies were
   conducted at Baylor College of Dentistry to examine the efficacy and
   safety of two formulations of Carrasyn[R] Hydrogel wound dressing in the
   treatment of oral aphthous ulcers (canker sores).  The first study
   involved Carrasyn[R] Hydrogel wound dressing modified for intraoral use
   versus a leading product.  The second trial involved the modified oral
   formulation of Carrasyn[R] Hydrogel that had been freeze-dried.  This
   product, the Carrington[TM] Patch, reduced the pain of these ulcers.  The
   Company was given clearance by the FDA to market the freeze-dried
   formulation for the management of oral aphthous ulcers in 1994.  In
   1996, the FDA cleared these additional indications to market: oral
   wounds, mouth sores, injuries and ulcers of the oral mucosa including
   traumatic ulcers such as those caused by braces and ill fitting
   dentures.  The product is being marketed as the Carrington[TM] Patch. 

   Evaluation of Carrasyn[R] in Wound Healing.  In 1993, a study was
   conducted at M.D. Anderson Cancer Center to determine if Carrasyn[R] 
   Hydrogel was of benefit in treating radiation-induced skin reactions of
   mice.  These studies clearly showed that, when compared to controls,
   Carrasyn[R] Hydrogel could significantly reduce radiation-induced
   inflammation and tissue damage in animals.  As a result of this work, a
   small clinical trial was performed in 1994, studying the radiation-
   sparing effects of Carrasyn[R] Hydrogel wound dressing in four oncology
   patients.  A study conducted at the Diabetic Foot and Wound Center in
   Denver, Colorado, suggested a higher incidence in wounds healed at
   sixteen weeks with Carrasyn[R] wound gel as compared to saline gauze. 
   Four new indications (post-surgical incisions, sunburn, diabetic ulcers
   and radiation dermatitis) for Carrasyn[R] were added in 1995.  Further
   studies may be conducted in 1997.

   Evaluation of RadiaCare[TM] Gel in the Treatment of Radiation Dermatitis.
   In 1996, a study was begun at the Texas Oncology Center of Dallas to
   determine if RadiaCare[TM] Gel was of benefit in treating radiation
   dermatitis in humans.  The results of this study should be known in mid-
   1997.

   Evaluation of Carrasyn[R] Freeze-Dried Gel (Carra Sorb[TM] M) in Wound
   Healing.  Following the submission of a 510(k) pre-market notification
   for a preservative-free freeze-dried gel for wound care, the FDA
   cleared Carrington to market CarraSorb[TM] M, and it was launched in early
   1996.  The Company is performing a case study to support the marketing
   effort for this product.

   Summary.  The following table outlines the status of the products and
   potential indications of the Company's aloe-based products developed,
   planned or under development.  There is no assurance of successful
   development, completion or regulatory approval of any product not yet
   on the market.
<PAGE>
                PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED,
                         PLANNED OR UNDER DEVELOPMENT

       PRODUCT OR
   POTENTIAL INDICATION      POTENTIAL MARKET APPLICATIONS          STATUS

   Topical
       Dressings             Pressure and Vascular Ulcers          Marketed
       Cleansers             Wounds                                
   Marketed
       Antifungal            Candida                               Marketed

   Oral
     Human
       Anti-inflammatory     Ulcerative Colitis                    On hold

   Injectable
     Human
       Anticancer            Melanoma, Breast, Prostate, Colon,    Phase I
                             Hypernephroma, and Soft Tissue        Clinical
                             Sarcoma                               Trial       
                             
     Veterinary
       Anticancer            Fibrosarcoma                          Marketed

   Dental
       Pain reduction        Aphthous Ulcers, Oral Wounds          Marketed

   Vaccine Adjuvant
     Veterinary
       Poultry Vaccines      Marek's Disease                       Marketed
       Livestock             Cattle, Sheep                         Clinical
                                                                   Trials      
       Marine 
         (water treatment)   Trout, Shrimp                         Clinical
                                                                   Trials


                              Licensing Strategy

   The Company expects that prescription pharmaceutical products
   containing certain defined mannans will require a substantial degree of
   development effort and expense.  Before governmental approval to market
   any such product is obtained, the Company may license these mannans for
   certain indications to other pharmaceutical companies in the United
   States or foreign countries and require such licensees to undertake the
   steps necessary to obtain marketing approval for specific indications
   or in a particular country.

   Similarly, the Company intends to license third parties to market
   products containing defined mannans for certain human indications when
   it lacks the expertise or financial resources to market effectively. 
   If the Company is unable to enter into such agreements, it may
   undertake to market the products itself for such indications.  The
   Company's ability to market these mannans for specific indications will
   depend largely on its financial condition at the time and the results
   of related clinical trials.  There is no assurance that the Company
   will be able to enter into any license agreements with third parties or
   that, if such license agreements are concluded, they will contribute to
   the Company's overall profits.
<PAGE>
                         Raw Materials and Processing

   The principal raw material used by the Company in its operations is the
   leaf of the plant Aloe barbadensis Miller, popularly known as Aloe
   vera.  Through a patented process, the Company produces bulk
   pharmaceutical and injectable mannans and freeze-dried aloe extract
   from the central portion of the Aloe vera leaf known as the gel.  Bulk
   pharmaceutical mannan, in the form of a hydrogel, is used as an
   ingredient in certain of the Company's wound and skin care products. 
   Through additional processing, bulk mannans may be produced in both
   oral and injectable dosage forms.

   In May 1990, the Company purchased a 405-acre farm in the Guanacaste
   province of northwest Costa Rica which currently has approximately 210
   acres planted with Aloe vera. The Company plans to plant additional
   acreage as demand for Aloe vera leaves increases.  The Company believes
   that the Costa Rica farm will be capable of providing substantially all
   of the Aloe vera leaves required to meet the Company's presently
   anticipated needs (see "Properties --Costa Rica Facility" below).

   
                                Manufacturing

   Prior to the second quarter of 1995, the Company produced substantially
   all of its wound and skin care products in a leased facility in Dallas,
   Texas.  During the first quarter of 1994, the Company completed an
   evaluation of the production requirements that would be needed to meet
   all federal regulatory requirements as a fully integrated
   pharmaceutical manufacturer, as well as the production capacity that
   would be required to meet continued growth in the Company's wound and
   skin care business.  It was decided to move its wound and skin care
   manufacturing operation to the Company's headquarters facility in
   Irving, Texas, and expand the facility through higher capacity
   equipment.  The moving, upgrading and expansion of the manufacturing
   operation began in the fourth quarter of 1994, and the project was
   completed and production began during the third quarter of 1995.  At
   the same location, the Company has upgraded its capabilities to produce
   injectable grade pharmaceutical products.  The Company believes that
   the new plant's capacity will provide sufficient capacity for the
   present line of products, and accommodate new products and sales
   growth.  Final packaging of certain of the Company's wound care
   products is completed by outside vendors.  The Company's calcium
   alginates, films, foam dressings, gel sheets, tablets, capsules, and
   freeze-dried products are being provided by third parties.

   All of the Company's bulk pharmaceutical mannans, bulk injectable
   mannans and freeze-dried Aloe vera extracts are produced in its
   processing plant in Costa Rica.  This facility has the ability to
   supply the bulk aloe raw materials requirements of the Company's
   current product lines for the foreseeable future.  During the first
   quarter of 1994, the Company initiated a project in Costa Rica to
   upgrade the production plant to meet regulatory requirements for the
   production of bulk pharmaceutical oral and injectable mannans as
   required for IND's.  This project was completed in the fourth quarter
   of 1994.  Finished oral and injectable dosage forms will be produced by
   outside vendors until in-house production becomes economically
   justified.
<PAGE>
   The production capacity of the Costa Rica plant is larger than the
   Company's current usage level.  Management believes, however, that the
   cost of the Costa Rica facility will eventually be recovered through
   operations.  The larger production capacity will be required to conduct
   large scale clinical trials with bulk pharmaceutical and injectable
   mannans.

                                 Competition

   Research and Development.  The biopharmaceutical field is expected to
   continue to undergo rapid and significant technological change. 
   Potential competitors in the United States are numerous and include
   pharmaceutical, chemical and biotechnology companies.  Many of these
   companies have substantially greater capital resources, research and
   development staffs, facilities and expertise (including in research and
   development, manufacturing, testing, obtaining regulatory approvals and
   marketing) than the Company.  This competition can be expected to
   become more intense as commercial applications for biotechnology and
   pharmaceutical products increase.  Some of these companies may be
   better able than the Company to develop, refine, manufacture and market
   products which have application to the same indications as bulk 
   pharmaceutical mannans and bulk injectable mannans.  The Company 
   understands that certain of these competitors are in the process of 
   conducting human clinical trials of, or have filed applications with 
   government agencies for approval to market, certain products that will 
   compete with the Company's products.

   Wound and Skin Care Division, Caraloe, Inc., and CVMD.  The Company
   competes against many companies that sell products which are
   competitive with the Company's products, with many of its competitors
   using very aggressive marketing efforts.  Many of the Company's
   competitors are substantially larger than the Company in terms of sales
   and distribution networks and have substantially greater financial and
   other resources.  The Company's ability to compete against these
   companies will depend in part on the continued expansion of the
   marketing network for its products.  The Company believes that the
   principal competitive factors in the marketing of its products is their
   quality, and that they are naturally based and competitively priced.

                           Governmental Regulation

   The production and marketing of the Company's products, and the
   Company's research and development activities, are subject to
   regulation for safety, efficacy and quality by numerous governmental
   authorities in the United States and other countries.  In the United
   States, drugs for human use are subject to rigorous FDA regulation. 
   The Federal Food, Drug and Cosmetic Act, as amended, the regulations
   promulgated thereunder, and other federal and state statutes and
   regulations govern, among other things, the testing, manufacture,
   safety, effectiveness, labeling, storage, record keeping, approval,
   advertising and promotion of the Company's products.  For marketing
   outside the United States, the Company is subject to foreign regulatory
   requirements governing human clinical trials and marketing approval for
   drugs and devices.  The requirements governing the conduct of clinical
   trials, product licensing, pricing and reimbursement may vary widely
   from country to country.
<PAGE>
   Food and Drug Administration.  The contents, labeling and advertising
   of many of the Company's products are regulated by the FDA.  The
   Company is required to obtain FDA approval before it can study or
   market any proposed prescription drugs and may be required to obtain
   such approval for proposed nonprescription products.  This procedure
   involves extensive clinical research, and separate FDA approvals are
   required at various stages of product development.  The approval
   process requires, among other things, presentation of substantial
   evidence to the FDA, based on clinical studies, as to the safety and
   efficacy of the proposed product.

   In order to initiate human clinical trials on a product, extensive
   basic research and development information must be submitted to the FDA
   in an investigational new drug ("IND") application.  The IND
   application contains a general investigational plan, a copy of the
   investigator's brochure (a comprehensive document provided by the drug
   manufacturer), copies of the initial protocol for the first study, a
   review of the chemistry, manufacturing and controls information for the
   drug, pharmacology and toxicology information, any previous human
   experience with the drug, results of preclinical studies and any other
   information requested by the FDA.

   If permission is obtained to proceed to clinical trials based on the
   IND application, initial trials, usually categorized as Phase I, are
   instituted.  The initial or Phase I trials typically involve the
   administration of small, increasing doses of the investigational drug
   to healthy volunteers, and sometimes patients, in order to determine
   the general overall safety profile of the drug and how it is
   metabolized.  Once the safety of the drug has been established, Phase
   II efficacy trials are conducted in which the expected therapeutic
   doses of the drug are administered to patients having the disease for
   which the drug is indicated, and a therapeutic response is sought as
   compared to the expected progression of the underlying disease or
   compared to a competitive product or placebo.  Information also is
   sought on any possible short-term side effects of the drug.  If
   efficacy and safety are observed in the Phase II trials, Phase III
   trials are undertaken on an expanded group in which the patients
   receiving the drug are compared to a different group receiving either a
   placebo or some form of accepted therapy in order to establish the
   relative safety and efficacy of the new drug compared with the control
   group.  Data are also collected to provide an adequate basis for future
   physician prescribing information.

   If Phases I through III are successfully completed, the data from these
   trials are compiled into a new drug application ("NDA"), which is filed
   with the FDA in an effort to obtain marketing approval.  In general, an
   NDA will include a summary of the components of the IND application, a
   clinical data section reviewing in detail the studies from Phases I
   through III and the proposed description of the benefits, risks and
   uses, or labeling, of the drug.
<PAGE>
   In general, a more comprehensive NDA and a more prolonged review
   process are required for drugs not previously approved for marketing by
   the FDA.  If a second indication for an already approved product is
   sought, since many of the components of the review process are the
   same, a shortened review process generally can be anticipated. 
   However, the FDA gives high priority to novel drugs providing unique
   therapeutic benefits and a correspondingly lower priority to drugs
   similar to or providing comparable benefits to others already on the
   market.

   In addition to submitting safety and efficacy data derived from
   clinical trials for FDA approval, NDA approval requires the
   manufacturer of the drug to demonstrate the identity, potency, quality
   and purity of the active ingredients of the product involved, the
   stability of these ingredients and compliance of the manufacturing
   facilities, processes and quality control with the FDA's current Good
   Manufacturing Practices regulations.  After approval, manufacturers
   must continue to expend time, money and effort in production and
   quality control to assure continual compliance with the current Good
   Manufacturing Practices regulations.

   Certain of the Company's wound and skin care products are registered
   with the FDA as "devices" pursuant to the regulations under Section
   510(k) of the Federal Food, Drug and Cosmetic Act, as amended.  A
   device is a product used for a particular medical purpose, such as to
   cover a wound, with respect to which no pharmacological claim can be
   made.  A device which is "substantially equivalent" to another device
   existing in the market prior to May 1976 can be registered with the FDA
   under Section 510(k) and marketed without further testing.  A device
   which is not "substantially equivalent" is subject to an FDA approval
   process similar to that required for a new drug, beginning with an
   Investigational Device Exemption and culminating in a Premarket
   Approval.  The Company has sought and obtained all its device approvals
   under Section 510(k).  With respect to certain of its wound and skin
   care products, the Company intends to develop claims for which IND and
   NDA submissions will be required.

   Department of Agriculture.  Certain products being developed by the
   Company for animal health indications must be approved by the USDA. 
   The procedure involves extensive clinical research, and USDA approvals
   are required at various stages of product development.  The approval
   process requires, among other things, presentation of substantial
   evidence to the USDA as to the safety and efficacy of the proposed
   product.  Furthermore, even if approval to test a product is obtained,
   there is no assurance that ultimate approval for marketing the product
   will be granted.  USDA approval procedures can be protracted.

   Other Regulatory Authorities.  The Company's advertising and sales
   practices are subject to regulation by the Federal Trade Commission,
   the FDA and state agencies.  The Company's processing and manufacturing
   plants are subject to federal, state and foreign laws and to regulation
   by the Bureau of Alcohol, Tobacco and Firearms of the Department of the
   Treasury and by the Environmental Protection Agency as well as the FDA.

   The Company believes that it is in substantial compliance with all
   applicable laws and regulations relating to its operations, but there
   is no assurance that such laws and regulations will not be changed. 
   Any such change may have a material adverse effect on the Company's
   operations.
<PAGE>
   
                        Patents and Proprietary Rights

   As is industry practice, the Company has a policy of using patent,
   trademark and trade secret protection with a view to preserving its
   right to exploit the results of its research and development activities
   and, to the extent it may be necessary or advisable, to exclude others
   from appropriating the Company's proprietary technology.  The Company's
   policy is to protect aggressively its proprietary technology by seeking
   and enforcing patents in a worldwide program.

   The Company has obtained patents or filed patent applications in the
   United States and approximately 24 other countries in three series
   regarding the compositions of acetylated mannan derivatives, the
   processes by which they are produced and the methods of their use.  The
   first series of patent applications, relating to the compositions of
   acetylated mannan derivatives and certain basic processes of their
   production, was filed in a chain of United States patent applications
   and its counterparts in the other 24 countries.  The first United
   States patent application in this first series, covering the
   composition claims of acetylated mannan derivatives, matured into
   United States Patent No. 4,735,935 (the "935 Patent"), which was issued
   on April 5, 1988.  United States Patent No. 4,917,890 (the "890
   Patent") issued on April 17, 1990 from a divisional application to the
   935 Patent.  This divisional application pertains to most of the
   remaining claims in the original application not covered by the 935
   Patent.  The 890 Patent generally relates to the basic processes of
   producing acetylated mannan derivatives, to certain specific examples
   of such processes and to certain formulations of acetylated mannan
   derivatives.  Two other divisional applications covering the remaining
   claims not covered by the 890 Patent matured into patents, the first on
   September 25, 1990, as United States Patent No. 4,959,214, and the
   second on October 30, 1990, as United States Patent No. 4,966,892. 
   Foreign patents that are counterparts to the foregoing United States
   patents have been granted in some of the member states of the European
   Economic Community and several other countries.

   The second series of patent applications related to preferred processes
   for the production of acetylated mannan derivatives.  One of them
   matured into United States Patent No. 4,851,224, which was issued on
   July 25, 1989.  This patent is the subject of a Patent Cooperation
   Treaty application and national foreign applications in several
   countries.  An additional United States patent based on the second
   series was issued on September 18, 1990, as United States Patent
   No. 4,957,907.

   The third series of patent applications, relating to the uses of
   acetylated mannan derivatives, was filed subsequent to the second
   series.  Three of them matured into United States Patent
   Nos. 5,106,616, issued on April 21, 1992, 5,118,673, issued on June 2,
   1992, and 5,308,838, issued on May 3, 1994.  The Company intends to
   file a number of divisional applications to these patents, each dealing
   with specific uses of acetylated mannan derivatives.  A Patent
   Cooperation Treaty application based on the parent United States
   application has been filed designating a number of foreign countries in
   which the Company has the option to file specific applications.
<PAGE>
   In addition, the Company has also obtained a patent in the United
   States relating to a wound cleanser, U.S. Patent No. 5,284,833, issued
   on February 8, 1994.  This patent application is the subject of a
   Patent Cooperation Treaty application designating a number of foreign
   countries in which the Company has the option to file specific
   applications in the designated foreign countries.

   The Company has obtained a patent in the United States relating to a
   therapeutic device made from freeze-dried complex carbohydrate hydrogel
   (U.S. Patent No. 5,409,703 issued on April 25, 1995).

   The Company intends to file patent applications with respect to
   subsequent developments and improvements when it believes such
   protection is in the best interest of the Company.  Although the scope
   of protection which ultimately may be afforded by the patents and
   patent applications of the Company is difficult to quantify, the
   Company believes its patents will afford adequate protection to conduct
   the business operations of the Company.  However, there can be no
   assurance that (i) any additional patents will be issued to the Company
   in any or all appropriate jurisdictions, (ii) litigation will not be
   commenced seeking to challenge the Company's patent protection or such
   challenges will not be successful, (iii) processes or products of the
   Company do not or will not infringe upon the patents of third parties
   or (iv) the scope of patents issued to the Company will successfully
   prevent third parties from developing similar and competitive products. 
   It is not possible to predict how any patent litigation will affect the
   Company's efforts to develop, manufacture or market its products.

   The Company also relies upon, and intends to continue to rely upon,
   trade secrets, unpatented proprietary know-how and continuing
   technological innovation to develop and maintain its competitive
   position.  The Company typically enters into confidentiality agreements
   with its scientific consultants, and the Company's key employees have
   entered into agreements with the Company requiring that they forbear
   from disclosing confidential information of the Company and assign to
   the Company all rights in any inventions made while in the Company's
   employ relating to the Company's activities.  Accordingly, the Company
   believes that its valuable trade secrets and unpatented proprietary
   know-how are adequately protected.

   The technology applicable to the Company's products is developing
   rapidly.  A substantial number of patents have been issued to other
   biopharmaceutical companies.  In addition, competitors have filed
   applications for, or have been issued, patents and may obtain
   additional patents and proprietary rights relating to products or
   processes competitive with those of the Company.
<PAGE>
   To the Company's knowledge, acetylated mannan derivatives do not
   infringe any valid, enforceable, United States patents.  A number of
   patents have been issued to others with respect to various extracts of
   the Aloe vera plant and their uses and formulations, particularly in
   respect to skin care and cosmetic uses.  While the Company is not aware
   of any existing patents which conflict with its current and planned
   business activities, there can be no assurance that holders of such
   other Aloe vera based patents will not claim that particular
   formulations and uses of acetylated mannan derivatives in combination
   with other ingredients or compounds infringe, in some respect, these
   other patents.  In addition, others may have filed patent applications
   and may have been issued patents relating to products and technologies
   potentially useful to the Company or necessary to commercialize its
   products or achieve their business goals.  There is no assurance that
   the Company will be able to obtain licenses of such patents on
   acceptable terms.

   The Company has given the trade name Carrasyn[R] to certain of its
   products containing acetylated mannan derivatives.  A selected series
   of domestic and foreign trademark applications exists for the marks
   Carrisyn[R], Manapol[R] and Carrasyn[R] which are registered in the United
   States and several foreign countries.  Further, the Company has filed
   applications for the registration of a number of other trademarks,
   including AVMP[R], both in the United States and in certain foreign
   countries.  The Company believes that its trademarks and trade names
   are valuable assets.

                                  Employees

   As of March 3, 1997, the Company employed 252 persons, of whom 19 were
   engaged in the operation and maintenance of its Irving processing
   plant, 127 were employed at the Company's facility in Costa Rica and
   the remainder were executive, research, quality assurance,
   manufacturing, administrative, sales, and clerical personnel.  Of the
   total number of employees, 87 were located in Texas, 127 in Costa Rica
   and one in Puerto Rico.  In addition, 37 sales personnel were located
   in 21 other states.  The Company considers relations with its employees
   to be good.  The employees are not represented by a labor union.

                                  Financing

   In January 1995, the Company entered into a financing arrangement with
   NationsBank of Texas, N.A. (the  Bank ).  The agreement was composed of
   a $2,000,000 line of credit which expired one year from the date of the
   agreement and a $6,300,000 term loan that was to mature five years from
   the date of the agreement.  The interest rate on both credit facilities
   was the Company's option of prime plus one-half percent or the London
   Interbank Offering Rate plus 200 basis points set for a period of
   thirty, sixty, ninety or one hundred eighty days.  The loans were
   collateralized by the Company's assets and contained certain covenants. 
   As of December 31, 1995, the Company was not in compliance with the
   term loan s fixed charge ratio covenant.  Rather than amend the terms
   of the term loan agreement, on April 29, 1996, the Company's management
   elected to pay off the entire term loan balance of $2,977,000 plus
   $18,000 in accrued interest with available cash to eliminate the
   interest expense on the term loan.  The Company's line of credit
   expired January 30, 1996.  The Company had reached an oral agreement
   with the Bank for a new line of collateralized credit for approximately
<PAGE>
   $1,200,000.  However due to fees that were payable for the unused line
   of credit and the Company's lack of immediate need of cash, management
   elected to withdraw from discussions with the Bank and allowed the
   agreement to be tabled until such time as a line of credit is desirable
   and favorable to the Company. 

   ITEM 2.  PROPERTIES.

   The Company believes that all its farming property, manufacturing and
   laboratory facilities, as described below, and material farm,
   manufacturing and laboratory equipment are in satisfactory condition
   and are adequate for the purposes for which they are used.

   Walnut Hill Facility.  The Company's corporate headquarters and
   principal U.S. manufacturing facility occupy all of the 35,000 square
   foot office and manufacturing building (the "Walnut Hill Facility"),
   which is situated on an approximately 6.6 acre tract of land located in
   the Las Colinas area of Irving, Texas.  The Company owns the land and
   the building.  During the fourth quarter of 1994, the Company began a
   project to move its manufacturing operation from a leased facility in
   Dallas to the unused space in this facility and expand the amount of
   office space.  This project was completed during the third quarter of
   1995.  The manufacturing operations occupy approximately 19,000 square
   feet of the facility, and administrative offices occupy approximately
   16,000 square feet.

   Laboratory Facility.  The Company leases 24,000 square feet of office,
   manufacturing and laboratory space (the "Laboratory Facility") in
   Irving, Texas pursuant to a lease that expires in January 2000.  The
   Company's in-house research and development and quality assurance
   activities are conducted at the Laboratory Facility.  The Company also
   maintains sterile production facilities (which occupy 4,000 square feet
   of the total space) at the Laboratory Facility for the production of
   injectable dosage forms of Acemannan Immunostimulant.

   Warehouse and Distribution Facility.  In August 1994, the Company
   leased a 35,050 square foot office and warehouse facility in Irving,
   Texas near the Walnut Hill Facility, and moved its warehouse and
   distribution center from a leased facility in Dallas to this location
   in September 1994.  The warehouse and distribution center occupy
   approximately 27,000 square feet and the remaining space is used for
   offices.  This lease expires in October 2001.  

   Costa Rica Facility.  The Company owns approximately 405 acres of land
   in the Guanacaste province of northwest Costa Rica.  This land is being
   used for the farming of Aloe vera plants and for a processing plant to
   produce bulk pharmaceutical and injectable mannans and freeze-dried
   Aloe vera extracts used in the Company s operations.  Construction of
   the processing plant was completed during the second quarter of 1993,
   and the plant became operational in June 1993.  The Company believes
   that the Costa Rica farm will provide substantially all the Aloe vera
   leaves required to meet the Company's needs.  Development of this
   facility was partially financed with borrowings under a five-year, U.S.
   dollar-denominated loan from Corporacion Privada de Inversiones de
   CentroAmerica, S.A., a private bank operating in San Jose, Costa Rica. 
   The loan was paid off in May 1995.  During the first quarter of 1994,
   the Company initiated a project in Costa Rica to upgrade the production
<PAGE>
   plant to meet regulatory requirements for the production of bulk
   pharmaceutical oral and injectable mannans as required for IND's.  This
   project was completed in the fourth quarter of 1994.

   ITEM 3.  LEGAL PROCEEDINGS.

   On March 2, 1996, Dianna Gold (the "Plaintiff"), a former employee of
   the Company, filed an action styled Dianna Gold vs. Carrington
   Laboratories, Inc., and Fireman's Fund Insurance Company with the
   Workers  Compensation Appeals Board for the State of California (Case
   No. SFO 394660).  On March 27, 1996, Plaintiff filed an Application for
   Discrimination Benefits Pursuant to Labor Code Section 132(a) in that
   case.  The Company is vigorously defending this action.

   On June 26, 1996, Robert W. Brown ("Brown"), a former employee of the
   Company, filed a lawsuit styled Robert W. Brown vs. Carrington
   Laboratories, Inc., Cause No. 96-6469-L in the 193rd District Court of
   Dallas County, Texas, alleging breach of contract, promissory estoppel,
   fraud, negligent misrepresentation and slander in connection with his
   employment and the termination of his employment with the Company. 
   Brown sought to recover unspecified common law and statutory damages,
   punitive damages, interest, attorneys  fees and cost of suit.

   On December 6, 1996, the Judge signed an Order of Nonsuit in Cause No.
   96-6469-L that dismissed the suit without prejudice to any party and
   ordered each party to bear its own costs and attorneys  fees.

   On November 3, 1996, Brown filed a Charge of Discrimination against the
   Company with the Equal Employment Opportunity Commission ("EEOC")
   alleging age discrimination.  The Company received a notification of
   this charge dated February 13, 1997 from the EEOC.  To date, the EEOC
   has not required any action of the Company.  The Company intends to
   vigorously defend this charge.

   On September 13, 1996, Linda M. Miller ("Miller"), a former employee of
   the Company, filed a lawsuit styled Linda M. Miller vs. Carrington
   Laboratories, Inc., Cause No. 96-9971 in the 191st District Court of
   Dallas County, Texas, alleging breach of contract in connection with
   her employment with the Company.  Miller seeks to recover damages in
   excess of $50,000, exclusive of interest and costs.  The Company is
   vigorously defending this lawsuit.

   
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

   The Company did not submit any matter to a vote of security holders
   during the fourth quarter of the fiscal year covered by this Annual
   Report.
<PAGE>
   
                                      PART II

   ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
   MATTERS.

   The Common Stock of the Company is traded on the NASDAQ National Market
   under the symbol "CARN."  The following table sets forth the high and
   low sales prices of the Common Stock for each of the periods indicated.

   Fiscal 1995                   High               Low
   -----------                 -------            -------
   First Quarter               $13 1/8            $11
   Second Quarter               24 1/2             11 1/4
   Third Quarter                40 3/4             25 1/2
   Fourth Quarter               32 1/2             14 3/4

   Fiscal 1996                   High               Low
   -----------                 -------            -------
   First Quarter               $34 1/2            $23 1/2
   Second Quarter               50 7/8             21
   Third Quarter                26 3/4             17 1/2
   Fourth Quarter               23 1/4              6 7/8

   At March 10, 1997, there were 971 holders of record. (including
   brokerage firms and other nominees)

   The Company has not paid any cash dividends on the Common Stock and
   presently intends to retain all earnings for use in its operations. 
   Any decision by the Board of Directors of the Company to pay cash
   dividends in the future will depend upon, among other factors, the
   Company's earnings, financial condition and capital requirements.
<PAGE>
   
   ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA.

   The selected consolidated financial data below should be read in 
   conjunction with the consolidated financial statements of the Company and 
   notes thereto and Item 7, Management's Discussion and Analysis of Financial 
   Condition and Results of Operations.  The selected consolidated financial 
   information for the five years ended December 31, 1996, is derived from 
   the consolidated financial statements of the Company which have been 
   audited by Arthur Andersen LLP, independent public accountants.

   <TABLE>
   Years Ended November 30, 1992, 1993, and 1994,
   and Month Ended December 31, 1994 and
   Years Ended December 31, 1995 and 1996
   (Dollars and numbers of shares in thousands,                  
   except per share amounts)
   <CAPTION>
                                               
                                                        November 30,                       December 31,
                                                 -----------------------------     ------------------------------
                                                 1992        1993        1994        1994       1995        1996
                                              ---------   ---------   --------     -------    -------      -------
   <S>                                       <C>         <C>         <C>         <C>        <C>         <C>
   Operations Statement Information:
      Net Sales                               $ 20,064    $ 21,184    $ 25,430    $  1,781   $ 24,374    $ 21,286
          Cost and expenses:                  
          Cost of sales                          5,113       5,289       6,415         516      7,944      10,327
          Selling, general and 
               administrative                    9,687       9,371      11,968         985     12,442      10,771
          Research and development               4,141       5,397       5,334         327      5,370       5,927
          Cost of uncompleted public 
               offering                            400           -           -           -          -           - 
          Interest, net                            249         218         133          23        115        (304)
   ----------------------------------------------------------------------------------------------------------------
       Income (loss) before income taxes           474         909       1,580         (70)    (1,497)     (5,435)
               Provision for income taxes          159         104         159           -        131          88
       Net income (loss)                       $   315    $    805    $  1,421    $    (70)  $ (1,628)   $ (5,523)
       Net income (loss) per common   
         and common equivalent share:          $   .03    $    .09    $    .18    $   (.01)  $   (.22)   $   (.63)
   -----------------------------------------------------------------------------------------------------------------

       Weighted average shares  
          used in per share computations         6,801       7,324       7,341       7,344      7,933       8,798
   -----------------------------------------------------------------------------------------------------------------

   BALANCE SHEET INFORMATION:

       Working capital                        $  5,702    $  5,292    $  4,720    $  4,472   $  9,095    $ 13,910
       Total assets                             15,115      16,305      19,797      18,899     27,934      31,202
       Long-term debt, 
          net of current portion                 2,821       2,168       2,035       1,997         88          46

       Total shareholders' investment         $ 10,062    $ 11,041    $ 12,509    $ 12,439   $ 22,399    $ 27,757
    ----------------------------------------------------------------------------------------------------------------
   </TABLE>
   <PAGE>

   ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS.

   Background

   The Company is a research-based pharmaceutical and medical device
   company engaged in the development, manufacturing and marketing of
   naturally occurring complex carbohydrate and other natural products for
   therapeutics in the treatment of major illnesses and the dressing and
   management of wounds and other skin conditions.  The Company sells
   nonprescription products through its wound and skin care division;
   veterinary medical devices and pharmaceutical products through its
   veterinary medical division; and consumer products through its consumer
   products subsidiary, Caraloe, Inc. (see Note 16 for financial
   information on each of the segments).  The Company's research and
   product portfolio is primarily based on complex carbohydrate technology
   derived naturally from the Aloe vera plant.

   Liquidity and Capital Resources

   At December 31, 1996 and 1995, the Company held cash and cash
   equivalents of $11,406,000 and $6,222,000, respectively.  The increase
   in cash of $5,184,000 is attributable to a private placement of
   preferred stock (see Note Eight to the consolidated financial
   statements) and the issuance of common stock through the exercise of
   stock options and warrants (see Note Nine to the consolidated financial
   statements) that resulted in an additional $10,883,000 cash.  This
   increase in cash was partially offset by the retirement of all bank
   debt and the purchase of a $1,500,000 certificate of deposit ("CD")
   (see Note Four to the consolidated financial statements) as well as
   increased research and development expenditures.  In March 1997, the
   Company repurchased 50% of the outstanding preferred stock for cash
   (see Note Eighteen to the consolidated financial statements).

   Although wound care sales for 1996 were lower than projected, the
   Company was able to effectively manage and reduce inventory levels
   throughout 1996.  The Company regularly evaluates its inventory levels
   and adjusts production at both its Costa Rica plant, where the bulk
   freeze-dried Aloe extracts are manufactured, and at its U.S. plant to
   meet anticipated demand.  As a result of these evaluations, inventory
   reduction programs were initiated in the latter part of 1995 and early
   1996.  These programs included reduced production at the Company's
   manufacturing facility in Irving, Texas, as well as the Costa Rica
   facility.  As a result of these programs, inventory levels were reduced
   by $1,481,000 during 1996, including a $630,000 reduction in the
   production cost of Aloe vera derived products as described below.  As a
   result of the decreased production levels, the Company expensed
   $1,396,000 of unabsorbed overhead as cost of goods sold in 1996.
   The production capacity of the Costa Rica plant is larger than the
   Company's current usage level.  The Company adopted Statement of
   Financial Accounting Standards No. 121, "Accounting for the Impairment
   of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" 
   ("SFAS 121"), in the first quarter of 1996.  SFAS 121 requires that
<PAGE>
   long-lived assets held and used by an entity be reviewed for impairment
   whenever events or changes in circumstances indicate that the carrying
   amounts of the assets may not be recoverable.  At the time of adoption,
   there was no impairment of asset value in Costa Rica based on
   historical production levels and future capacity requirements needed to
   produce the Company's drug Aliminase[TM], then under initial phase III
   clinical trials (see discussion below).  In late October 1996, the
   Company received the results of the initial phase III clinical trial
   for the testing of Aliminase[TM] oral capsules, which indicated no
   statistically significant differences that would support a conclusion
   that Aliminase[TM] oral capsules provides a therapeutic effect in the
   treatment of ulcerative colitis.  As a result, the Company terminated
   the second large scale clinical trial and placed further testing of
   Aliminase[TM] oral capsules on hold.  These results triggered a new
   assessment of the recoverability of the costs of the Costa Rica plant's
   assets using the methodology provided by SFAS 121 in the fourth quarter
   of 1996.  The net book value of the Costa Rica Plant assets as of
   December 31, 1996, was $3,958,000.  The Company evaluated the value of
   Costa Rica produced components in its current product mix to determine
   the amount of net revenues, excluding Manapol[R] powder sales to
   Mannatech (see discussion of Caraloe sales to Mannatech below),
   attributable to the Costa Rica plant.  Cash inflows for 1997 and future
   years were estimated using management's current forecast and business
   plan.  All direct costs of the facility, including certain allocations
   of Company overhead, were considered in the evaluation of cash
   outflows.  Results indicate there is no impairment of value under SFAS
   121.  However, there is no assurance that future changes in product mix
   or the content of Costa Rica produced components in the current
   products will generate sufficient revenues to recover the costs of the
   plant under SFAS 121 methodology.

   As of March 14, 1997, the Company had no material capital commitments
   other than its leases and agreements with suppliers.  In January 1995,
   the Company entered into an agreement with NationsBank of Texas, N.A.
   (the "Bank") for a $2,000,000 line of credit and a $6,300,000 term
   loan.  Proceeds from the term loan were used to fund planned capital
   expenditures, a letter of credit required by a supplier, as discussed
   below, and planned research projects.  The line of credit was to be
   used for operating needs, as required.  As of December 31, 1995, the
   Company was not in compliance with the term loan's fixed charge ratio
   covenant.  Rather than amend the terms of the term loan, on April 29,
   1996, the Company's management elected to pay off the entire term loan
   balance of $2,977,000 plus $18,000 in accrued interest with available
   cash to eliminate the interest expense on the term loan.  All assets
   previously collateralizing the term loan were released by the Bank. 
   The Company pledged a $1,500,000 CD to secure the letter of credit as
   described below.

   Although the aforementioned CD matures every 90 days, the Company's
   management has elected not to classify the CD as a cash equivalent.  As
   the CD secures a letter of credit, described below, it is effectively
   unavailable to the Company for other purposes until such time as the
   letter of credit expires or is otherwise released.  Therefore, the CD
   is included in other non-current assets for reporting purposes.
<PAGE>
   The line of credit agreement expired January 30, 1996.  The Company had
   reached an oral agreement with the Bank for a new line of
   collateralized credit for approximately $1,200,000.  However, due to
   fees that were payable for the unused line of credit and the Company's
   lack of immediate need of cash, management elected to withdraw from
   discussions with the Bank and allowed the agreement to be tabled until
   such time as a line of credit is desirable and favorable to the
   Company.

   In February 1995, the Company entered into a supply agreement with its
   supplier of freeze-dried products.  The agreement required that the
   Company establish a $1,500,000 letter of credit.  The term loan with
   NationsBank was initially used to fund this letter of credit.  The
   funding of the letter of credit reduced the amount that the Company
   could borrow under the term loan but did not increase the Company's
   debt unless the letter of credit was utilized by the supplier.  As of
   March 14, 1997, the supplier had not made a presentation for payment
   under the letter of credit.  In April 1996, and in conjunction with the
   Company's settlement of the term loan, the Bank agreed to reduce the
   fees on the letter of credit by one percentage point in consideration
   of the Company's agreement to purchase and assign to the Bank a CD in
   an amount equal to the letter of credit.  The Company will maintain the
   CD until such time as the letter of credit expires or is otherwise
   released.  The contract also requires the Company to accept minimum
   monthly shipments of $30,000 and to purchase a minimum of $2,500,000
   worth of product over a period of five years.  At the request of the
   supplier, the minimum purchase requirements were waived for the three
   month period ending December 31, 1996.  The supplier currently
   produces the CarraSorb[TM] M Freeze Dried Gel and the Carrington[TM] 
   (Aphthous Ulcer) Patch for the Company.  Both of these products
   represent new technology and are still in the product acceptance and
   launch phase.  The Company had approximately $325,000 and $370,000 of
   CarraSorb[TM] M and Carrington[TM] (Aphthous Ulcer) Patch inventory on hand
   as of December 31, 1996 and March 11, 1997, respectively.  Current
   sales of both items are lower than the minimum purchase requirement,
   but the Company believes that as licensing, acceptance and demand for
   the new technology increases, demand will exceed the minimum purchase
   requirement.  As of March 11, 1997, the Company has purchased products
   totaling approximately $281,000 from this supplier. The Company is in
   full compliance with the agreement and, as of March 14, 1997, has the
   available resources to meet all future minimum purchase requirements.  

   In November 1995, the Company signed a licensing agreement with a
   supplier of calcium alginates and other wound care products.  Under the
   agreement, the Company has exclusive marketing rights for ten years to
   advanced calcium alginate products for North and South America and in
   the People's Republic of China.  Under the agreement, the Company made
   an up-front payment to the supplier of $500,000.  This payment resulted
   in increasing the prepaid assets of the Company.  Additional payments
   totaling $500,000 will be made to the supplier as new products are
   delivered.

   The Company began a large scale clinical trial during the third quarter
   of 1995 for the testing of its Aliminase[TM] oral capsules for the
   treatment of acute flare-ups of ulcerative colitis. The cost of this
   clinical trial was approximately $2,300,000.  All expenses related to
<PAGE>
   this trial have been recognized and paid.  In the third quarter of
   1996, the Company began a second large scale clinical trial for the
   testing of Aliminase[TM] oral capsules for the treatment of ulcerative
   colitis.  The cost of this trial was expected to be approximately
   $2,500,000, of which approximately $212,000 was required as an initial
   payment when the research contract was signed on September 19, 1996. 
   The full amount of the initial payment was expensed in the third
   quarter.  In late October 1996, the Company received the results of the
   initial phase III clinical trial for the testing of Aliminase[TM] oral
   capsules, which indicated that no statistically significant
   differences were found to support a therapeutic effect.  As a result,
   the Company terminated the second large scale clinical trial and placed
   further testing of Aliminase[TM] oral capsules on hold.  Approximately
   $150,000 in cancellation fees was recorded in relation to this
   termination.  No significant additional expenses related to phase III
   trials of Aliminase[TM] oral capsules are anticipated as of March 14,
   1997.

   In late 1995, the Company began an initial Phase I study using
   CarraVex[TM] injectable (formerly CARN 750) in cancer patients involving
   six cancer types.  The estimated cost of this study is $475,000, of
   which, approximately $201,000 had been expensed as of December 31,
   1996.  An additional $95,000 has been expensed in the first quarter of
   1997.

   Also in late 1995, the Company initiated an ongoing program to reduce
   expenses and the cost of manufacturing, thereby increasing the gross
   margin on existing sales.  This program included a restructuring of the
   work force in Costa Rica as well as a change in the manufacturing
   process for Aloe vera based raw materials.  Product costs have been
   decreased through changes in product packaging and other costs have
   been reduced through competitive bidding.  Where appropriate, the
   Company now complies with lower USDA or food grade requirements instead
   of more stringent FDA requirements.  The Company has restructured the
   sales force to position it for growth and is refocusing the sales
   effort to increase market share in the alternative care markets.  As
   part of this restructuring, the Company eliminated six sales positions,
   including representatives in five sales territories.  The Company
   replaced three of these positions with commission based independent
   manufacturer's representatives.  Two of the positions were integrated
   into existing sales territories.  And finally, sales representatives in
   territories that were contributing a low return are now compensated
   under a compensation plan that emphasizes increased sales.  This
   compensation plan rewards the employee by paying a commission on every
   sales dollar.  To offset the higher commissions, the employees have a
   significantly lower base salary and are responsible for covering their
   own travel and entertainment expenses.  This program will continue into
   the foreseeable future and will continually challenge the costs of
   doing business and where possible, further reduce the cost of
   operations.  

   In October 1996, the Company completed a $6,600,000 financing involving
   the private placement of Series E Convertible Preferred Stock (the
   "Series E Shares".  At that time, plans called for much of the
   proceeds from this sale to be used to continue Carrington's clinical
   research programs (see Footnote Eight to the consolidated financial
   statements).  On October 31, 1996, the Company announced the results of
   the first Phase III trial of Aliminase[TM] oral capsules.  Due to the
<PAGE>
   unfavorable results of the first Phase III trial, the Aliminase[TM] 
   project was placed on hold.  Additionally, the Company's management
   canceled the second Phase III clinical trial then under contract.  This
   event resulted in significant changes in the Company's planned uses of
   and need for these funds.  

   In addition to the change in the Company's needs, the decline in the
   market price of the Company's Common Stock has increased the extent of
   the dilution that would have occurred if all of the Series E Shares then
   outstanding were converted into Common Stock.  For these and other
   reasons, the Company's Board of Directors concluded that it was in the
   best interest of the Company and its shareholders that the Company use a
   portion of its existing funds to repurchase 50% of the Series E Shares
   (see Note Eighteen to the consolidated financial statements).  On
   March 4, 1997, the Company completed a repurchase of 50% of the above
   Series E Shares.

   The Company believes that its available cash resources, after the above
   described repurchase of the Series E Shares, and expected cash flows
   from operations, will provide the funds necessary to finance its current
   operations.  However, the Company does not expect that its current cash
   resources will be sufficient to finance the major clinical studies and 
   costs of filing new drug applications necessary to develop its products 
   to their full commercial potential.  Additional funds, therefore, may 
   have to be raised through equity offerings, borrowings, licensing 
   arrangements or other means, and there is no assurance that the Company 
   will be able to obtain such funds on satisfactory terms when they are 
   needed.

   The Company is subject to regulation by numerous governmental
   authorities in the United States and other countries.  Certain of the
   Company's proposed products will require governmental approval prior to
   commercial use.  The approval process applicable to prescription
   pharmaceutical products usually takes several years and typically
   requires substantial expenditures.  The Company and any licensees may
   encounter significant delays or excessive costs in their respective
   efforts to secure necessary approvals.  Future United States or foreign
   legislative or administrative acts could also prevent or delay
   regulatory approval of the Company's or any licensees  products. 
   Failure to obtain requisite governmental approvals or failure to obtain
   approvals of the scope requested could delay or preclude the Company or
   any licensees from marketing their products, or could limit the
   commercial use of the products, and thereby have a material adverse
   effect on the Company's liquidity and financial condition.

   Impact of Inflation

   The Company does not believe that inflation has had a material impact
   on its results of operations.
<PAGE>
   Fiscal 1996 Compared to Fiscal 1995

   Net sales were $21,286,000 in 1996, compared with $24,374,000 in 1995. 
   This decrease of $3,088,000, or 12.6%, resulted from a decrease of
   $3,845,000 in sales of the Company's wound and skin care products from
   $21,147,000 to $17,302,000, or 18.2%.  New products introduced in late
   January accounted for $1,182,000 in wound and skin care sales during
   1996.  The decrease in wound and skin care sales was partially offset
   by a $787,000, or 27.1%, increase in sales of Caraloe, Inc., the
   Company's consumer products subsidiary.

   In the past, the Company's wound and skin care products have been
   marketed primarily to hospitals and select acute care providers.  This
   market has become increasingly competitive as a result of pressures to
   control health care costs.  Hospitals and distributors have reduced
   their inventory levels and the number of suppliers used.  Also, health
   care providers have formed group purchasing consortiums to leverage
   their buying power.  This environment required the Company to offer
   greater discounts and allowances to maintain customer accounts. 
   Additionally, in the fourth quarter of 1995, the Medicare/ Medicaid
   reimbursement rate for hydrogels was significantly reduced (from 1
   ounce per day to 3 ounces per month).  This change significantly
   reduced the demand for hydrogels in the market place.  In February
   1996, the Company revised its price list to more accurately reflect
   current market conditions.  Overall wound and skin care prices were
   lowered by a weighted average of 19.1%.  With the February price
   reduction, the Company expected, and began to realize, a decrease in
   the amount of discounts required.  In addition to these cost pressures,
   over the last several years the average hospital stay has decreased
   over 50%, resulting in more patients being treated at alternative care
   facilities and at home by home health care providers.  This also had a
   negative impact on sales since the Company's sales force had been
   primarily focused on the hospital market.  To counter the market
   changes, the sales force is now also aggressively pursuing the
   alternative and home health care markets.

   To continue to grow its wound care business, the Company realized that
   it had to expand from the estimated $38 million hydrogel market in
   which it competed to a much larger segment of the estimated billion
   dollar wound care market.  To achieve this objective, an aggressive
   program of new product development and licensing was undertaken in 1995
   with the goal of creating a complete line of wound care products to
   address all stages of wound management.  As a result of this program,
   the Company launched three new wound care product types in late January
   1996.  The Company expects to launch additional products in 1997.

   Caraloe's sales increased from $2,907,000 to $3,694,000, or 27.1%. 
   Caraloe sales to Mannatech increased from $2,488,000 to $3,273,000.  Of
   the 1996 sales, $3,213,000 was related to the sale of bulk Manapol[R]
   powder.  Pursuant to the Supply Agreement, Mannatech is currently
   required to purchase a minimum of 225 kilograms of Manapol[R] powder per
   month at a purchase price of $1,200 per kilogram.  The Supply Agreement
   provides for an increase in Mannatech's minimum purchase requirement
   commencing in April 1997, but it also provides for renegotiation by the
   parties by March 15, 1997 of the purchase price to be paid by Mannatech
   for Manapol[R] powder.  The Company has been informed by Mannatech that
   the supply agreement will not be renewed.  Mannatech has indicated it
<PAGE>
   will honor the minimum purchase requirements through March 31, 1997,
   the termination date.  As the Supply Agreement between Mannatech and
   the Company will not be renewed, the exclusive license agreement for
   the Manapol[R] trade mark will also terminate on March 31, 1997.   The
   Company will then be able to sell Manapol[R] powder or license the trade
   mark to other third parties as well as use it in the Company's
   products.  Mannatech may continue to purchase Manapol[R] powder on an as-
   needed basis.  The termination of the Supply Agreement could have a
   material effect on the Company s results of operations. 

   Sales of the Company's veterinary products decreased from $320,000 to
   $290,000.  In March 1996, the Company entered into an agreement with
   Farnam Companies, Inc., a leading marketer of veterinary products, to
   promote and sell the Company s veterinary line on a broader scale.  In
   1997, the Company will begin to private label the veterinary line under
   the Farnam name.  Farnam has increased its sales force to improve the
   market share of the private labeled products.

   Cost of sales increased from $7,944,000 to $10,327,000, or 30.0%.  As a
   percentage of sales, cost of sales increased from 32.2% to 42.0% after
   adjusting for a $630,000 inventory valuation decrease on June 30, 1996,
   as described below, and period costs of $104,000 and $766,000 in 1995
   and 1996, respectively.  The period costs are related to the annual
   shutdown of the facility in Costa Rica for routine maintenance and
   inventory reduction programs.  The increase in cost of goods sold is
   largely attributable to the increased sales of bulk Manapol[R] powder,
   which had a substantially lower profit margin in the first quarter of
   1996 as compared to 1995, as a result of decreased production levels in
   the first quarter of 1996, and as compared to the margins on the
   Company's wound and skin care products, and the overall 19.1% price
   decrease which occurred in February of 1996.  Additionally, all of the
   new products introduced in the first half of 1996 are manufactured for
   the Company by third-party manufacturers and have a lower profit margin
   than the products manufactured by the Company.

   As a result of the implementation of programs to reduce operating and
   production costs, several changes were implemented at the Company's
   Costa Rica production facility in early 1996.  This facility produces
   all of the Company's freeze dried Aloe vera raw materials.  Among these
   changes was a restructuring of the work force as well as improvements
   in efficiencies in the manufacturing process.  The implementation of
   these changes significantly reduced the cost of Costa Rica production
   in the second quarter of 1996.  As a result of these reductions in
   cost, the actual cost of production under FIFO as of June 30, 1996, was
   approximately 18% lower than the Company's standard cost, which was
   equal to the FIFO cost of production at December 31, 1995 and March 31,
   1996.  The Company determined that the standard cost should be reset to
   the then current actual cost of production.  This reduction in standard
   FIFO cost decreased inventory valuation by $630,000.  This amount
   represents the change in the accumulated value of all items in inventory
   as of June 30, 1996 that were produced in Costa Rica as well as those
   finished goods that contain component items produced in Costa Rica.  This
   decrease in inventory value was expensed in the second quarter as a
   period cost and is included in cost of sales.
<PAGE>
   To accelerate new product development and reduce overhead, the Company
   was restructured in 1995.  The restructuring included the lay-off of
   seventeen high level and under-utilized positions in administration,
   marketing, and research and development, for a net reduction in
   salaries and benefits of approximately $120,000 per month. 
   Approximately $15,000 of these savings were offset with the hiring of
   Kirk Meares, Vice President of Sales and Marketing, in the second
   quarter of 1996.  Also, the Company relocated its manufacturing
   operations to its current facility on Walnut Hill in Irving, Texas, and
   immediately realized a reduction in overhead and production costs as
   the new facility is more efficient than the prior location.  As the
   Walnut Hill facility is owned by the Company, rent and other facility
   expenses related to the former production facility of approximately
   $25,000 per month were eliminated.  Each of these items is expected to
   reduce future expenses and improve cash flow results.  As a result of
   the restructuring, approximately $1,400,000 of one-time charges were
   taken during 1995.  Of these charges, approximately $147,000 of
   severance compensation was paid in the first two quarters of 1996.  Of
   this amount, $75,000 was a final payment to a single former high
   ranking research and development employee.  This negotiated payment
   relieved the Company of $128,000 in future severance compensation
   liability to this employee.  As of June 30, 1996, all liabilities
   resulting from the restructuring were paid in full or otherwise
   relieved.

   Selling, general and administrative ("SG&A") expenses decreased to
   $10,771,000 from $12,442,000, or 13.4%.  This decrease was attributable
   in part to approximately $900,000 in one-time charges in the first nine
   months of 1995.  These one-time charges were related to severance
   agreements, legal expenses and settlements and debt refinancing costs. 
   This was partially offset as the Company incurred approximately
   $150,000 in additional costs related to the launch of three new product
   types and a one-time write-off of approximately $92,000 of bank and
   legal charges related to the early retirement of all bank debt in 1996. 
   Also contributing to the reduced SG&A expenses were the benefits
   received from the cost reduction programs put in place earlier in the
   year as well as savings generated from the restructuring of the sales
   force.

   Research and development ("R&D") expenses increased to $5,927,000 from
   $5,370,000, or 10.4%.  This increase was the result of beginning the
   initial large scale phase III clinical trial for the testing of
   Aliminase[TM] oral capsules for the treatment of acute flare-ups of
   ulcerative colitis during the third quarter of 1995.  This study was
   substantially completed in the third quarter of 1996.  In September of
   1996, the Company initiated the second pivotal phase III testing of
   Aliminase[TM] oral capsules.  The initial payment of approximately
   $212,000 was expensed in the third quarter.  In late October 1996, the
   Company received the results of the initial phase III clinical trial
   for the testing of Aliminase[TM] oral capsules, which indicated that no
   statistically significant differences were found to support a
   therapeutic effect.  As a result, the Company terminated the second
   large scale clinical trial and placed further testing of the Aliminase[TM] 
   oral formulation on hold.  Approximately $150,000 in cancellation fees
   was recorded in the third quarter of 1996.  Additional R&D costs
   related to the ongoing cancer research contributed to the increase in
   R&D during 1996 as well.  These costs were partially offset by a
   reduction of internal salaries and other operating expenses.
<PAGE>
   Net interest income of $304,000 was realized in 1996, versus net
   interest costs of $115,000 in 1995, due to having more excess cash to
   invest as well as the retirement of all bank debt in April 1996.

   Net loss for 1996 was $5,523,000, versus a net loss of $1,628,000 for
   1995.  This change is a result of a changing product mix, more products
   manufactured by third parties, decreased sales which resulted from a
   change in the Medicare reimbursement rates, and increased research and
   development expenditures related to the Phase III ulcerative colitis
   study and the ongoing Phase I cancer study.  Loss per share was $.63 in
   1996, compared to a loss per share of $.22 in 1995.


   Fiscal 1995 Compared to Fiscal 1994

   Net sales decreased from $25,430,000 to $24,374,000, or 4%.  The
   decrease of $1,056,000 resulted from a $2,557,000, or 11%, decrease in
   sales of the Company's wound and skin care products.  Sales of these
   products decreased from $23,665,000 to $21,147,000.  Fourth quarter
   sales of the wound and skin care products decreased from $5,900,000 to
   $4,348,000, or 26%.  The Company's wound and skin care products have
   been marketed primarily to hospitals and select acute care providers. 
   This market has become increasingly competitive as a result of
   pressures to control health care costs.  Hospitals and distributors
   have reduced their inventory levels and the number of suppliers used. 
   Also, health care providers have formed group purchasing consortiums to
   leverage their buying power.  This environment required the Company to
   offer greater discounts and allowances during 1995 to maintain customer
   accounts. Discounts and allowances increased from $1,267,000 to
   $3,063,000.  They averaged 6.2% of gross wound care sales in the fiscal
   fourth quarter of 1994, compared with an 18.3% average during the fourth
   quarter of 1995.  In February 1996, the Company revised its price list
   to more accurately reflect current market conditions.  Overall wound
   care prices were lowered by an average of 19%.  In addition to these
   cost pressures, over the last several years the average hospital stay
   has decreased over 50%, resulting in more patients being treated at
   alternative care facilities and at home by home health care providers. 
   This also had a negative impact on sales since the Company's sales
   force had been primarily focused on the hospital market.  To counter
   the market changes, the sales force is now also aggressively pursuing
   the alternative and home health care markets.

   The decrease in the Company's wound and skin care products was
   partially offset by an increase in sales of Caraloe, Inc., the
   Company's consumer products subsidiary.  Caraloe's sales increased from
   $1,361,000 to $2,907,000, or 114%.  Of this, $1,513,000 is related to
   the sale of bulk Manapol[R] powder to one customer, Mannatech.  Sales of
   bulk Manapol[R] powder to Mannatech increased from $934,000 to
   $2,447,000.  Sales of the Company's veterinary products decreased from
   $404,000 to $320,000.  In March 1996, the Company entered into an
   agreement with Farnam Companies, Inc., a leading marketer of veterinary
   products, to promote and sell its veterinary line on a broader scale.

   Cost of sales increased from $6,415,000 to $7,944,000, or 23.8%.  As a
   percentage of sales, cost of sales increased from 25.2% to 32.6%.  This
   increase was attributable in part to the increased sales of bulk
   Manapol[R] powder, which has a substantially lower profit margin, 33%, as
   compared to the Company's wound and skin care products.  In January
<PAGE>
   1996, the profit margin on Manapol[R] powder was reduced to 8% as a
   result of current production levels and costs at the Company's Costa
   Rica facility.   Also, the increasing discounts, as discussed earlier,
   resulted in the Company's wound and skin care product costs increasing
   by approximately 4% as a percentage of sales.

   To accelerate new product development and reduce overhead, the Company
   was restructured in 1995.  The restructuring included the lay-off of
   seventeen high level and under-utilized positions in administration,
   marketing, and research and development for a net reduction in salaries
   and benefits of approximately $120,000 per month.  Also, the Company
   relocated its manufacturing operations to its current facility on
   Walnut Hill in Irving, Texas, and immediately realized a reduction in
   overhead and production costs as the new facility is more efficient
   than the prior location.  As the Walnut Hill facility is owned by the
   Company, rent and other facility expenses related to the former
   production facility of approximately $25,000 per month were eliminated. 
   Each of these items is expected to reduce future expenses and improve
   cash flow results.  As a result of the restructuring, approximately
   $1,400,000 of one-time charges were taken during 1995.  Of these
   charges, only $275,000 remained unpaid as of December 31, 1995.

   Of the above charges, approximately $700,000 were selling, general and
   administrative expenses, $500,000 related to severance agreements,
   $130,000 was due to increased legal fees and a $70,000 write off of
   unamortized legal and banking costs that resulted when the Company
   refinanced its long-term debt in 1993.  Approximately, $90,000 of costs
   were incurred in 1995 to complete the refinancing.  These costs were
   included in other long-term assets and were amortized over the term of
   the loan.  As a result, selling, general and administrative expenses
   increased from $11,968,000 to $12,442,000, or 4%.

   Research and development expenses increased from $5,334,000 to
   $5,370,000, or 1%.  During the first half of 1995, $564,000 of cost
   associated with severance agreements resulting from the above described
   restructuring was charged to research and development.  These charges
   will reduce internal salaries on an ongoing basis.  However, this
   reduction was offset in 1995 by beginning the large scale clinical
   trial for the testing of Aliminase[TM] (formerly CARN 1000) oral capsules
   for the treatment of acute flare-ups of ulcerative colitis during the
   third quarter of 1995.

   Interest expense increased from $171,000 to $251,000, or 47%, due to
   increased borrowings during the first four months of 1995.  Interest
   income increased from $38,000 to $136,000, or 258%, due to having more
   excess cash to invest.

   The net loss for 1995 was $1,628,000, compared with net income of
   $1,421,000 for 1994.  This change is a result of a changing product
   mix, increased discounts and one-time charges related to restructuring. 
   Losses per share were $.22 in 1995, compared to earnings per share of
   $.18 in 1994.

   All statements other than statements of historical fact contained in
   this report, including but not limited to statements in this
   "Management's Discussion and Analysis of Financial Condition and
   Results of Operations" (and similar statements contained in the Notes
   to Consolidated Financial Statements) concerning the Company's
   financial position, liquidity, capital resources and results of
<PAGE>
   operations, its prospects for the future and other matters, are
   forward-looking statements.  Forward-looking statements in this report
   generally include or are accompanied by words such as  anticipate, 
   believe, estimate, expect, intend or words of similar import. 
   Such forward-looking statements include, but are not limited to,
   statements regarding the Company's plan or ability to recover the cost
   of the Costa Rica plant, to absorb the plant s operating cost, to
   achieve growth in demand for, or sales of, products, to reduce expenses
   and manufacturing costs and increase gross margin on existing sales, to
   use the proceeds from its sale of Series E Convertible Preferred Stock
   to continue its clinical research programs, to file a registration
   statement and have it declared effective within the time required by
   its agreements with the holders of its Series E Convertible Preferred
   Stock, to vigorously defend the legal proceedings described in this
   report, to maintain the CD that secures its outstanding letter of
   credit, to obtain financing when it is needed, to increase the
   Company's market share in the alternative and home health care markets,
   to improve its revenues and fund its operations from such revenues and
   other available cash resources, to enter into licensing agreements, to
   develop and market new products and increase sales of existing
   products, to obtain government approval to market new products, to
   expand its business into a larger segment of the market for wound care
   products and increase its market share in the alternative care markets,
   to promote and sell its veterinary products on a broader scale, and
   various other matters.

   Although the Company believes that the expectations reflected in its
   forward-looking statements are reasonable, no assurance can be given
   that such expectations will prove correct.  Factors that could cause
   the Company's results to differ materially from the results discussed
   in such forward-looking statements include but are not limited to the
   possibilities that the Company may be unable to obtain the funds needed
   to carry out large scale clinical trials and other research and
   development projects, that the results of the Company's clinical trials
   may not be sufficiently positive to warrant continued development and
   marketing of the products tested, that new products may not receive
   required approvals by the appropriate government agencies or may not
   meet with adequate customer acceptance, that the Company may not be
   able to obtain financing when needed, that the Company may not be able
   to obtain appropriate licensing agreements for products that it wishes
   to market or products that it needs assistance in developing, that
   demand for the Company's products may not be sufficient to enable it to
   recover the cost of the Costa Rica plant or to absorb all of that
   plant's operating costs, and that the Company's efforts to improve its
   sales and reduce its costs may not be sufficient to enable it to fund its 
   operating costs from revenues and available cash resources.

   All forward-looking statements in this report are expressly qualified
   in their entirety by the cautionary statements in the two immediately
   preceding paragraphs.

   
   ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

   Reference is made to the Consolidated Financial Statements of the
   Company and its subsidiaries listed on page F-1 of this Annual Report,
   which are hereby incorporated by reference in this Item 8.
<PAGE>

   ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
             AND FINANCIAL DISCLOSURE.

   Effective March 10, 1997, the Company appointed the accounting firm of
   Ernst & Young LLP as the Company's independent public accountants for
   fiscal 1997 to replace Arthur Andersen LLP effective with such
   appointment.  The Company's Board of Directors approved the selection
   of Ernst & Young LLP as independent public accountants upon the
   recommendation of the Board s Audit Committee.

   During the two most recent fiscal years, there have been no
   disagreements with Arthur Andersen LLP on any matter of accounting
   principle or practice, financial statement disclosure or auditing scope
   or procedures or any reportable events.  Arthur Andersen LLP's report
   on the financial statements for the past two years contained no adverse
   opinion or disclaimer of opinion and was not qualified or modified as
   to uncertainty, audit scope or accounting principles.

   The Company has provided Arthur Andersen LLP with a copy of this
   disclosure and has requested that Arthur Andersen LLP furnish it with a
   letter addressed to the Securities and Exchange Commission (the
   "Commission") stating whether it agrees with the above statements.  (A
   copy of Arthur Andersen LLP's letter to the Commission, dated March
   19 1997, is filed as Exhibit 16.1 to this report.)

   
                                      PART III

   ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

   The information required by Item 10 of Form 10-K is hereby incorporated
   by reference from the information appearing under the captions
   "Election of Directors", "Executive Officers" and "Section 16(a)
   Beneficial Ownership Reporting Compliance" in the Company's definitive
   Proxy Statement relating to its 1997 annual meeting of shareholders,
   which will be filed pursuant to Regulation 14A within 120 days after
   the Company's fiscal year ended December 31, 1996.


   ITEM 11.   EXECUTIVE COMPENSATION.

   The information required by Item 11 of Form 10-K is hereby incorporated
   by reference from the information appearing under the caption
   "Executive Compensation" in the Company's definitive Proxy Statement
   relating to its 1997 annual meeting of shareholders, which will be
   filed pursuant to Regulation 14A within 120 days after the Company's
   fiscal year ended December 31, 1996.


   ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
   MANAGEMENT.

   The information required by Item 12 of Form 10-K is hereby incorporated
   by reference from the information appearing under the captions
   "Security Ownership of Management" and "Principal Shareholders" in the
   Company's definitive Proxy Statement relating to its 1997 annual
   meeting of shareholders, which will be filed pursuant to Regulation 14A
   within 120 days after the Company's fiscal year ended December 31,
   1996.
<PAGE>

   ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

   The information required by Item 13 of Form 10-K is hereby incorporated
   by reference from the information appearing under the caption "Certain
   Transactions" in the Company's definitive Proxy Statement relating to
   its 1997 annual meeting of shareholders, which will be filed pursuant
   to Regulation 14A within 120 days after the Company's fiscal year ended
   December 31, 1996.

   
                                      PART IV

   ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
              8-K.

   (a)(1) Financial Statements.

      Reference is made to the index on page F-1 for a list of all
      financial statements filed as a part of this Annual Report.

      (2) Financial Statement Schedules.   

      Reference is made to the index on page F-1 for a list of all
      financial statement schedules filed as a part of this Annual Report.

      (3) Exhibits.   

      Reference is made to the Index to Exhibits on pages E-1 through
      E-10 for a list of all exhibits filed as a part of this Annual Report.

   (b) Reports on Form 8-K.   

      During the last quarter of 1996, the Company filed a Form 8- K Current
      Report dated October 21, 1996 with the Securities and Exchange
      Commission describing the Comapny's private placement of 660 shares of
      Series E Convertible Preferred Stock.  See Notes Seven and Seventeen to
      the consolidated financial statements for a description of that private
      placement and subsequent repurchase by the Company of 330 of such
      shares.
         
<PAGE>
                           CARRINGTON LABORATORIES, INC.
                     INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                         AND FINANCIAL STATEMENT SCHEDULES

   Consolidated Financial Statements of the Company:

     Consolidated Balance Sheets --
       December 31, 1995 and 1996                                      F - 2

     Consolidated Statements of Operations -- year ended 
       November 30, 1994, month ended December 31, 1994
       and years ended December 31, 1995 and 1996                      F - 3

     Consolidated Statements of Shareholders' Investment -- 
       year ended November 30 1994, month ended December 31, 1994
       and years ended December 31, 1995 and 1996                      F - 4

     Consolidated Statements of Cash Flows -- year ended
       November 30, 1994, month ended December 31, 1994
       and years ended December 31, 1995 and 1996                      F - 5

     Notes to Consolidated Financial Statements                        F - 6

     Report of Independent Public Accountants                         F - 28
<PAGE>
   <TABLE>  
   Consolidated Balance Sheets
   (Dollar amounts in thousands, except share amounts)
   <CAPTION>

                                                               December 31,    December 31, 
                As of                                              1995            1996    
                                                               ------------    ------------
   <S>                                                          <C>              <C>
   ASSETS
   Current assets:
     Cash and cash equivalents                                   $ 6,222         $11,406 
     Accounts receivable, net of
       allowance for doubtful accounts of
       $227 and $213 as of December 31,
       1995 and 1996, respectively                                 2,227           1,912 
     Inventories                                                   5,235           3,623 
     Prepaid expenses                                                858             368
                                                                ---------         -------
   Total current assets                                           14,542          17,309
             
     Property, plant and equipment, at cost                       18,933          18,851
     Less: Accumulated depreciation                               (6,222)         (7,173)
                                                                ---------         -------
                                                                  12,711          11,678 
     Other assets                                                    681           2,215 
                                                                ---------        --------
   Total assets                                                  $27,934         $31,202 
                                                                =========        ========
   LIABILITIES AND SHAREHOLDERS' INVESTMENT 
   LIABILITIES:
     Current portion of long-term debt                           $ 3,026         $    29 
     Accounts payable                                                590           1,621 
     Accrued liabilities                                           1,831           1,749 
     Short-term borrowings                                            -               -   
                                                                 --------        --------  
   Total current liabilities                                       5,447           3,399 

     Long-term debt,
      net of current portion                                          88              46 

   SHAREHOLDERS' INVESTMENT:
    Preferred stock, 1,000,000 shares
     authorized (all series)
     Series C, $100 par value, 
     11,840, and 0 shares issued
     December 31, 1995 and 
     1996, respectively                                            1,167             -
    Series E Convertible, $100 par value
     and 660 issued at December 31, 1996                             -                66 
<PAGE>
    Common stock, $.01 par value,
     30,000,000 shares authorized, 
     8,378,999, and 8,869,819
     shares issued and outstanding at 
     December 31, 1995 and 1996,
     respectively                                                     84              89 
    Capital in excess of par value                                44,666          56,680 
    Deficit                                                      (23,344)        (28,904) 
    Foreign currency translation adjustment                         (174)           (174)
                                                                 --------       ---------           
   Total shareholders' investment                                 22,399          27,757
                                                                 --------       ---------
   Total liabilities and 
   shareholders' investment                                      $27,934         $31,202
                                                                 =======        =========
   </TABLE>
   [FN]
   The accompanying notes are an integral part of these balance sheets.
                                                  F - 2
   <PAGE>
   <TABLE>
   Consolidated Statements of Operations For the Year Ended November 30, 1994,
   the Month Ended December 31, 1994 and the Years Ended December 31, 1995 and 1996
   (Dollar amounts in thousands, except per share amounts)
   <CAPTION>

                                              November 30,               December 31,
                                              ------------      --------------------------------
                                                 1994           1994         1995         1996  
                                                ------        -------       -------      -------
   <S>                                         <C>            <C>          <C>          <C>
   Net sales                                    $25,430        $1,781       $24,374      $21,286 
   Cost and expenses:
     Cost of sales                                6,415           516         7,944       10,327 
     Selling, general and
       administrative                            11,968           985        12,442       10,771
     Research and development                     5,334           327         5,370        5,927
     Interest expense                               171            23           251           88 
     Interest income                                (38)          -            (136)        (392)
     Income (loss) before
       income taxes                               1,580           (70)       (1,497)      (5,435)
     Provision for
       income taxes                                 159           -             131           88 
                                                -------        -------      --------     --------                      
     Net income (loss)                          $ 1,421        $  (70)      $(1,628)     $(5,523)
                                                =======        =======      ========     ========

     Weighted average
       shares outstanding                         7,341         7,344         7,933        8,798

     Net income (loss) per common
       and common equivalent share:             $   .18        $ (.01)      $  (.22)     $  (.63)
                                                ========       =======      ========     ========
   </TABLE>
   [FN] 
   The accompanying notes are an integral part of these statements.
                                                           F - 3
   <PAGE>
   <TABLE>
   Consolidated Statements of Shareholders' Investment
   For the Year Ended November 30, 1994, the Month
   Ended December 31, 1994, and the Years Ended
   December 31, 1995 and 1996
   (Dollar amounts and share amounts in thousands)
   <CAPTION>

                                                                                  Foreign
                                                          Capital in              Currency
                            Preferred        Common       Excess of               Translation
                              Stock          Stock        Par Value     Deficit   Adjustment 
                         Shares  Amount  Shares  Amount                                         
                         ------  ------  ------  ------   ----------    --------  -----------
   <S>                    <C>   <C>     <C>     <C>       <C>         <C>           <C>
   ------------------------------------------------------------------------------------------
   Balance,
    November 30, 1993       10    $928    7,336  $   74    $33,016     $(22,802)     $(174)
   ------------------------------------------------------------------------------------------
   Issuance of 
    common stock upon
    exercise of stock
    options and warrants     -     -          8     -           59          -          -
   Dividends on
    Preferred stock          1     113      -       -          -           (125)       -
   Net income                -     -        -       -          -          1,421        -
   ------------------------------------------------------------------------------------------
   Balance,
    November 30, 1994       11  $1,041    7,344  $   74    $33,075     $(21,506)     $(174)
   ------------------------------------------------------------------------------------------
   Net loss                  -     -        -       -          -            (70)       -
   ------------------------------------------------------------------------------------------
   Balance,
    December 31, 1994       11  $1,041    7,344  $   74    $33,075     $(21,576)     $(174)
   ------------------------------------------------------------------------------------------
   Sales of common stock
    at $10 per share,
    net of issuance
    costs of $41,000         -     -        300       3      2,956          -          -
   Issuance of common
    stock upon exercise
    of stock options
    and warrants             -     -        711       7      8,426          -          -
   Issuance of common
    stock for management
    and directors 
    compensation             -     -         24     -          209          -          -
   Dividends on
    preferred stock          1     126      -       -          -           (140)       -
   Net loss                  -     -        -       -          -         (1,628)       -
   -----------------------------------------------------------------------------------------
   Balance,
    December 31, 1995       12  $1,167    8,379  $   84    $44,666     $(23,344)     $(174)
   -----------------------------------------------------------------------------------------
<PAGE>
   Issuance of common
    stock upon exercise
    of stock options,
    warrants and 
    employee stock
    purchase plan            -     -        316       3      4,604          -          -
   Dividends on
    preferred stock          -      35      -       -          -            (37)       -
   Conversion of
    preferred to common
    stock (Series C)       (12) (1,202)     175       2      1,200          -          -
   Sales of preferred 
    convertible stock 
    (Series E), $100 Par,
    net of issuance costs
    of $58,000               1      66      -       -        6,210          -          -
   Net loss                  -     -        -       -          -         (5,523)       -
   -----------------------------------------------------------------------------------------
   Balance,
    December 31, 1996        1      66    8,870      89     56,680      (28,904)      (174)
   -----------------------------------------------------------------------------------------
   </TABLE>
   [FN]
   The accompanying notes are an integral part of these statements.
                                               F - 4      
   <PAGE>
   <TABLE>
   Consolidated Statements of Cash Flows
   For the Year Ended November 30, 1994, the
   Month Ended December 31, 1994 and the Years Ended
   December 31, 1995 and 1996
   (Dollar amounts in thousands)
   <CAPTION>
                                                      November 30,          December 31,        
                                                      ------------   ------------------------
                                                         1994        1994      1995      1996 
                                                        ------      ------    ------   -------
  <S>                                                 <C>          <C>      <C>       <C>
   Cash flows from operating activities:
    Net income (loss)                                  $ 1,421      $ (70)   $(1,628)  $(5,523)
    Adjustments to reconcile income (loss)
     to net cash provided (used) by 
     operating activities:
      Depreciation and amortization                      1,206        110      1,277     1,273
    Changes in assets and liabilities:
    (Increase) decrease in accounts receivable, net       (603)         6        658       315
    (Increase) decrease in inventories                  (2,072)      (411)      (188)    1,612 
    (Increase) decrease in prepaid expenses               (428)       102       (319)      490 
     Decrease (increase) in other assets                     8         36       (514)   (1,534)
     Increase (decrease) in accounts payable
       and accrued liabilities                             838       (638)      (545)      949
                                                        -------     ------    -------   -------
     Net cash provided (used) by operating
       activities                                          370       (865)    (1,259)   (2,418)
                                                        -------     ------    -------   -------
   Cash flows from investing activities:
    Purchases of property, plant and equipment          (3,014)      (286)    (4,206)     (242) 
                                                        -------     ------    -------   -------
     Net cash used by investing activities              (3,014)      (286)    (4,206)     (242)
                                                        -------     ------    -------   -------
   Cash flows from financing activities:
    Issuances of common stock                               59        -       11,393     4,607
    Issuance of preferred stock                            -          -          -       6,276
    Proceeds from short- and long-term borrowings        1,500        -        5,742       -
    Payments of short- and long-term debt                 (385)      (187)    (5,848)   (2,999)
    Principal payments of capital lease obligations        (49)        (3)       (64)      (40)
                                                        -------     ------    -------   ------- 
     Net cash provided (used) by financing activities    1,125       (190)    11,223      7,844 
                                                        -------     ------    -------   -------
   Net (decrease) increase in cash and 
     cash equivalents                                   (1,519)    (1,341)     5,758     5,184 
   Cash and cash equivalents at beginning of year        3,324      1,805        464     6,222 
                                                        -------    -------    -------   ------- 
   Cash and cash equivalents at end of year            $ 1,805    $   464    $ 6,222   $11,406 
                                                       ========   ========   =======   ========
  <PAGE>
   Supplemental Disclosure of Cash
    Flow Information:
     Cash paid during the year for interest            $   206    $    20    $   281   $    87 
     Cash paid during the year for income taxes            124        -           99        13
   Supplemental Disclosure of Non-Cash
   Financing Activities:
     Equipment acquired through capital leases             114        -          -          39
     Issuances of common stock and warrants                -          -          209       -
  </TABLE>
  [FN]
   The accompanying notes are an integral part of these statements.
                                                  F - 5
  <PAGE>
                
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

   NOTE ONE.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


   In February 1995, the Company changed its fiscal year end from November 30
   to December 31.  Comparative financial statements reflect the fiscal year
   ended November 30, 1994, the single month of December 1994, and the fiscal
   years ended December 31, 1995 and 1996.

   PRINCIPLES OF CONSOLIDATION     The consolidated financial statements
   include the accounts of Carrington Laboratories, Inc. (the "Company"), and
   its subsidiaries, all of which are wholly owned.  All intercompany
   accounts and transactions have been eliminated in consolidation.  Certain
   prior year amounts have been reclassified to conform with 1996
   presentation.

   CASH EQUIVALENTS     The Company's policy is that all highly liquid
   investments purchased with a maturity of three months or less are
   considered to be cash equivalents unless otherwise restricted.

   REVENUE RECOGNITION     The Company recognizes revenue when title to the
   goods transfers.  For the majority of the Company's sales, this occurs at
   the time of shipping.  However, certain customers do not take title until
   the goods are delivered to their location or agent at which time revenue
   is recognized.

   DEPRECIATION AND AMORTIZATION     Land improvements, buildings and
   improvements, furniture and fixtures and machinery and equipment are
   depreciated on the straight-line method over their estimated useful lives
   (3 - 40 years).  Leasehold improvements and equipment under capital leases
   are depreciated over the terms of the respective leases (2 - 5 years).

   TRANSLATION OF FOREIGN CURRENCIES     Based on an evaluation of the
   activities of its Costa Rica subsidiaries, as of September 1, 1993, the
   Company concluded that the functional currency for these operations was
   the U.S. dollar.  Accordingly, such foreign entities translate monetary
   assets and liabilities at year-end exchange rates while non-monetary items
   are translated at historical rates.  Revenue and expense accounts are
   translated at the average rates in effect during the year, except for
   depreciation and cost of sales which are translated at historical rates. 
   Translation adjustments and transaction gains or losses are recognized in
   consolidated income in the year of occurrence.

   Prior to September 1, 1993, all assets and liabilities of foreign
   subsidiaries were translated into U.S. dollars at the exchange rates in
   effect at the balance sheet date.  Revenue and expense accounts were
   translated at weighted average exchange rates.  Translation gains and
   losses were reflected as a separate component of shareholders' investment.

   FEDERAL INCOME TAXES     The Company applies Statement of Financial
   Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109")
   which was issued in February 1992 to account for federal income taxes.

                                        F - 6
<PAGE>
   Deferred income taxes reflect the tax effect of temporary differences
   between the amount of assets and liabilities recognized for financial
   reporting and tax purposes.  These deferred taxes are measured by applying
   currently enacted tax laws.  The effect on deferred income tax assets and
   liabilities of a change in tax rates is recognized in income in the period
   that includes the enactment date.

   Certain of the Company's research and development expenditures qualify for
   tax credits and such credits are accounted for as a reduction of the
   current provision for income taxes in the year they are realized.  

   RESEARCH AND DEVELOPMENT     Research and development costs are expensed
   as incurred.  Certain laboratory and test equipment determined to have
   alternative future uses in other research and development activities has
   been capitalized and is depreciated as research and development expense
   over the life of the equipment.

   POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS     The Company does not
   offer any post-retirement or post-employment benefits.

   EARNINGS PER SHARE     Earnings per share are based on the weighted
   average number of common and common equivalent shares outstanding during
   each period.  Stock options and warrants are included as common stock
   equivalents if the dilutive effect on net earnings per share is greater
   than 3%.  The common stock equivalents were either antidilutive, or
   represented dilution of less than 3%, in 1994, 1995 and 1996.  The
   weighted average numbers of common shares used in computing earnings per
   share were  7,340,982, 7,932,675, and 8,798,211 for the fiscal years ended
   November 30, 1994, and December 31, 1995 and 1996, respectively.

   USE OF ESTIMATES     The preparation of financial statements in conformity
   with generally accepted accounting principles requires management to make
   estimates and assumptions that affect the reported amounts of assets and
   liabilities at the date of the financial statements and the reported
   amounts of revenues and expenses during the reporting period.  Actual
   results could differ from those estimates.

   NOTE TWO.     INVENTORIES:

   Inventories are recorded at the lower of first-in, first-out cost or
   market. The following summarizes the components of inventory at December
   31, 1995 and 1996:


   (Dollar amounts in thousands)
                                     1995         1996
   ------------------------------------------------------
   Raw materials and supplies      $  714        $  658
   Work-in-process                  2,726         1,197
   Finished goods                   1,795         1,768
   ------------------------------------------------------
   Total                           $5,235        $3,623
   ------------------------------------------------------
                                        F - 6
<PAGE>
   Included in work-in-process are $2,538,000 and $1,124,000 of freeze-dried
   Aloe vera inventory as of December 31, 1995 and 1996, respectively. 
   Finished goods consist of materials, labor and manufacturing overhead.

   NOTE THREE.   PROPERTY, PLANT AND EQUIPMENT:

   The Company has a 6.6 acre tract of land and a 35,000 square foot office
   and manufacturing building situated thereon.  This facility is located in
   Irving, Texas, a suburb of Dallas, and is used as the Company's
   headquarters and primary manufacturing facility.

   During July 1995, the Company completed the manufacturing and distribution
   project started during the first quarter of 1994.  The project involved
   the physical relocation of its manufacturing operation from a leased
   facility in Dallas to an unused portion of the Company's corporate
   headquarters facility in Irving, Texas.  The new facility is intended to
   meet all federal regulatory requirements applicable to provide the
   production capacity needed to meet long-term sales growth.  At the same
   location, the Company has upgraded its capability to enable it to produce
   injectable products that meet FDA standards.  The total cost expended on
   the project was $4,469,000.

   During the first quarter of 1994, the Company initiated a project in Costa
   Rica to upgrade its production plant to meet regulatory requirements for
   the production of bulk acetylated oral and injectable mannans as required
   for investigational new drugs ("INDs").  This project was completed in the
   fourth quarter of 1994 and cost approximately $1,200,000.  Funding was
   provided by existing cash on hand and cash flow from operations.  The
   Company's net investment in property, plant, equipment and other assets in
   Costa Rica at November 30, 1994 and December 31, 1995 and 1996 were
   $4,545,000, $4,280,000, and $3,958,000, respectively.

   The production capacity of the Company's Aloe vera processing plant in
   Costa Rica, where its bulk freeze-dried Aloe vera extract is manufactured,
   is greater than the Company's current level of usage of the plant.  The
   Company is currently exploring other options to utilize the available
   capacity.  There is no assurance that the Company will be able to fully
   utilize the Costa Rica plant s capacity.  The Company adopted Statement of
   Financial Accounting Standards No. 121, "Accounting for the Impairment of
   Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS
   121") in the first quarter of 1996.  SFAS 121 requires that long-lived
   assets held and used by an entity be reviewed for impairment whenever
   events or changes in circumstances indicate that the carrying amounts of
   the assets may not be recoverable.  At the time of adoption, there was no
   impairment of asset value in Costa Rica based on historical production
   levels and future capacity requirements needed to produce the Company's
   drug Aliminase[TM], then under initial phase III clinical trials.  Under 
   SFAS 121, when there is an event or change in circumstances that may 
   impair the recoverability of the assets, the carrying amount of the asset 
   should be assessed.  In late October 1996, the Company received the results
   of the initial phase III clinical trial for the testing of Aliminase[TM]
   oral capsules, which no statistically significant differences that would
   support a conclusion that Aliminase[TM] oral capsules provide a
   therapeutic effect in the treatment of ulcerative colitis.  As a result,
   the Company terminated the second large scale clinical trial and placed
   further testing of Aliminase[TM] oral formulation on hold.  These results
   triggered a new assessment of the

                                   F - 6
<PAGE>
   recoverability of the costs of The Costa Rica plant's assets using the
   methodology provided by SFAS 121 in the fourth quarter of 1996.  The net
   book value of the Costa Rica Plant assets as of December 31, 1996, was
   $3,958,000.  The Company evaluated the value of Costa Rica produced
   components in its current product mix to determine the amount of net
   revenues, excluding Manapol[R] powder sales to Mannatech (see also Note
   Thirteen), attributable to the Costa Rica plant.  Sales to Mannatech were
   excluded from the analysis as the Company has been informed by Mannatech
   that the supply agreement in effect throughout 1996 will not be renewed.
   Mannatech has indicated it will honor the minimum purchase requirements
   through March 31, 1997, the termination date.  As the Supply Agreement
   between Mannatech and the Company will not be renewed, the exclusive
   license agreement for the Manapol[R] trademark will also terminate on
   March 31, 1997.  The Company will then be able to sell Manapol[R] powder
   or license the trademark to other third parties as well as use it in the
   Company's products.  Mannatech may continue to purchase Manapol[R] powder
   on an as-needed basis, but no such purchases could be anticipated for the
   SFAS 121 analysis.  Cash inflows for 1997 and future years were estimated
   using management's current forecast and business plan.  All direct costs
   of the facility, including certain allocations of Company overhead, were
   considered in the evaluation of cash outflows.  Results indicate there is
   no impairment of value under SFAS 121.  However, there is no assurance that
   future changes in product mix or the content of Costa Rica produced
   components in the current products will generate sufficient revenues to
   recover the costs of the plant under SFAS 121 methodology.

   The following summarizes the components of property, plant and equipment
   at December 31, 1995 and 1996:

   (Dollar amounts in thousands)
                                                1995         1996
   ----------------------------------------------------------------
   Land and improvements                      $ 1,389       $ 1,389
   Buildings and improvements                   8,073         8,085
   Furniture and fixtures                         868           880
   Machinery and equipment                      7,826         7,589
   Leasehold improvements                         330           756
   Equipment under capital leases                 447           152
   -----------------------------------------------------------------
   Total                                      $18,933       $18,851
   -----------------------------------------------------------------
   

   NOTE FOUR.     OTHER ASSETS

   The Company owns a $1,500,000 certificate of deposit ("CD") that matures
   every 90 days. Although includable in cash as a cash equivalent, the
   Company's management has elected not to classify the CD as such.  Because
   the CD secures a letter of credit (see Note Seven), it is effectively
   unavailable to the Company for other purposes until such time as the
   letter of credit expires or is otherwise released.  Therefore, the CD is
   included in other non-current assets for reporting purposes.

                                      F - 6
<PAGE>   
   Also included in other assets are the unamortized portion of a Product
   Development and Exclusive Distribution Agreement with Innovative
   Technologies Limited ("IT"), capitalized legal and start-up costs related
   to the Costa Rica operation, and a $200,000 investment in Aloe Commodities
   International, Inc. ("ACI").

   The following summarizes the components of other assets at December 31,
   1995 and 1996:

   (Dollar amounts in thousands)                    1995             1996
   -----------------------------------------------------------------------
   Certificate of Deposit                           $ -             $1,500
   IT Product Development 
      and Exclusive Distribution Agreement           442               392
   Callable Note to ACI                               -                200
   Costa Rica Start-up Costs                         123                81
   Cost of 1995 restructuring bank debt               77               -
   Other                                              39                42
   ------------------------------------------------------------------------
   Total                                            $681            $2,215
   ------------------------------------------------------------------------
   

   NOTE FIVE.     ACCRUED LIABILITIES:

   The following summarizes significant components of accrued liabilities at
   December 31, 1995 and 1996:
   (Dollar amounts in thousands)
                                                            1995       1996
   -------------------------------------------------------------------------
   Accrued payroll                                        $  210     $  232
   Accrued sales commissions                                 251        187
   Accrued taxes                                             165        512
   Preferred dividends (Series C Shares)                     124         -
   Accrued severance liability                               267         -
   Rebates                                                   182        129
   Legal                                                      30        125
   Other                                                     602        564
   -------------------------------------------------------------------------
   Total                                                  $1,831     $1,749
   -------------------------------------------------------------------------

                                     F - 6
<PAGE>
   NOTE SIX.     SHORT-TERM BORROWINGS:

   Short-term debt activity for each of the years ended December 31, 1995 and
   1996 was as follows:

   (Dollar amounts in thousands)
                                  1995            1996
   ------------------------------------------------------
   Average amount
     of short-term
     debt outstanding
     during the year            $  468           $  991
   Maximum amount
     of short-term
     debt outstanding
     during the year             2,977            2,977
   Average interest rate
     for the year                  7.9%             7.7%
   ------------------------------------------------------

   NOTE SEVEN.     DEBT:

   In January 1995, the Company entered into an agreement with NationsBank of
   Texas, N.A., (the "Bank") for a $2,000,000 line of credit and a $6,300,000
   term loan.  Proceeds from the term loan were used to fund planned capital
   expenditures, a letter of credit required by a supplier, as discussed
   below, and planned research projects.  The line of credit was to be used
   for operating needs, as required.  The term loan was payable in equal
   quarterly installments of $250,000 principal plus accrued interest
   beginning March 31, 1995 and ending January 30, 1999, when the unpaid
   balance was due.  The interest rate on both credit facilities was the
   Company's option of prime plus .5% or 30, 60, 90, or 180 day reserve
   adjusted LIBOR (London Interbank Offering Rate) plus 2%.  The Company paid
   a commitment fee of $31,500 on the closing date.  In February 1995, the
   Bank waived the requirement that the Costa Rica assets be pledged to
   secure the term loan.  The Company agreed to pay an additional commitment
   fee of $31,500 at that time.  As of December 31, 1995, the Company was not
   in compliance with the term loan's fixed charge ratio covenant. 
   Therefore, the entire balance was classified as current debt for reporting
   purposes.  Rather than amend the terms of the term loan, on April 29,
   1996, the Company's management elected to pay off the entire term loan
   balance of $2,977,000 plus $18,000 in accrued interest with available cash
   to eliminate the interest expense on the term loan.  All assets previously
   collateralizing the term loan were released by the Bank.  The Company
   pledged a $1,500,000 CD to secure the letter of credit as described below. 
   The interest rate on the borrowing ranged from 7.70% to 8.125% between
   January 30, 1995 and December 31, 1995.  In 1996, the interest rate was
   7.7% from January 1, 1996 through April 29, 1996.

   In order to help finance the development of the Company's Costa Rica
   facilities, the Company arranged a five-year U.S. dollar-denominated loan
   in the amount of $600,000 from Corporacion Privada de Inversiones de
   CentroAmerica, S.A.  In May 1995, the note was paid off using proceeds of
   the Company's private placement (see Note Nine).

                                       F - 6
<PAGE>
   In February 1995, the Company entered into a supply agreement with its
   supplier of freeze-dried products.  The agreement required that the
   Company establish a $1,500,000 letter of credit.  The term loan with
   NationsBank was used to fund this letter of credit.  The funding of the
   letter of credit reduced the amount that the Company could borrow under
   the term loan but did not increase the Company's debt unless the letter of
   credit was utilized by the supplier.  As of March 14, 1997, the supplier
   had not made a presentation for payment under the letter of credit.  In
   April 1996, and in conjunction with the Company's settlement of the term
   loan, the Bank agreed to reduce the fees on the letter of credit by one
   percentage point in consideration of the Company's agreement to purchase
   and assign to the Bank a CD in an amount equal to the letter of credit. 
   The Company will maintain the CD until such time as the letter of credit
   expires or is otherwise released.

   Long-term debt of the Company for the years ended December 31, 1995 and
   1996 is summarized as follows:

   (Dollar amounts in thousands)
                                          1995        1996
   --------------------------------------------------------
   Term Loan                             $2,977       $ -
   Obligations under capital leases         137         75
   --------------------------------------------------------
                                          3,114         75
   Less - Current portion                 3,026         29 
   --------------------------------------------------------
     Long-term debt, net of current      $   88       $ 46
   --------------------------------------------------------
   
   The Company leases certain computer and other equipment under capital
   leases expiring at various dates through 2001.  The following is a
   schedule of future minimum lease payments under the capital lease
   agreements together with the present value of these payments as of
   December 31, 1996:

   (Dollar amounts in thousands)

   Fiscal years ending December 31,
   -----------------------------------------------
   1997                                   $ 35
   1998                                     35
   1999                                      9
   2000                                      6
   2001                                      1
   -----------------------------------------------
   Aggregate minimum lease payments         86
   Less - Imputed interest included in
     aggregate minimum lease payments       11
   -----------------------------------------------

   Present value of aggregate minimum
      lease payments                      $ 75
   -----------------------------------------------

                                F - 6
<PAGE>
   NOTE EIGHT.     PREFERRED STOCK:

   SERIES C SHARES     In June 1991, the Company completed a transaction
   whereby the Company issued 7,909 shares of Series C 12% cumulative
   convertible preferred stock (the "Series C Shares") in exchange for
   convertible debentures plus interest accrued to the date of exchange to a
   private investor (the "Investor").  The Series C Shares had a par value of
   $100 per share, were convertible at par into common stock of the Company
   at a price of $7.58 per share (subject to certain adjustments), and were
   callable by the Company, after January 14, 1996 and provided for dividend
   payments to be made only through the issuance of additional Series C
   Shares.

   In January 1996, all of the outstanding Series C shares were converted to
   174,935 shares of the Company's common stock.

   The Company had previously issued to the Investor warrants to purchase
   55,000 shares of common stock of the Company at $15 per share through
   February 1, 1996.  In addition to issuing the Series C Shares to the
   Investor, the Company reduced the exercise price of warrants held by the
   Investor from $15 per share to $12.75 per share, which was above the
   market price of the common stock at the date of adjustment.  These
   warrants were exercised in the first quarter of 1996.  The Company also
   extended by three years, to February 1, 1996, the life of certain warrants
   that had previously been issued to this Investor for the purchase of
   20,000 shares of common stock of the Company (all of which are now owned
   10,000 shares each by two executives of the Investor, one of whom is a
   director of the Company), and reduced the exercise price of such warrants
   from $25 to $15 per share, which was above the market price of the common
   stock at the date of adjustment.

   SERIES E SHARES     On October 21, 1996 (the "Closing Date"), the Company
   completed a $6,600,000 financing involving the private placement of Series
   E Convertible Preferred Stock (the "Series E Shares").  Each Series E
   Share has a par value of $100 and an initial purchase price of $10,000. 
   After placement fees, legal and other costs related to the private
   placement, the Company expects to realize net proceeds of $6,266,000.  At
   the Closing Date, the Company's plans called for much of the proceeds from
   this sale to be used to continue Carrington's clinical research programs.

   The Series E Shares are convertible, at the option of the holder thereof,
   into shares of the Compan's common stock beginning on December 20, 1996,
   and prior to October 21, 1999 (the "Maturity Date"), at a conversion price
   per share (the "Conversion Price") equal to the lower of $25.20 (120 %
   of the market price of the Company's common stock as calculated
   over the three trading-day period ended on the last trading day prior to
   the Closing Date) or 87% of the market price as calculated over the three
   trading-day period ending on the last trading day immediately preceding
   the conversion date.  The Conversion Price is subject to adjustment to
   take into account stock dividends, stock splits and share combinations
   involving the Company's common stock.  Each Series E Share will be
   convertible into the number of whole shares of common stock determined by
   dividing $10,000 by the Conversion Price.

                                      F - 6
<PAGE>
   Each Series E Share outstanding on the Maturity Date will automatically
   convert into common stock at the then current Conversion Price.  Holders
   of Series E Shares will be entitled to receive an annual dividend payment
   equal to $500 per share for the one year period commencing on October 21,
   1998 and ending on October 20, 1999 (equal to 5% of the per share Purchase
   Price).  Dividends are payable only if the preferred shares are held to
   maturity, and are payable either in shares of common stock at the then
   current Conversion Price or in cash, or a combination of both, at the
   option of the Company. 

   The Company entered into Registration Rights Agreements (collectively, the
   "Registration Agreements") with the holders of the Series E Shares
   obligating the Company to prepare and file with the Securities and
   Exchange Commission (the "Commission") a registration statement (the
   "Registration Statement") with respect to the resale of the underlying
   shares of common stock (including any shares issued in payment of
   dividends on the Series E Shares or the periodic payments described below. 
   The Registration Agreements provided that if the Commission did not
   declare the Registration Statement effective on or before January 9, 1997,
   the Company would make periodic payments to the holders of the Series E
   Shares equal to 1% of the Purchase Price for the first 30-day period
   thereafter and 2% of the Purchase Price for each additional 30-day period,
   prorated to the date on which the Commission declared the Registration
   Statement effective.  Such payments could be made in cash or shares of
   common stock or a combination of both, at the election of the Company. 
   The Company filed the Registration Statement with the Commission on
   December 2, 1996.

   In March 1997, the Company repurchased 50% of the above Series E shares
   for $3,729,000.  See Note Eighteen for further discussion.

   NOTE NINE.     COMMON STOCK:

   PRIVATE PLACEMENT OF COMMON STOCK     In April 1995, the Company completed
   a self-directed private placement of 300,000 shares of common stock at a
   price of $10.00 per share.  The average of the high and low sale prices of
   the Company's common stock on the NASDAQ National Market on the day of the
   placement was $10.69 per share.  Total proceeds net of issuance costs were
   $2,956,000.  The Company agreed to use its best efforts to file a
   registration statement with the Securities and Exchange Commission within
   90 days after the placement.  Effective July 11, 1995, shares related to
   the private placement were registered for resale with the Securities and
   Exchange Commission.  Proceeds from the placement were used for planned
   capital expenditures, payment of bank debt, research and development
   expenditures and other operating needs.

   EMPLOYEE STOCK PURCHASE PLAN     On October 29, 1992, the Company adopted
   an Employee Stock Purchase Plan (the "Stock Purchase Plan").  Under the
   Stock Purchase Plan, employees may purchase common stock at a price equal
   to the lesser of 85% of the market price of the Company's common stock on
   the last business day preceding the enrollment date (defined as January 1,
   April 1, July 1 or October 1 of any plan year) or 85% of the market price
   on the last business day of the month.  If any employee elects to
   terminate participation in the Stock Purchase Plan, the employee is not

                                    F - 6
<PAGE>
   eligible to re-enroll until the first enrollment date following six months
   from such election.  The Stock Purchase Plan provides for the grant of
   rights to employees to purchase a maximum of 500,000 shares of common
   stock of the Company commencing on January 1, 1993.  As of December 31,
   1996, 62,970 shares had been purchased by employees at prices ranging from
   $7.23 to $29.54 per share. 

   STOCK OPTIONS     The Company has an incentive stock option plan (the
   "Option Plan") under which incentive stock options and nonqualified stock
   options may be granted to certain employees as well as non-employee
   directors.  Options are granted at a price no less than the market value
   of the shares on the date of the grant, except for incentive options to
   employees who own more than 10% of the total voting power of the Company's
   common stock, which are granted at a price no less than 110% of the market
   value.  Options granted expire four to ten years from the dates of grant.
   The Company accounts for employee stock based compensation under APB Opinion
   No. 25, under which no compensation cost has been recognized.  Had
   compensation cost been determined based on the fair value of options at their
   grant dates consistent with the method of Statement of Financial Accounting
   Standards No. 123 ("SFAS 123"), the Company's net loss and losses per share
   would have been reduced to the following pro forma amounts:

   --------------------------------------------------------
                                  1995              1996
   --------------------------------------------------------
   Net loss (in thousands):
      As reported               $(1,628)         $(5,523)
      Pro forma                  (2,656)          (8,022)

   Loss per share:
      As reported               $ (0.22)         $ (0.63)
      Pro forma                   (0.35)           (0.92)
   --------------------------------------------------------


   Because the SFAS 123 method of accounting has not been applied to options
   granted prior to January 1, 1995, the pro forma compensation cost may not
   be representative of the pro forma cost to be expected in future years.

                                     F - 6
<PAGE>
   The following summarizes stock option activity for each of the three years
   ended November 30, 1994 and December 31, 1995 and 1996:
   (Shares in thousands)

                                   Options Outstanding              
   -------------------------------------------------------------------------
                                                                    Weighted
                                                                    Average
                                                                    Exercise
                                  Shares      Price Per Share       Price
   -------------------------------------------------------------------------
   Balance, November 30, 1993      754     $ 6.25   to   $29.00      $13.96
       Granted                     268     $ 8.25   to   $12.75      $11.47
       Lapsed or canceled         (118)    $ 6.25   to   $21.72      $14.45
       Exercised                    (7)    $ 6.25   to   $10.25      $ 6.25
   -------------------------------------------------------------------------
   Balance, November 30, 1994      897     $ 6.25   to   $29.00      $12.95
       Granted                     592     $11.12   to   $35.25      $20.63
       Lapsed or canceled          (72)    $ 8.62   to   $20.12      $11.93
       Exercised                  (581)    $ 6.25   to   $29.00      $12.45
   -------------------------------------------------------------------------
   Balance, December 31, 1995      836     $ 6.25   to   $35.25      $18.82
       Granted                     141     $24.25   to   $47.75      $32.69
       Lapsed or canceled         (109)    $11.25   to   $28.75      $23.81
       Exercised                  (201)    $ 6.25   to   $29.00      $15.33
   -------------------------------------------------------------------------
   Balance, December 31, 1996      667     $ 8.25   to   $47.75      $21.99
   -------------------------------------------------------------------------
   Options exercisable at
     December 31, 1996             223     $ 8.25   to   $47.75      $22.84
   -------------------------------------------------------------------------
   
   Weighted Average Fair Value of Options 
   Granted using SFAS 123 Valuation Method:
                                                     1995    $11.86
                                                     1996     18.70
   -------------------------------------------------------------------------
<PAGE>   
   <TABLE>
   The following table summarizes information about fixed stock options
   outstanding at December 31, 1996:
   <CAPTION>

                              Options Outstanding                                               Options Exercisable
   -----------------------------------------------------------------------------       ---------------------------------

                        Number             Weighted-Avg                                 Number            
   Range of             Outstanding        Remaining              Weighted-Avg          Exercisable       Weighted-Avg
   Exercise Prices      at 12/31/96        Contractual Life       Exercise Price        at 12/31/96       Exercise Price
   ---------------      -----------        ----------------       --------------        -----------       --------------
  <C>                      <C>                 <C>                   <C>                  <C>                <C>
   $ 8.25 to $13.13         227                 7.0 years             $11.18                71                $10.74
   $16.56 to $20.13         107                 7.0                   $18.22                45                $18.62
   $24.25 to $30.25         251                 9.1                   $27.16                62                $27.62
   $35.25                    45                 8.6                   $35.25                30                $35.25
   $47.75                    37                 7.0                   $47.75                15                $47.75
   ----------------     -----------         ---------------        -------------         ----------        -------------
   $ 8.25 to $47.75         667                 7.9                   $21.99               223                $22.84
   ================     ===========         ===============        =============         ==========        =============
   </TABLE>

   The fair value of each option granted is estimated on the date of the
   grant using the Black-Scholes option pricing model with the following
   weighted-average assumptions used for grants in 1995 and 1996,
   respectively: risk-free interest rates of 6.50% and 6.47%, expected
   volatility of 64.2% and 63.0%.  The Company used the following weighted-
   average assumptions for grants in 1995 and 1996: expected dividend yields
   of 0% and expected lives of 5.0 years on options granted to employees and
   4.0 years on grants to directors.

   The Company has reserved 1,500,000 shares of common stock for issuance
   under the Option Plan.  As of December 31, 1996, options to purchase
   525,125 shares had been granted under the option plan, of which options
   for 17,200 shares had been exercised.  As of December 31, 1996, options
   covering 422,675 shares were outstanding with exercise prices between
   $16.56 and $47.75, with a weighted average exercise price of $27.87 and a
   weighted average contractual life of 8.8 years.  Of these options, 134,518
   are currently exercisable with a weighted average exercise price of
   $29.56.
   
   The Company's 1985 Stock Option Plan expired in February 1995.  The
   Company had reserved 1,400,000 shares of common stock for issuance under
   this plan.  At the time the plan expired, options to purchase 1,150,440
   had been granted, of which options for 863,540 shares have been exercised. 
   As of December 31, 1996, options covering 244,089 shares were outstanding
   with exercise prices between $6.25 and $29.00, with a weighted average
   exercise price of $11.81 and a weighted average contractual life of 6.8
   years.  Of these options, 88,330 are currently exercisable with a weighted
   average exercise price of $12.57.

                                       F - 6      
<PAGE>                                       
   STOCK WARRANTS     From time to time, the Company has granted warrants to
   purchase common stock to the Company's research consultants and certain
   other persons rendering services to the Company. The exercise price of
   such warrants was normally the market price or in excess of the market
   price of the common stock at date of issuance. The following summarizes
   warrant activity for each of the years ended November 30, 1994, and
   December 31, 1995 and 1996:

                                             Warrants Outstanding             
   (Shares in thousands)         --------------------------------------------
                                                                     Weighted
                                                                     Average
                                                                     Exercise
                                  Shares      Price per Share        Price
   --------------------------------------------------------------------------
   Balance, November 30, 1993      331     $ 6.25   to   $26.00     $14.43
       Granted                      10     $ 9.75                   $ 9.75
       Lapsed or canceled          (42)    $18.00   to   $26.00     $23.66
   --------------------------------------------------------------------------
   Balance, November 30, 1994      299     $ 6.25   to   $26.00     $14.27
       Granted                      20     $16.00                   $16.00
       Lapsed or canceled          (88)    $11.25   to   $26.00     $17.88
       Exercised                  (102)    $ 6.25   to   $16.25     $11.88
   --------------------------------------------------------------------------
   Balance, December 31, 1995      129     $ 9.75   to   $20.13     $13.99
       Lapsed or canceled           (3)    $12.13                   $12.13
       Exercised                   (75)    $12.75   to   $15.00     $13.35
   --------------------------------------------------------------------------
   Balance, December 31, 1996       51     $ 9.75   to   $20.13     $15.03
   --------------------------------------------------------------------------
   Warrants exercisable at
     December 31, 1996              49     $ 9.75   to   $20.13     $15.14
   --------------------------------------------------------------------------
   
   <TABLE>
   The following table summarizes information about stock warrants oustanding
   at December 31, 1996:
   <CAPTION>

                                       Warrants Outstanding                               Warrants Exercisable
                       -------------------------------------------------------      --------------------------------

                          Number          Weighted-Avg                                 Number
   Range of             Outstanding       Remaining              Weighted-Avg       Exercisable         Weighted-Avg
   Exercise Prices      at 12/31/96       Contractual Life      Exercise Price      at 12/31/96       Exercise Price
   ---------------      -----------       ----------------      --------------      -----------       --------------
  <C>                      <C>                <C>                   <C>                <C>                <C>
   $ 9.75 to $13.00         20                 2.8 Years             $11.38             18                 $11.14
   $16.00 to $20.13         31                 2.8                   $17.39             31                 $17.39
   ----------------     -----------       ----------------      --------------      -----------       --------------
   $ 9.75 to $20.13         51                 2.8                   $15.03             49                 $15.14
   ================     ===========       ================      ==============      ===========       ==============
  </TABLE>

                                      F - 6
<PAGE>
   NOTE TEN.     SHARE PURCHASE RIGHTS PLAN:

   In September 1991, the Company's Board of Directors adopted a share
   purchase rights plan by declaring a dividend distribution of one preferred
   share purchase right (a "Right") on each outstanding share of the
   Company's common stock (the "Common Shares").  The dividend distribution
   was made October 15, 1991, payable to shareholders of record on that date. 
   The Rights are subject to an agreement (the "Rights Agreement") between
   the Company and the Company's stock transfer agent, and will expire
   October 15, 2001, unless redeemed at an earlier date.

   Pursuant to the Rights Agreement, each Right will entitle the holder
   thereof to buy one one-hundredth of a share of the Company's Series D
   Preferred Stock (the "Preferred Shares"), at an exercise price of $80,
   subject to certain antidilution adjustments.  The Rights will not be
   exercisable or transferable apart from the Common Shares, until (i) the
   tenth day after a person or group acquires 20% or more of the Common
   Shares or (ii) the tenth business day following the commencement of, or
   the announcement of an intention to make, a tender or exchange offer for
   20% or more of the Common Shares.  The Rights will not have any voting
   rights or be entitled to dividends.  If the Company is acquired in a
   merger or other business combination, each Right will entitle its holder
   to purchase, at the exercise price of the Right, a number of the acquiring
   company's common shares having a current market value of twice such price. 
   Alternatively, if a person or group acquires 20% or more of the Common
   Shares, then each Right not owned by such acquiring person or group will
   entitle the holder to purchase, for the exercise price, a number of Common
   Shares having a market value of twice such price.  The Rights are
   redeemable at the Company's option for $.01 per Right at any time prior to
   the close of business on the seventh day after the first date of public
   announcement that a person or group has acquired beneficial ownership of
   20% or more of the Common Shares.  At any time after a person or group
   acquires 20% or more of the Common Shares, but prior to the time such
   acquiring person acquires 50% or more of the Common Shares, the Company's
   Board of Directors may redeem the Rights (other than those owned by the
   acquiring person or group), in whole or in part, by exchanging one Common
   Share for each Right.

   NOTE ELEVEN.     OPERATING LEASES:

   The Company conducts a significant portion of its operations from an
   office/ warehouse/distribution facility and an office/laboratory facility
   under operating leases that expire over the next five years.  In addition,
   the Company leases certain office equipment under operating leases that
   expire over the next four years.

                                     F - 6
<PAGE>
   The Company is committed under noncancellable operating leases, with
   minimum lease payments as of December 31, 1996 as follows:

   (Dollar in thousands)

   Fiscal Years Ending December 31,
   ----------------------------------------------
   1997                                    $  409
   1998                                       421
   1999                                       394
   2000                                       394
   Thereafter                                  97
   ----------------------------------------------
   Total minimum lease payments            $1,715
   ----------------------------------------------

   Total rental expenses under operating leases were $447,000, $364,000 and
   $451,000 for the years ended November 30, 1994 and December 31, 1995 and
   1996, respectively.

   NOTE TWELVE.     INCOME TAXES:

   The tax effects of temporary differences that give rise to deferred tax
   assets and deferred tax liabilities at December 31, 1995 and 1996 are as
   follows:

   (Dollars in thousands)
                                         1995         1996
   --------------------------------------------------------

   Net operating loss carryforward   $  9,835     $ 12,875
   Research and development                               
      and other credits                   839          839 
   Patent fees                            308          318 
   Other, net                             795          791 
   Less - Valuation allowance         (11,777)     (14,823) 
   --------------------------------------------------------
   Deferred income tax asset         $    -       $    - 
   --------------------------------------------------------

   Pursuant to the requirements to SFAS 109, a valuation allowance is
   provided when it is more likely than not the deferred income tax asset
   will not be realized.  The Company has provided a valuation allowance
   against the entire deferred tax asset at December 31, 1995 and 1996.
   
                                  F -6
<PAGE>
   The provisions for federal income and state franchise taxes for the years
   ended November 30, 1994 and December 31, 1995 and 1996 consisted of the
   following:

   (Dollars in thousands)

                                1994      1995      1996
   -------------------------------------------------------
   Current provision            $159      $131      $ 88
   Deferred provision, net        -         -         -
   -------------------------------------------------------
   Total provision              $159      $131      $ 88
   -------------------------------------------------------

   The differences (expressed as a percentage of pre-tax income) between the
   statutory and effective federal income tax rates are as follows:


                                   1994    1995     1996
   -------------------------------------------------------
   Statutory tax rate              34.0%  (34.0%)  (34.0%)
   State income taxes               5.4     2.8       .5
   Recognition of previously
      unrecognized deferred
      tax benefits                (35.3)     -        -
   Unrecognized deferred tax
      benefit                        -     34.6     34.9
   Expenses related to foreign
     operations                     4.7     4.1       -
   Research and development
      tax credit adjustment          .5      -        -
   Other                             .8     1.3       .2
   -------------------------------------------------------
   Effective tax rate              10.1%    8.8%     1.6%
   -------------------------------------------------------

   At December 31, 1996, the Company had net operating loss carryforwards of
   approximately $37,868,000 for federal income tax purposes, which expire
   during the period from 1999 to 2011, and investment and research and
   development tax credit carryforwards of approximately $839,000, which
   expire during the period from 1999 to 2008, all of which are available to
   offset federal income taxes due in future periods.

   NOTE THIRTEEN.     CONCENTRATIONS OF CREDIT RISK:

   Financial instruments that potentially expose the Company to
   concentrations of credit risk, as defined by SFAS No. 105, consist
   primarily of trade accounts receivable.  The Company's customers are not
   concentrated in any specific geographic region but are concentrated in the
   health care industry.  Significant sales were made to three unaffiliated
   customers.  Allegiance Healthcare Corporation (Allegiance, formerly
   Baxter Healthcare Corporation) accounted for $2,775,000, $2,492,000 and
    
                                   F - 6
<PAGE>
   $1,877,000; Owens & Minor accounted for $1,795,000, $3,348,000 and
   $2,433,000; and Bergen Brunswig, which acquired Durr Medical and Colonial
   Healthcare in December 1996, accounted for $2,042,000, $2,359,000, and
   $2,568,000 of the Company's net sales in 1994, 1995 and 1996,
   respectively.  Sales by Caraloe, Inc., to an unaffiliated customer,
   Mannatech, Inc., formerly Emprise International, Inc., accounted for
   $934,000, $2,488,000 and $3,273,000 of the Company's net sales in 1994,
   1995 and 1996, respectively.  The Company performs ongoing credit
   evaluations of its customers' financial condition and establishes an
   allowance for doubtful accounts based on factors surrounding the credit
   risk of specific customers and historical trends and other information.

   In the first quarter of 1997, the Company granted extended payment terms
   to Mannatech for orders placed in January through March, 1997, after which
   Mannatech's exclusive supply agreement will terminate.  Orders placed in
   1997, which should total approximately $810,000, will be paid in even
   monthly installments of $101,250 from February through September 1997. 
   The Company's normal terms for sales to Mannatech are net 30.

   NOTE FOURTEEN.     FAIR VALUES OF FINANCIAL INSTRUMENTS:

   SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
   requires disclosure of the fair value of financial instruments.  The
   following methods and assumptions were used by the Company in estimating
   the fair value disclosures for its financial instruments.  For cash, trade
   receivables and payables, the net carrying amounts reported in the
   Consolidated Balance Sheets approximate fair value.  The carrying amounts
   for revolving notes and notes payable approximate fair value based upon
   the borrowing rates currently available to the Company for similar bank
   loans.  No such instruments were outstanding as of December 31, 1996.

   NOTE FIFTEEN.     RELATED PARTY TRANSACTIONS

   In April 1996, the Company hired an independent manufacturer's
   representative as Vice President of Sales and Marketing.  This individual
   continues to maintain his sales territory, primarily Alabama and Georgia,
   as an independent manufacturer's representative and currently employs
   three sales representatives to cover the territory.  From April 1996
   through December 31, 1996, the Company paid commissions of approximately
   $268,000 to this individual.

                                       F - 6
<PAGE>
   NOTE SIXTEEN.     SALES BY DIVISION

   <TABLE>
   The following summarizes the Company's sales by division and consolidated
   sales for the years ended November 30, 1994, December 31, 1995, and
   December 31, 1996:
   (Dollar amounts in thousands)
   <CAPTION>

                            Carrington Laboratories           Consolidated  
                        -------------------------------     ----------------
    Year Ended            Wound                 Carrington  Caraloe     Total
     November 30, 1994     Care    Veterinary     Sales       Inc.      Sales
    -------------------  --------  ----------   ----------  -------    -------
    <S>                  <C>        <C>         <C>         <C>       <C>
    Net Sales             $23,665     $404       $24,069     $1,361    $25,430
    Cost of Sales           5,392      190         5,582        833      6,415
                          --------   ------      --------    -------   -------
    Gross Margin          $18,273     $214       $18,487     $  528    $19,015
                          ========   ======      ========    =======   =======

    Year Ended
     December 31, 1995
    ------------------
    Net Sales             $21,147     $320       $21,467     $2,907    $24,374
    Cost of Sales           5,971      163         6,134      1,810      7,944
                          --------   ------      --------    -------   -------
    Gross Margin          $15,176     $157       $15,333     $1,097    $16,430
                          ========   ======      ========    =======   =======

    Year Ended
     December 31, 1996
    ------------------

    Net Sales             $17,302     $290       $17,592     $3,694    $21,286
    Cost of Sales           7,128      249         7,377      2,950     10,327 
                         --------    ------      --------    -------   -------
    Gross Margin          $10,174     $ 41       $10,215     $  744    $10,959
                         ========    ======      ========    =======   =======
   </TABLE>
                                            F - 6
   <PAGE>
    
   NOTE SEVENTEEN.     UNAUDITED SELECTED QUARTERLY FINANCIAL DATA:

   The unaudited selected quarterly financial data below reflect the fiscal
   years ended December 31, 1995 and 1996, respectively.

   <TABLE>
   (Dollar and share amounts in thousands, except per share amounts)
   <CAPTION>

   1995                 1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
   --------------------------------------------------------------------------
   <S>                   <C>           <C>           <C>           <C>
    Net sales             $6,276         $6,408        $6,621       $ 5,069
    Gross profit           4,636          4,332         4,351         3,111
    Net (loss) income       (497)          (287)          163        (1,007)
   (Loss) income
      per share           $ (.07)        $ (.04)       $  .02       $  (.12)
    Weighted average
      common shares        7,359          7,813         8,213         8,345

   1996                 1st Quarter   2nd Quarter   3rd Quarter   4th Quarter
   --------------------------------------------------------------------------
    Net sales              $5,515         $5,438        $5,112        $5,221
    Gross profit            2,584          2,073         2,967         3,335 
    Net (loss) income      (2,156)        (2,545)        ( 839)           17 
   (Loss) income
      per share            $ (.25)        $ (.29)       $ (.09)        $   - 
    Weighted average
      common shares         8,666           8,805         8,855         8,868
   --------------------------------------------------------------------------
   </TABLE>

   NOTE EIGHTEEN.     SUBSEQUENT EVENT

   On October 31, 1996, the Company announced that the results of its first
   Phase III trial of Aliminase[TM] oral capsules were not favorable and that
   the Company had placed the Aliminase[TM] project on hold and terminated the
   second Phase III trial of that product.  Those developments resulted in
   changes in the Company's planned uses of and need for funds.  In addition, a
   decline in the market price of the Company's common stock that followed
   that announcement increased the extent of the dilution that would have
   occurred if all of the outstanding Series E Shares issued in October 1996
   were converted into common stock (see Note Eight).  Also, since the
   Registration Statement covering the shares of common stock underlying the
   Series E Shares had not been declared effective by the Commission, the
   periodic payments required by the Registration Agreements had begun to
   accrue (see Note Eight).

   Accordingly, the Company's Board of Directors concluded that it was in the
   best interest of the Company and its shareholders to use a portion of its
   existing funds to repurchase 50% of the outstanding Series E Shares, and
   that repurchase was completed on March 4, 1997 (the "Repurchase Date"). 
   The price paid by the Company was $11,300 per Series E Share, or a premium
   of $1,300 over the original Purchase Price.  In connection with the
   repurchase, the parties agreed (i) that no periodic payments would be due

                                    F - 6
<PAGE>
   for the period from February 15, 1997 through May 15, 1997; (ii) that the
   Company would pay in cash on the Repurchase Date the periodic payments
   that had accrued from January 10 through February 14, 1997; (iii) that the
   Company would pay the holders of the Series E Shares interest at the rate
   of 7% per annum on the original Purchase Price of their outstanding Series
   E Shares for the period from February 15, 1997 through the earliest of (a)
   May 15, 1997, (b) the Repurchase Date (in the case of Series E Shares
   repurchased by the Company), or (c) the date on which the Registration
   Statement is declared effective by the Commission; and (iv) that if the
   Commission does not declare the Registration Statement effective on or
   before May 15, 1997, the periodic payments required by the Registration
   Agreements will resume accruing on May 16, 1997, but will be equal to 1%
   of the original Purchase Price of the outstanding Series E Shares through
   June 15, 1997 and 2% for each additional 30-day period, prorated to the
   date on which the Commission declares the Registration Statement
   effective, and will be payable only in cash.

   On the Repurchase Date, the Company paid the Series E Shareholders
   $3,729,000 (330 Series E Shares at $11,300 per share), $92,400 (periodic
   payment due on all 660 Series E Shares from January 10, 1997 through 
   February 14, 1997) and $10,759 (7% per annum interest earned on $3,300,000 
   from February 15, 1997 to the Repurchase Date).  These amounts will be 
   shown as a reduction of Shareholders  Investment in the first quarter of 
   1997.

                                     F - 6    
<PAGE>                                     
   -------------------------------------------------------------------------
   Report of Independent Public Accountants
   -------------------------------------------------------------------------

   To the Shareholders and Board of Directors 
   of Carrington Laboratories, Inc., and Subsidiaries:

   We have audited the accompanying consolidated balance sheets of Carrington
   Laboratories, Inc. (a Texas corporation), and subsidiaries as of December
   31, 1995, and December 31, 1996, and the related consolidated statements 
   of operations, shareholders' investment, and cash flows for the year ended 
   November 30, 1994, the month ended December 31, 1994, and the two years 
   ended December 31, 1995 and December 31, 1996.  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 generally accepted auditing
   standards.  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 consolidated financial statements referred to above
   present fairly, in all material respects, the financial position of
   Carrington Laboratories, Inc., and subsidiaries as of December 31, 1995 
   and December 31, 1996, and the results of their operations and their cash 
   flows for the year ended November 30, 1994, the month ended December 
   31, 1994 and the two years ended December 31, 1995 and December 31, 1996, 
   in conformity with generally accepted accounting principles.



   Arthur Andersen LLP
   Dallas, Texas
   February 9, 1997 (except with respect to the matter discussed in Note
   Eighteen, as to which the date is March 4, 1997).

                                        F - 6
<PAGE>

                                      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.

                                                CARRINGTON LABORATORIES, INC.

   Date: March 26, 1997                         By:  /s/ Carlton E. Turner
                                                   --------------------------
                                                Carlton E. Turner, President

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

           Signatures                   Title                        Date
           ----------                   -----                        ----
   /s/ Carlton E. Turner       President, Chief Executive       March 26, 1997
   -------------------------     Officer and Director
   Carlton E. Turner

   /s/ Sheri L. Pantermuehl     Chief Financial Officer         March 26, 1997
   -------------------------   (principal financial and
   Sheri L. Pantermuehl           accounting officer)

   /s/ R. Dale Bowerman                Director                 March 26, 1997
   -----------------------------
   R. Dale Bowerman

   /s/ George DeMott                   Director                 March 26, 1997
   -----------------------------
   George DeMott

   /s/ Robert A. Fildes, Ph.D.         Director                 March 26, 1997
   -----------------------------
   Robert A. Fildes, Ph.D.

   /s/ Thomas J. Marquez               Director                 March 26, 1997
   -----------------------------
   Thomas J. Marquez

   /s/ James T. O'Brien                Director                 March 26, 1997
   -----------------------------
   James T. O'Brien

   /s/ Selvi Vescovi                   Director                 March 26, 1997
   -----------------------------
   Selvi Vescovi

                                         S - 1
<PAGE>   

                                      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.

                                               CARRINGTON LABORATORIES, INC.
                                              
   Date: March 26, 1997                        By: --------------------------
                                               Carlton E. Turner, President


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

           Signatures                   Title                         Date
           ----------                   -----                         ----
                               President, Chief Executive      March 26, 1997
   -------------------------     Officer and Director
   Carlton E. Turner

                                Chief Financial Officer        March 26, 1997
   -------------------------   (principal financial and
   Sheri L. Pantermuehl           accounting officer)     

                                       Director                March 26, 1997
   -------------------------
   R. Dale Bowerman

                                       Director                March 26, 1997
   -------------------------
   George DeMott

                                       Director                March 26, 1997
   -------------------------
   Robert A. Fildes, Ph.D.

                                       Director                March 26, 1997
   -------------------------
   Thomas J. Marquez

                                       Director                March 26, 1997
   -------------------------
   James T. O'Brien

                                       Director                March 26, 1997
   -------------------------
   Selvi Vescovi
   
                                             S - 1
<PAGE>
   
                               INDEX TO EXHIBITS


     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

       3.1   Restated Articles of Incorporation of
             Carrington Laboratories, Inc. (incorporated herein 
             by reference to Exhibit 3.1 to Carrington's 1988 
             Annual Report on Form 10-K).

       3.2   Statement of Cancellation of Redeemable Shares
             of Carrington Laboratories, Inc., dated June 9, 
             1989 (incorporated herein by reference to Exhibit 3.2 
             to Carrington's 1991 Annual Report on Form 10-K).

       3.3   Statement of Change of Registered Office and
             Registered Agent of Carrington Laboratories, Inc.  
             (incorporated herein by reference to Exhibit 3.1 to
             Carrington's Quarterly Report on Form 10-Q for
             the quarter ended May 31, 1991).

       3.4   Statement of Resolution Establishing Series D
             Preferred Stock of Carrington Laboratories, Inc. 
             (incorporated herein by reference to Exhibit 3.1 to
             Carrington's Quarterly Report on Form 10-Q for
             the quarter ended August 31, 1991).

       3.5   Statement of Resolution Establishing Series E
             Convertible Preferred Stock of Carrington Laboratories, Inc.
             (incorporated herein by reference to Exhibit 3.1 to Carrington's 
             Form 8-K Current Report dated October 21, 1996).
             
       3.6   Bylaws of Carrington Laboratories, Inc., as amended 
             through April 27, 1995 (incorporated herein by reference 
             to Exhibit 3.5 to Carrington's 1995 Annual Report on Form 10-K).

       4.1   Form of certificate for Common Stock of
             Carrington Laboratories, Inc. (incorporated herein by 
             reference to Exhibit 4.5 to Carrington's Registration
             Statement on Form S-3 (No. 33-57360) filed with
             the Securities and Exchange Commission on
             January 25, 1993).

       4.23  Rights Agreement dated as of September 19, 1991, between 
             Carrington Laboratories, Inc., and Ameritrust Company
             National Association (incorporated herein by
             reference to Exhibit 1 to Carrington's Report
             on Form 8-K dated September 19, 1991).
                                  
                                  E - 1
<PAGE>

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

       10.1+ 1985 Stock Option Plan of Carrington Laboratories, Inc.,
             as amended through April 28, 1994 (incorporated herein 
             by reference to Exhibit 4.1 to Carrington's Form S-8 
             Registration Statement (No. 33-64407) filed with the 
             Securities and Exchange Commission on November 17, 1995).
              
       10.2+ Form of Nonqualified Stock Option Agreement for
             employees, as amended, relating to Carrington's
             1985 Stock Option Plan (incorporated herein by
             reference to Exhibit 4.2 to Carrington's
             Registration Statement on Form S-8 (No. 33-
             50430) filed with the Securities and Exchange
             Commission on August 4, 1992).

       10.3+ Form of Nonqualified Stock Option Agreement for
             nonemployee directors, as amended, relating to 
             Carrington's 1985 Stock Option Plan (incorporated 
             herein by reference to Exhibit 4.3 to Carrington's
             Registration Statement on Form S-8 (No. 33-64407) 
             filed with the Securities and Exchange Commission 
             on November 17, 1995).

       10.4  License Agreement dated September 20, 1990,
             between Carrington Laboratories, Inc., and Solvay 
             Animal Health, Inc. (incorporated herein by reference 
             to Exhibit 10.1 to Carrington's Quarterly Report
             on Form 10-Q for the quarter ended August 31, 1990).

       10.5  Contract Research Agreement dated as of August
             8, 1991, between Carrington Laboratories, Inc., and 
             Texas Agriculture Experimental Station, as agent for
             the Texas A&M University System (incorporated
             herein by reference to Exhibit 10.55 to
             Carrington's 1991 Annual Report on Form 10-K).

       10.6  Lease Agreement dated as of August 30, 1991,
             between Carrington Laboratories, Inc., and Western Atlas
             International, Inc. (incorporated herein by
             reference to Exhibit 10.59 to Carrington's 1991
             Annual Report on Form 10-K).

       10.7+ Employee Stock Purchase Plan of Carrington Laboratories, 
             Inc., as amended through June 15, 1995 (incorporated
             herein by reference to Exhibit 10.29 to Carrington's
             1995 Annual Report of Form 10-K).


                                   E - 2

<PAGE>

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

       10.8+ Employment Agreement dated July 6, 1993, between
             Carrington Laboratories, Inc., and Luiz F. Cerqueira
             (incorporated herein by reference to Exhibit 10.43
             to Carrington's 1993 Annual Report on Form 10-K).

       10.9  Common Stock Purchase Warrant dated September
             14, 1993, issued by Carrington Laboratories, Inc., 
             to E. Don Lovelace (incorporated herein by reference to
             Exhibit 10.44 to Carrington's 1993 Annual Report on 
             Form 10-K).
     
      10.10  Common Stock Purchase Warrant dated September
             14, 1993, issued by Carrington Laboratories, Inc., 
             to Jerry L. Lovelace (incorporated herein by 
             reference to Exhibit 10.45 to Carrington's 1993 
             Annual Report on Form 10-K).

      10.11+ Agreement Regarding Termination of Employment
             and Full and Final Release dated February 16,
             1994, between Carrington Laboratories, Inc., 
             and David A. Hotchkiss (incorporated herein by 
             reference to Exhibit 10.49 to Carrington's 1993 
             Annual Report on Form 10-K).

      10.12  License Agreement dated March 18, 1994, between
             Carrington Laboratories, Inc., and Socie'te' 
             Europe'enne de Biotechnologie (incorporated herein by
             reference to Exhibit 10.53 to Carrington's 1994
             Annual Report on Form 10-K).

      10.13  Agreement dated March 28, 1994, between
             Carrington Laboratories, Inc., and Keun Wha
             Pharmaceutical Co., Ltd., (incorporated herein by 
             reference to Exhibit 10.54 to Carrington's 1994 Annual
             Report on Form 10-K).

      10.14  Lease Agreement dated June 15, 1994, between
             DFW Nine, a California limited partnership, and
             Carrington Laboratories, Inc. (incorporated herein by 
             reference to Exhibit 10.55 to Carrington's 1994 Annual
             Report on Form 10-K).

      10.15  Lease Amendment dated August 23, 1994, amending
             Lease Agreement listed as Exhibit 10.14
             (incorporated herein by reference to Exhibit
             10.57 to Carrington's 1994 Annual Report on
             Form 10-K).

                                 E - 3
<PAGE>

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

      10.16  License Agreement dated September 29, 1994, between
             Carrington Laboratories, Inc., and Immucell Corporation
             (incorporated herein by reference to Exhibit 10.58
             to Carrington's 1994 Annual Report on Form 10-K).

      10.17  Third Lease Amendment dated December 1, 1994,
             amending Lease Agreement listed as Exhibit
             10.6 (incorporated herein by reference to
             Exhibit 10.60 to Carrington's 1994 Annual
             Report on Form 10-K).


      10.18  Production Contract dated February 13, 1995,
             between Carrington Laboratories, Inc., and 
             Oregon Freeze Dry, Inc. (incorporated herein 
             by reference to Exhibit 10.63 to Carrington's 
             1994 Annual Report on Form 10-K).

      10.19+ Management Compensation Plan (incorporated
             herein by reference to Exhibit 10.64 to
             Carrington's 1994 Annual Report on Form 10-K).

      10.20  Research Agreements dated June 24, 1994,
             September 16, 1994, and February 2, 1995,
             between Southern Research Institute and
             Carrington Laboratories, Inc. (incorporated 
             herein by reference to Exhibit 10.65 to 
             Carrington's 1994 Annual Report on Form 10-K).

      10.21  Trademark License Agreement between Caraloe,
             Inc. (Licensor) and Emprise International, Inc.
             (Licensee) dated March 31, 1995 (incorporated
             herein by reference to Exhibit 10.2 to
             Carrington's Second Quarter 1995 Report on Form
             10-Q). 

      10.22  Supply Agreement between Caraloe, Inc. (Seller),
             and Emprise International, Inc. (Buyer), dated
             March 31,1995 (incorporated herein by reference
             to Exhibit 10.3 to Carrington's Second Quarter
             1995 Report on Form 10-Q). 

      10.23  Sales Distribution Agreement between the
             Chinese Academy of Sciences and Carrington
             Laboratories, Inc., dated August 16, 1995
             (incorporated herein by reference to Exhibit
             10.1 to Carrington's Third Quarter 1995 Report
             on Form 10-Q). 

                                   E - 4
<PAGE>     

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

      10.24  Sales Distribution Agreement between the
             Chinese Academy of Sciences and Carrington
             Laboratories, Inc., dated August 16, 1995
             (incorporated herein by reference to Exhibit
             10.2 to Carrington's Third Quarter 1995 Report
             on Form 10-Q). 

      10.25  Sales Distribution Agreement between the
             Chinese Academy of Sciences and Carrington
             Laboratories, Inc., dated August 16, 1995
             (incorporated herein by reference to Exhibit
             10.3 to Carrington's Third Quarter 1995 Report
             on Form 10-Q). 

      10.26  Supply and Distribution Agreement between
             Medical Polymers, Inc., and Carrington
             Laboratories, Inc., dated September 15, 1995
             (incorporated herein by reference to Exhibit
             10.4 to Carrington's Third Quarter 1995 Report
             on Form 10-Q). 

      10.27  Clinical Services Agreement between
             Pharmaceutical Products Development, Inc., and
             Carrington Laboratories, Inc., dated July 10,
             1995 (incorporated herein by reference to
             Exhibit 10.5 to Carrington's Third Quarter 1995
             Report on Form 10-Q). 

      10.28  Non-exclusive Sales and Distribution Agreement
             between Innovative Technologies Limited and
             Carrington Laboratories, Inc., dated August 22,
             1995 (incorporated herein by reference to
             Exhibit 10.6 to Carrington's Third Quarter 1995
             Report on Form 10-Q). 

      10.29  Supplemental Agreement to Non-exclusive Sales
             and Distribution Agreement between Innovative
             Technologies Limited and Carrington
             Laboratories, Inc., dated October 16, 1995
             (incorporated herein by reference to Exhibit
             10.7 to Carrington's Third Quarter 1995 Report
             on Form 10-Q).

      10.30  Product Development and Exclusive Distribution
             Agreement between Innovative Technologies
             Limited and Carrington Laboratories, Inc., dated
             November 10, 1995 (incorporated herein by
             reference to Exhibit 10.8 to Carrington's Third
             Quarter 1995 Report on Form 10-Q).


                                    E - 5
<PAGE>

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

      10.31+ Resignation Agreement and Full and Final
             Release dated February 24, 1995, between
             Carrington Laboratories, Inc., and Bill H. 
             McAnalley (incorporated herein by reference 
             to Exhibit 10.68 to Carrington's 1995 Annual 
             Report on Form 10-K).

      10.32+ Revised and Restated Resignation Agreement
             dated March 14, 1995, between Carrington Laboratories,
             Inc., and Karl H. Meister (incorporated herein by
             reference to Exhibit 10.69 to Carrington's 1995
             Annual Report on Form 10-K).

      10.33  Common Stock Purchase Warrant dated August 4,
             1995, issued by Carrington Laboratories, Inc., to 
             Clifford T. Kalista. (incorporated herein by 
             reference to Exhibit 10.70 to Carrington's 1995 
             Annual Report on Form 10-K).

      10.34  Form of Stock Purchase Agreement dated April 5, 1995
             between Carrington Laboratories, Inc., and persons 
             named in Annex I thereto (incorporated herein by 
             reference to Exhibit 2.1 to Carrington's Registration
             Statement 33-60833 on Form S-3).

      10.35  Form of Registration Rights Agreement dated
             June 20, 1995 between Carrington Laboratories, Inc., 
             and persons named in Annex I thereto (incorporated herein
             by reference to Exhibit 2.2 to Carrington's
             Registration Statement 33-60833 on Form S-3).

      10.36  Supply and Distribution Agreement between
             Farnam Companies, Inc., and Carrington
             Laboratories, Inc., dated March 22, 1996.
             (incorporated herein by reference to Exhibit
             10.76 to Carrington's 1995 Annual Report on
             Form 10-K).

      10.37  Placement Agent Agreement between Carrington Laboratories,
             Inc., and First Granite Securities, Inc. (incorporated
             herein by reference to Exhibit 10.1 to Carrington's
             Current Report on Form 8-K dated October 21, 1996).
      
      10.38  Indemnification Agreement between Carrington laboratories, 
             Inc., and First Granite Securities, Inc. (incorporated herein 
             by reference to Exhibit 10.2 to Carrington's Current Report
             on Form 8-K dated October 21, 1996).

                                  
                                  E - 6
<PAGE>

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

      10.39  Joint Escrow Instructions from Carrington Laboratories, Inc.,
             and accepted by Krieger & Prager, Esqs., as escrow agent 
             (incorporated herein by reference to Exhibit 10.3 to
             Carrington's Current Report on Form 8-K dated 
             October 21, 1996).

      10.40  Stock Purchase Agreement between Carrington Laboratories,
             Inc., and each of the purchasers of shares of the 
             Registrant's Series E Convertible Preferred Stock 
             (incorporated herein by reference to Exhibit 10.4 to
             Carrington's Current Report on Form 8-K dated 
             October 21, 1996).

      10.41  Amendment to the Stock Purchase Agreement between 
             Carrington Laboratories, Inc., and each of the purchasers
             of shares of Carrington's Series E Convertible Preferred
             Stock, dated October 15, 1996 (incorporated herein by
             reference to Exhibit 10.5 to Carrington's Current Report 
             on Form 8-K dated October 21, 1996).
             
      10.42  Registration Right Agreement between Carrington 
             Laboratories, Inc., and each of the purchasers of shares
             of Carrington's Series E Convertible Preferred Stock
             (incorporated herein by reference to Exhibit 10.6 to
             Carrington's Current Report on Form 8-K dated 
             October 21, 1996).

      10.43  Distribution Agreement between Carrington
             Laboratories, Inc., and Ching Hwa Pharmaceutical
             Co., Ltd., dated March 1, 1996 (incorporated herein 
             by reference to Exhibit 10.1 to Carrington's First 
             Quarter 1996 Report on Form 10-Q).

      10.44  Fourth Amendment to Credit Agreement and Term
             Note between Carrington Laboratories, Inc., and
             NationsBank of Texas, N.A., dated May 1, 1996 
             (incorporated herein by reference to Exhibit 10.2 
             to Carrington's First Quarter 1996 Report on Form 10-Q).

      10.45  Assignment of Certificate of Deposit to
             NationsBank of Texas, N.A., dated May 1, 1996 
             (incorporated herein by reference to Exhibit 10.3 
             to Carrington's First Quarter 1996 Report on Form 10-Q).

                                  E - 7
<PAGE>     

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

      10.46  Release of Liens agreement between Carrington
             Laboratories, Inc., and NationsBank of Texas,
             N.A., dated May 1, 1996 (incorporated herein by reference 
             to Exhibit 10.4 to Carrington's First Quarter 1996
             Report on Form 10-Q).

      10.47+ Form of Nonqualified Stock Option Agreement for
             Employees (incorporated herein by reference to
             Exhibit 4.1 to Carrington's Second Quarter 1996
             Report on Form 10-Q).

      10.48+ Carrington Laboratories, Inc., 1995 Stock Option
             Plan, As Amended and Restated effective March
             27, 1996 (incorporated herein by reference to
             Exhibit 4.2 to Carrington's Second Quarter 1996
             Report on Form 10-Q).

      10.49+ Form of Nonqualified Stock Option Agreement for
             Nonemployee Directors (incorporated herein by
             reference to Exhibit 4.3 to Carrington's Second
             Quarter 1996 Report on Form 10-Q).

      10.50+ Form of Incentive Stock Option Agreement for
             Employees (incorporated herein by reference to
             Exhibit 4.4 to Carrington's Second Quarter 1996
             Report on Form 10-Q).

      10.51  Sales Distribution Agreement between Faulding
             Pharmaceuticals Laboratories and Carrington
             Laboratories, Inc., dated September 30, 1996 
             (incorporated herein by reference to Exhibit 10.1 
             to Carrington's Third Quarter 1996 Report on Form 10-Q).

      10.52  Sales Distribution Agreement between Trudell
             Medical Marketing Limited and Carrington
             Laboratories, Inc., dated may 15, 1996 (incorporated 
             herein by reference to Exhibit 10.2 to Carrington's Third
             Quarter 1996 Report on Form 10-Q).

      10.53  Clinical Research Agreement between ICON and
             Carrington Laboratories, Inc., dated July 15, 1996 
             (incorporated herein by reference to Exhibit 10.3 to
             Carrington's Third Quarter 1996 Report on Form
             10-Q).

     10.54*  Sales Distribution Agreement between Suco
             International Corp. and Carrington Laboratories, 
             Inc., dated December 1, 1996.

                                     E - 8
<PAGE>     

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

     10.55*  Sales Distribution Agreement between Recordati,
             S.P.A., and Carrington Laboratories, Inc., and
             Carrington Laboratories Belgium N.V., dated December
             20, 1996.

     10.56*  Nonexclusive Distribution Agreement between
             Polymedica Industries, Inc., and Carrington
             Laboratories, Inc., dated November 15, 1996.

     10.57*  Sales Distribution Agreement between Gamida-
             Medequip Ltd., and Carrington Laboratories,
             Inc., dated December 24, 1996.

     10.58*  Sales Distribution Agreement between Gamida For
             Life BV, and Carrington Laboratories, Inc., dated
             December 24, 1996.

     10.59*  Sales Distribution Agreement between Darrow
             Laboratorios S/A and Carrington Laboratories,
             Inc., dated December 4, 1996.

     10.60*  Independent Sales Representative Agreement
             between Vision Medical and Carrington
             Laboratories, Inc., dated October 1, 1996.

     10.61*  Independent Sales Representative Agreement
             between Think Medical, Inc., and Carrington
             Laboratories, Inc., dated October 1, 1996.

     10.62*  Independent Sales Representative Agreement
             between Meares Medical Sales Associates and
             Carrington Laboratories, Inc., dated October
             1, 1996.

     10.63*  Supply Agreement between Aloe Commodities
             International, Inc., and Caraloe, Inc., dated
             February 13, 1997.

     10.64*  Trademark License Agreement between Light
             Resources Unlimited and Carrington Laboratories, 
             Inc., dated March 1, 1997.

     10.65*  Supply Agreement between Light Resources
             Unlimited and Caraloe, Inc., dated february 13, 1997.
             
     10.66*  Sales Distribution Agreement between Penta
             Farmaceutica, S.A., and Carrington Laboratories, 
             Inc., dated December 27, 1996.

     10.67*  Stock Subscription Offer of Aloe Commodities,
             Inc., and Caraloe, Inc., dated October 30, 1996.

                                     E - 9
<PAGE>     

     Exhibit                                                   Sequentially  
      Number                      Exhibit                       Numbered Page

     10.68*  Modification Number Two to the Production
             Contract dated February 13, 1995, between
             Carrington Laboratories, Inc., and Oregon Freeze Dry, 
             Inc., listed as Exhibit 10.18, dated November 19, 1996.

     10.69*  Offer and Agreement of Sale and Purchase of
             Convertible Preferred Series E Stock between
             Holders' of Carrington Laboratories, Inc., Convertible
             Preferred Series E Stock and Carrington
             Laboratories, Inc., dated February 26, 1997.

     10.70*  Sales Distribution Agreement between Laboratorios PiSA
             S.A. DE C.V. and Carrington Laboratories, Inc., dated
             November 1, 1995.
             
     10.71*  Terminination Acknowledgement between China Academy of  
             Sciences and Carrington Laboratories, Inc., dated February 
             12, 1996, regarding the three agreements listed as Exhibits
             10.23, 10.24 and 10.25.

     10.72*  Letter from Immucell Corporation to Carrington Laboratories
             Inc., dated February 7, 1996 canceling the License Agreement
             listed as Exhibit 10.16.

      11.1*  Computation of Net Income (Loss) Per Common and
             Common Equivalent Share.

      16.1*  Letter from Arthur Andersen LLP to the
             Securities and Exchange Commission.

      21.1*  Subsidiaries of Carrington.

      23.1*  Consent of Arthur Andersen LLP

      27.1*  Financial Data Schedule
                             

   *  Filed herewith.
   +  Management contract or compensatory plan.
   
                                     E - 10
<PAGE>