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

                                  Form 10-K

 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the fiscal year ended December 31, 2006

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

     For the transition period from ____________ to _____________

                        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
       -------------------        ------------------------------------
  Common Stock ($0.1 par value)           NASDAQ Capital Market

         Securities registered pursuant to Section 12(g) of the Act:
                       Preferred Share Purchase Rights
                               (Title of class)

      Indicate by check mark if the registrant is a well-known seasoned
 issuer, as defined in Rule 405 of the Securities Act.       Yes [ ]  No  [X]

      Indicate by check mark if the registrant is not required to file
 reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]  No  [X]

      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 (S229.405  of this  chapter) 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.  [ ]

      Indicate by check mark  whether the registrant  is a large  accelerated
 filer, an accelerated filer,  or non-accelerated filer.   See definition  of
 "accelerated filer  and  large  accelerated filer"  in  Rule  12b-2  of  the
 Exchange Act.

 Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

      Indicate by check mark  whether the registrant is  a shell company  (as
 defined in Rule 12b-2 of the Act).                          Yes [ ]  No  [X]

      The aggregate market value of the  voting and non-voting common  equity
 held by non-affiliates  of the Registrant  (treating all executive  officers
 and directors  of  the Registrant  and  holders of  10%  or more  of  shares
 outstanding, for  this  purpose,  as  if  they  may  be  affiliates  of  the
 Registrant) was $36,019,887,  computed by reference  to the  price at  which
 common equity was sold on June 30, 2006 of $3.69 per share.

      Indicate the number of shares outstanding  of each of the  Registrant's
 classes of common  stock, as  of the  latest practicable  date:   10,895,761
 shares of Common Stock, par value $.01 per share, were outstanding on  March
 19, 2007.

                     DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant's proxy statement for its annual meeting of
 shareholders to be held on May 17, 2007 are incorporated by reference into
 Part III hereof, to the extent indicated herein.

<PAGE>

                                    PART I

 ITEM 1.   BUSINESS.
           --------
                                   General
                                   -------

 Incorporated in Texas in  1973, Carrington Laboratories, Inc.  ("Carrington"
 or  the  "Company")  is  a research-based biopharmaceutical, medical device,
 raw  materials  and  nutraceutical  company   engaged  in  the  development,
 manufacturing and marketing of  naturally-derived complex carbohydrates  and
 other  natural  product  therapeutics  for the treatment of major illnesses,
 the dressing  and  management  of wounds  and  nutritional supplements.  The
 Company's research and proprietary product portfolios are based primarily on
 complex carbohydrates isolated from the Aloe vera L. plant.  The Company  is
 comprised of three business segments.  See Note Thirteen to the consolidated
 financial statements in this Annual  Report for financial information  about
 these business segments:  the Medical Services  Division, Consumer  Services
 Division and DelSite Biotechnologies Inc.,  ("DelSite").  The Company  sells
 prescription  and  nonprescription  medical  products  through  its  Medical
 Services Division  and  provides  manufacturing  services  to  customers  in
 medical markets.  Through its Consumer  Services Division the Company  sells
 consumer  and  bulk  raw  material   products  and  also  provides   product
 development and  manufacturing services  to customers  in the  cosmetic  and
 nutraceutical markets.  DelSite was incorporated  in 2001 as a  wholly-owned
 subsidiary.  DelSite operates independently from the Company's research  and
 development program and  is responsible  for the  research, development  and
 marketing of the Company's proprietary GelSite[R] technology for  controlled
 release and delivery of bioactive pharmaceutical ingredients.

                              Business Strategy
                              -----------------

 The  Company's  strategy  is  to  continue  to  grow  as  a   research-based
 biopharmaceutical company focused on offering quality products to  customers
 and potential partners.  Key aspects of the Company's strategy are to:

 *    enlarge and diversify our customer base to reduce dependence on a
      limited number of significant customers;

 *    increase revenues by offering innovative new products, growing existing
      product lines and continuing to offer exceptional customer service;

 *    increase profitability by continuing to improve operational efficiency,
      working capital management and modernization of equipment;

 *    develop and market the proprietary GelSite[R] polymer technology for
      delivery of vaccines and therapeutics;

 *    enter into strategic partnerships and collaboration arrangements
      related to the GelSite[R] technology; and

 *    continue to develop the knowledge of polymers and their relationship to
      vaccines and bioactive protein and peptide therapeutics.

                          Medical Services Division
                          -------------------------

 Carrington's Medical Services Division offers a comprehensive line of  wound
 management products.  Carrington products are used in a wide range of  acute
 and chronic wounds, for skin conditions and incontinence care.  The  primary
 marketing emphasis for Carrington's wound and skin care products is directed
 toward hospitals, nursing homes, alternate care facilities, cancer  centers,
 home health care providers  and  managed care organizations.  The wound  and
 skin care  product lines  are being  promoted  primarily to  physicians  and
 specialty nurses, for example, enterostomal therapists.

 The Company  distributes  its Medical  Services  products through  a  single
 source distributor, Medline  Industries, Inc. ("Medline").  Pursuant to  its
 agreement with  Medline,  the  Company manufactures  its  existing  line  of
 products and sells  them to  Medline at specified  prices.   The prices  are
 subject to adjustment not more than  once each year to reflect increases  in
 manufacturing cost.  If  Medline elects to market  any other products  under
 any of the Company's trademarks, Medline  will pay the Company a royalty  of
 between one percent and five percent of the annual sales of the  trademarked
 products, depending on  the aggregate  amount of  the net  sales under  this
 agreement to Medline.  In  addition,  pursuant  to a  Supply Agreement  with
 Medline, which  expires November  2008,  the Company  manufactures  Medline-
 branded dermal management products.

 The  Company  maintains  dual  control  with  Medline  of  certain  national
 pricing agreements which  cover hospitals,  alternate care  facilities, home
 health care  agencies  and  cancer centers.  These agreements allow  Medline
 representatives to make  presentations in member  facilities throughout  the
 country.  In order to promote continued brand-name recognition, the  Company
 engages in limited marketing and advertising to bolster Medline's efforts in
 these areas.

 The  Medical  Services  Division  has  several  distribution  and  licensing
 agreements for the  sale of its  products into international  markets.   The
 Division also sells wound care products into international markets on a non-
 contract, purchase order basis.   Opportunities in  the Internet market  are
 also addressed through  the Company's  websites, www.carringtonlabs.com  and
 www.woundcare.com.  These website addresses are included in this document as
 an inactive textural reference only and  the information contained on  these
 websites is not incorporated into this Form 10-K.

 The Medical Services Division is aggressively pursuing the veterinary  wound
 care markets, both equine and companion animal, based on the commercial  and
 brand success the  Company has  had in the  advanced wound  care market  for
 humans.  The Company also produces Acemannan Immunostimulant[TM], a biologic
 product fully  licensed  by  the United  States  Department  of  Agriculture
 ("USDA") as an adjuvant therapy for certain cancers in dogs and cats.   This
 product, in  addition to  several wound  and  skin care  products  developed
 specifically for  the veterinary  market,  are marketed  through  veterinary
 distributors.   The Company  is  actively pursuing  additional  distribution
 arrangements for these products.

 The Medical  Services  Division  is  actively  involved  in  developing  and
 promoting the SaliCept[R] line  of products, which  includes an oral  rinse,
 patches for oral wounds and extraction  sites, and other products.  In  2006
 the Company  signed a  three-year  exclusive representative  agreement  with
 Executive Sales Associates.  Under the  terms of the agreement, the  Company
 will supply Executive Sales Associates with the Salicept[R] line of products
 for use in  the management of  dry socket for  distribution into the  dental
 practitioner market in the United States  and Canada.  In return,  Executive
 Sales Associates will be responsible  for sales, marketing and  distribution
 of these products through its diversified  network of national and  regional
 distributors.

                          Consumer Services Division
                          --------------------------

 The Consumer  Services  Division  markets and  licenses  products  in  three
 distinct categories in the  health and beauty  markets: Bulk Raw  Materials,
 Specialty Manufacturing Services  and Finished Consumer  Products. The  Bulk
 Raw Materials  category  is  comprised of  proprietary  bulk  raw  materials
 produced from  Aloe  vera  L.  utilizing  the  Company's  patented  alcohol-
 precipitation method.  The  premier  product  is  Manapol[R] powder,  a bulk
 raw material  that  contains  greater  than  60% polymeric  polysaccharides.
 Manapol[R] powder  is  marketed to  manufacturers  of food  and  nutritional
 products  who  desire  quality,  clinically-proven  ingredients  for   their
 finished products  that  can carry  a  structure/function claim  for  immune
 system enhancement. In addition to Manapol[R] powder, the Consumer  Services
 Division markets the bulk raw material Hydrapol[TM] powder to  manufacturers
 of bath, beauty and skin care products. Hydrapol[TM] powder is currently the
 only raw material from Aloe vera L. that has the International  Nomenclature
 Cosmetic Ingredient ("INCI") name of Aloe Barbadensis Leaf  Polysaccharides.
 The Company is also developing additional bulk raw materials to expand their
 market presence and increase opportunities to sell the Company's products to
 other potential customers.

 Historically, the vast majority of the Manapol[R] powder manufactured by the
 Company was supplied  to two  customers, Mannatech,  Inc. ("Mannatech")  and
 Natural Alternatives International, Inc., ("Natural Alternatives")  pursuant
 to a non-exclusive supply agreement, which expired in November 2005.  During
 2006, the Company supplied Manapol[R] powder to Mannatech on a non-contract,
 purchase order basis, resulting in decreased  sales volumes and revenues  in
 the Consumer Services Division.  In December 2006, the company entered  into
 a  non-binding  term  sheet  with Mannatech as the result of negotiations to
 re-establish a contractual supply arrangement.  Subsequently, on January 25,
 2007, the  Company  and  Mannatech entered  into  a  three-year  Supply  and
 Trademark Licensing Agreement that provides for purchase of minimum  monthly
 volumes by Mannatech in  the first two  years.  In  2006, combined sales  to
 Mannatech and Natural  Alternatives decreased $2.64  million, or 28.5%  from
 2005 levels.   The Company  anticipates 2007  sales to  Mannatech under  the
 agreement to be above the minimum levels required by the agreement but,  due
 to inconsistency in the size and timing of Mannatech's orders, is  uncertain
 as to by how much sales  to Mannatech will exceed the contractual  minimums.
 (See  Note  Nineteen - Subsequent Events).  Additionally,  the  Company  has
 continued its focused marketing effort to identify potential new  Manapol[R]
 powder customers.  See "Item 1A. Risk Factors" regarding our dependence on a
 limited number of customers.

 The  Consumer  Services  Division   also  markets  and  licenses   Specialty
 Manufacturing Services to segments of the health, cosmetic and personal care
 industries. The  Specialty  Manufacturing Services  group  concentrates  its
 efforts on  providing custom  product development  of functional  beverages,
 skin care products  and bath  products. The  scope of  the various  services
 provided by  the  Specialty  Manufacturing Services  group  includes  taking
 projects from formulation  design through  manufacturing, manufacturing  and
 filling according  to  customer-provided  formulations  and  specifications,
 filling customer-provided packaging  components and  assembling custom  kits
 for customers.

 In December 2002, the Company acquired certain assets of the Custom Division
 of  Creative  Beauty  Innovations,   Inc.  ("CBI"),  including   specialized
 manufacturing customer  information,  intellectual property,  equipment  and
 selected inventories.  Under  the  agreement,  the  Company  paid  CBI  $1.6
 million, including $0.6 million for related inventory.  In addition, for the
 five-year period ending in  December 2007, the Company  agreed to pay CBI  a
 royalty in  an amount  equal to  9.0909% of  Carrington's net  sales of  CBI
 products to CBI's transferring  customers up to $6.6  million per year,  and
 8.5% of its net sales of  CBI products to CBI's transferring customers  over
 $6.6 million per year. The Company  recorded expenses of $308,000,  $262,000
 and $271,000 in 2006, 2005 and  2004, respectively, for royalties due  under
 the agreement.

 The final category of  the Consumer Services  Division is Finished  Consumer
 Products. This  unit markets  finished  products containing  Manapol[R]  and
 Hydrapol[TM] powders into domestic  health and nutritional products  markets
 through health food stores,  independent retail outlets, internet  marketing
 services at  www.carringtonlabs.com,  direct  consumer  sales,  and  to  the
 international marketplace on a non-contract, purchase order basis.


                        DelSite Biotechnologies, Inc.
                        -----------------------------

 In 2001, the  Company incorporated a  wholly-owned subsidiary named  DelSite
 Biotechnologies,  Inc.  DelSite  was  formed  to  commercialize  innovations
 discovered by scientists at the Company and operates independently from  the
 Company's  other  businesses.  DelSite  is  responsible  for  the  research,
 development  and  marketing  of  the  Company's  proprietary  drug  delivery
 technologies based on GelSite[R] polymer, a  new and unique natural  complex
 carbohydrate, which  was characterized  in 1998  from Aloe  vera L.  DelSite
 commenced operations  in  January  2002  and  is  currently  developing  new
 technologies for  controlled  delivery  of vaccines  as  well  as  bioactive
 protein  and  peptide   therapeutics.  GelVac[TM]   nasal  powder   delivery
 technology for vaccines  is DelSite's  most advanced  delivery platform.  An
 avian influenza powder  vaccine utilizing  this technology  is currently  in
 preclinical development.

 DelSite's business plan is to partner with biotechnology and  pharmaceutical
 companies to provide novel delivery solutions for their drugs and  vaccines.
 Together with its collaborators and  contractors, DelSite has the  following
 capabilities:

 *  Formulation development

 *  Feasibility studies

 *  Preclinical development

 *  Clinical supply production

 *  Product scale-up

 *  Technology transfer

 *  cGMP production of clinical materials

 *  Bio-Safety Lab, Class II, enhanced

 In 2002, DelSite  formed a  strategic collaboration  with Southern  Research
 Institute, Inc., of Birmingham, Alabama, to assist in the development of  an
 injectable drug  delivery  system  based on  the  GelSite[R]  polymer.  This
 agreement  was  subsequently assigned  to  Brookwood  Pharmaceuticals,  Inc.
 Brookwood is  a  for-profit center  for  scientific research  and  is  still
 associated with Southern  Research Institute.   The two  companies signed  a
 five-year collaborative  agreement  in April  2003,  under which  they  will
 jointly  develop  an  injectable  long-term  delivery  system  for  proteins
 and  peptides.  In  July 2006,  the   Company  signed  a  one-year renewable
 collaboration agreement  with Brookwood  to continue  developing  injectable
 therapeutic  formulations.  Intellectual  property  rights  for  discoveries
 under these agreements will be determined  based upon the nature and  source
 of the discovery.  Research efforts under these agreements are managed by  a
 team comprised of two scientists from each company.

 In March 2004,  the National Institute  of Allergy  and Infectious  Diseases
 ("NIAID") awarded a Small  Business Innovation Research ("SBIR")  Biodefense
 Grant to DelSite  of up to  $888,000 over two  years, based on  satisfactory
 progress of the project. The grant proposal has funded development of  nasal
 vaccine delivery  formulations including  the GelVac[TM]  intranasal  powder
 vaccine delivery platform technology.  In January 2006, DelSite applied  for
 and received a nine-month  extension of time to  complete the approved  work
 under  this grant.  In  November 2006,  DelSite received  the permission  to
 further extend the grant to May 2007.  The research covered under the  grant
 has been completed  and  the extension is mainly for  further expanding  the
 development activities.

 In July 2004, DelSite leased 5,773 square feet of new laboratory and  office
 space in the Texas A&M University  Research Park in College Station,  Texas.
 DelSite also completed a  3,000 square foot expansion  of its facilities  in
 Irving, Texas.

 In October 2004,  NIAID awarded  DelSite a $6  million grant  to develop  an
 inactivated influenza nasal powder vaccine against the H5N1 strain  commonly
 known as avian or  bird flu. The  grant was awarded  under a biodefense  and
 SARS product development initiative and is funding a three-year  preclinical
 program utilizing the Company's proprietary GelVac[TM] nasal powder delivery
 system. DelSite has completed  the first two milestones  of this program  on
 schedule.

 In January 2007, DelSite granted  a non-exclusive license to  EndoBiologics,
 Inc., ("EndoBiologics") of Missoula, Montana.  The license covers developing
 and  evaluating   investigational  conjugate   vaccines   against  bacillary
 dysentery  (shigellosis)  and  other  bacterial  diseases  using   DelSite's
 GelVac[TM] nasal powder vaccine delivery platform.  GelVac[TM]  is DelSite's
 leading  vaccine  delivery platform based  on GelSite[R] polymer technology.
 The goal  of the  program is  to develop  needle-free vaccines  that can  be
 shipped worldwide and stored without refrigeration.

 Shigellosis is the leading cause of  dysentery worldwide.  It is endemic  in
 lesser developed  countries,  and causes  infections  in about  160  million
 children annually.  It is also  a serious threat to international  travelers
 and U.S. military forces who visit or are deployed to endemic regions.

 EndoBiologics  is  a   privately-held  biotechnology  company   and  has   a
 Cooperative Research  and Development  Agreement ("CRADA")  with the  Walter
 Reed Army Institute of  Research and grants from  the Department of  Defense
 for the  development of  vaccines to  protect U.S.  military troops  against
 bacterial dysentery.

 In January 2007, DelSite granted a  non-exclusive license to AriaVax,  Inc.,
 ("AriaVax"), a biotechnology company located in Gaithersburg, Maryland,  for
 the purpose of  developing and evaluating  an investigational novel  peptide
 vaccine against HIV infection using DelSite's proprietary GelSite[R] polymer
 delivery  technology.  The  objective  of  the  program  is  to  develop  an
 effective peptide vaccine formulation that will not only enhance the  immune
 system but will also  remain stable at room  temperature, be easily  shipped
 and require no refrigeration.

 HIV infection is  well known as  a primary health  scourge of the  twentieth
 century. The HIV virus  rapidly mutates, and  hundreds of different  strains
 are present worldwide.  The key challenge for creating a safe and  effective
 anti-HIV vaccine  is  to  elicit in  people  a  single  neutralizing  immune
 response that covers all of the world's strains.  Molecular components  that
 are common to the different strains of HIV should be useful components of  a
 broadly neutralizing vaccine, an approach AriaVax is pursuing.

 AriaVax is  a privately-held  small molecule  vaccine company.   AriaVax  is
 using its proprietary Deadlock[TM] technology to create novel  peptide-based
 vaccine candidates for a variety of indications.  A portion of the HIV  work
 described here has been supported by grants from the National Institutes  of
 Health of the Department of Health and Human Services.

 In  February  2007,  DelSite   signed   a  non-exclusive  license  agreement
 with  privately-held  ElSohly Laboratories,  Inc.,  ("ElSohly")  of  Oxford,
 Mississippi.  The agreement covers the use of GelSite[R] polymer  technology
 in formulating the anticancer drug and  analogs that are being developed  by
 ElSohly.  The overall  goal is to use  the GelSite[R] polymer technology  to
 enhance the solubility and extend the release time of the drug candidate and
 analogs.

 Cancer is  the leading  cause of  death  in  the  U.S.  and  worldwide.  The
 anticancer drug and analogs being developed by ElSohly are intended for more
 than one type of cancers.  The development effort is conducted in part under
 CRADA with  the National  Cancer Institute  and  in collaboration  with  the
 National  Center  for  Natural  Products  Research  at  the  University   of
 Mississippi.

 ElSohly  is  a  privately-held  company  specializing  in  naturally-derived
 therapeutics.  One  of its drug  candidates has undergone  a human  clinical
 trial in Europe.   Funding for  product development comes  from private  and
 government  contracts,  as   well  as  sale   of  reference  standards   for
 organizations involved in  the National Laboratory  Certification Program.
 The Company has been in business for over 20 years.

                           Research and Development
                           ------------------------
                                   General
                                   -------

 Carrington has developed proprietary processes for obtaining materials  from
 Aloe  vera L.  The Company  intends to seek  approval of the  Food and  Drug
 Administration (the "FDA")  and other regulatory  agencies to sell  products
 containing materials obtained from Aloe vera L. in the United States and  in
 foreign countries.  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 domestic and international,  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 expended approximately $5,760,000, $5,796,000 and $4,737,000  on
 research and development  in 2006, 2005  and 2004,  respectively.   Research
 activities associated with DelSite accounted for 88% of the 2006, 86% of the
 2005 and 81% of the 2004 research and development expenditures.

                       DelSite Research and Development
                       --------------------------------

 The  Company  believes   that  DelSite's   products'  functionality   and/or
 pharmacological  activity  make  them   potential  candidates  for   further
 development as pharmaceutical or therapeutic agents.  In 2007, DelSite  will
 continue to focus its research and development activities on its preclinical
 development program for an intranasal powder avian influenza vaccine as well
 as developing further basic research data for the use of its GelSite[R]  and
 GelVac[TM] delivery technologies with  potential pharmaceutical and  vaccine
 partners. There is no assurance, however, that DelSite will be successful in
 its efforts.

 The Company  sponsors  research  and development  activities  at  Texas  A&M
 University in association with the College of Veterinary Medicine to support
 research activities of the Company and  its DelSite subsidiary. Pursuant  to
 this arrangement, the Company has access to leading authorities in the  life
 sciences, as well as facilities and equipment, to help further the Company's
 research programs.  DelSite  also  has  a  research  relationship  with  the
 University of  Southern  Mississippi  where  it  sponsors  research  in  the
 university's School  of Polymers  and High  Performance Materials.  In  July
 2004, DelSite entered into  a master research agreement  with the Texas  A&M
 University System  Health Science  Center College  of Medicine  through  the
 Texas A&M  Research  Foundation  that allows  DelSite  to  conduct  multiple
 research projects in association  with the Center in  the areas of  virology
 and bacteriology for vaccine delivery.

 DelSite is developing  new platform  technologies based  on its  proprietary
 GelSite[R] polymer for controlled delivery of vaccines as well as  bioactive
 protein and  peptide therapeutics.   Basic  research is  continuing on  this
 material, which includes both nasal  and injectable delivery of  therapeutic
 proteins and  peptides and  delivery of  protein  and particle  antigens  as
 vaccines using its proprietary GelVac[TM] intranasal powder vaccine delivery
 system.  Selected studies have been completed through sponsored research  at
 Texas A&M  and  Southern Research  Institute.   The  technology  has  varied
 utility, but the primary focus of research is in the area of intranasal  and
 injectable delivery of bioactive agents. Six patents covering this invention
 have been  issued  to  DelSite  with  several  patents  pending.  The  first
 composition and process patent was issued in 1999.

 DelSite successfully  completed a  Phase I  clinical  safety study  for  its
 GelVac[TM] vaccine  delivery  system  (without  vaccine  antigen)  in  2005.
 Additional  clinical  trials  will  be  required  for  DelSite's   products,
 including its avian influenza H5 nasal powder vaccine.  In addition, DelSite
 filed a drug  master file ("DMF")  with the Center  for Drug Evaluation  and
 Research, ("CDER") of  the FDA for  mucosal applications  of its  GelSite[R]
 polymer technology in September 2005.   The DMF was updated with the CDER of
 the FDA and  was also  filed with the  Center for  Biologics Evaluation  and
 Research ("CBER") of FDA in September 2006.

                            Human Clinical Studies
                            ----------------------

 The Company's new product programs for its operating segments do not require
 clinical trials for clearance or approval prior to commercial  distribution.
 However,  from time to time, the Company supports its existing products  and
 new products with clinical studies that  will support or expand the  product
 claims and  indications  for  use  and  thereby  demonstrate  the  product's
 features and benefits.  DelSite's program of  developing its GelSite[R]  and
 GelVac[TM] technologies  for  the  delivery  of  vaccines  and  therapeutics
 periodically  requires  clinical studies to demonstrate safety and efficacy.
 In 2005, DelSite conducted a successful Phase I human safety study utilizing
 the GelVac[TM] delivery system with the GelSite[R] polymer only.  In 2007 or
 early 2008, DelSite expects  to conduct another Phase  I human safety  study
 with both the GelSite[R] polymer and a vaccine antigen.

                       Research and Development Summary
                       --------------------------------

 The following  table  outlines the  status  of the  products  and  potential
 indications  of  the   Company's  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.


                PRODUCTS AND POTENTIAL INDICATIONS DEVELOPED,
                         PLANNED OR UNDER DEVELOPMENT

 PROGRAM                         INDICATION                         STATUS
 -------                         -------------------                ------
 GelVac[TM] Nasal Powder         Delivery system for vaccines       Phase I
 Delivery System                                                    completed

 GelSite[R] Polymer Powder       Mucosal delivery system for        Preclinical
                                 therapeutics

 GelSite[R] Polymer              Controlled release delivery        Preclinical
 Injectable Delivery             system for protein and
 System                          peptide therapeutics

 GelVac[TM] Avian H5 Nasal       Pandemic influenza                 Preclinical
 Powder Vaccine

 GelVac[TM] Trivalent Nasal      Seasonal influenza epidemic        Preclinical
 Powder Vaccine


 PRODUCT OR                      POTENTIAL
 POTENTIAL INDICATION            MARKET APPLICATIONS                STATUS
 --------------------            -------------------                ------
 Topical
 -------
   Dressings                     Pressure and Vascular Ulcers       Marketed
   Dressings                     Diabetic Ulcers, Surgical Wounds   Marketed
   Cleansers                     Wounds                             Marketed
   Anti-fungal                   Cutaneous Fungal Infection         Marketed
   Hydrocolloids                 Wounds                             Marketed
   Alginates                     Wounds                             Marketed
   Anti-infective                Wounds                             Development
   Sunscreens                    Skin                               Marketed

 Oral
 ----
   Human
     Pain Reduction              Mucositis                          Marketed

   Dental
     Pain Reduction              Aphthous Ulcers, Oral Wounds       Marketed
     Post Extraction             Oral Surgery                       Marketed
     Wounds

 Injectable
 ----------
   Veterinary
     Adjunct for cancer          Fibrosarcoma                       Marketed

 Nutraceuticals
 --------------
  Immune Enhancing               Manapol[R]/Maitake Gold 404[R]     Marketed
    Product
  Immune Enhancing                                                  Clinical
    Product                      Manapol[R]/Calcium Enriched        Evaluation


                              Licensing Strategy
                              ------------------

 The Company  expects that  prescription pharmaceutical  products  containing
 certain defined  drug  substances  will  require  a  substantial  degree  of
 developmental effort and  expense.  Before  governmental approval to  market
 any such product  is obtained, the  Company may license  these products  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  in  a particular  country  or  for
 specific indications.

 Similarly, the Company intends to license  third parties to market  products
 containing defined chemical entities for  certain human indications when  it
 lacks  the  expertise  or  financial  resources  to  market  such   products
 effectively.  If the Company is unable to enter into such agreements, it may
 undertake marketing the products itself for such indications.  The Company's
 ability to  market  these  products 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.

                         Raw Materials and Processing
                         ----------------------------

 The principal raw material used by the Company in its operations is the leaf
 of the plant known as Aloe vera L.  Through patented processes, the  Company
 obtains several  bulk  freeze-dried  biologic  materials  from  the  central
 portion of the Aloe  vera L. leaf known  as the gel.   A basic bulk  mannan,
 Acemannan Hydrogel[R], is used as an ingredient in certain of the  Company's
 proprietary wound and skin care products.

 The Company owns  a 410-acre farm  in the Guanacaste  province of  northwest
 Costa Rica which currently has approximately 71 acres planted with Aloe vera
 L.  The Company  is currently performing a  land reclamation project on  the
 farm to increase productive acreage.  The Company's current need for  leaves
 exceeds the supply of harvestable leaves from the Company's farm,  requiring
 the purchase of leaves from other sources in Costa Rica at prices comparable
 to the cost of acquiring  leaves from the Company's  farm.  The Company  has
 entered into  several  supply  agreements  with  local  suppliers  near  the
 Company's factory to  provide leaves.   From time to  time the Company  also
 imports leaves from Central and South America at prices comparable to  those
 in  the  local  market.  The  Company  anticipates  that  the  suppliers  it
 currently uses will be able to meet all  of  its requirements for leaves  in
 2007.

 The Company has a 21.5% ownership interest in Aloe and Herbs  International,
 Inc., ("Aloe & Herbs"), a Panamanian  corporation formed for the purpose  of
 establishing an Aloe  vera L.  farm in Costa  Rica.   The Company  purchases
 leaves from Rancho Aloe, S.A., ("Rancho Aloe") a wholly-owned subsidiary  of
 Aloe &  Herbs,  which  has a  5,000-acre  farm  in close  proximity  to  the
 Company's farm, at a market price per kilogram of leaves supplied.

 As of December 31, 2006, Rancho Aloe was providing an average  of 16% of the
 Company's monthly requirement of leaves.   See "Management's Discussion  and
 Analysis of Financial Condition and Results  of Operations -- Liquidity  and
 Capital  Resources"  for   further  information   regarding  the   Company's
 relationship with Aloe & Herbs.

                                Manufacturing
                                -------------

 Since 1995, the  Company's manufacturing facility  has been  located in  the
 Company's headquarters in  Irving, Texas.   The Company  believes that  this
 manufacturing facility has  sufficient capacity to  provide for the  present
 line of products and  to 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,  hydrocolloids,
 foam dressings, gel sheets, tablets, capsules, and freeze-dried products are
 being provided by third parties.

 All of the  Company's proprietary bulk  pharmaceutical products and  freeze-
 dried Aloe vera L.  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  and  bulk  material
 contracts for the foreseeable future. Certain liquid nutraceutical  products
 which the Company provides to customers on a custom manufacturing basis  are
 also produced at the  Costa Rica facility.   In addition, production of  the
 Salicept[R] Patch has been transferred to the plant in Costa Rica to  better
 meet anticipated market demands for  the product for post-extraction  wounds
 and aphthous ulcers.

                                 Competition
                                 -----------

 DelSite and  Research  and  Development.   The  biopharmaceutical  field  is
 expected to continue to undergo rapid and significant technological  change.
 Potential  competitors  in the  United States  and abroad  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 (in  areas including  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 the  Company  is  exploring.  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, both  in its present wound care  market
 and in  markets associated  with products  the Company  currently has  under
 development.

 Medical Services  Division  and Consumer  Services  Division.   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 expansion  of the  marketing  network for  its  products.   The  Company
 believes that  the principal  competitive factors  in the  marketing of  its
 products  are  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, drug devices for  human
 use are subject  to rigorous  FDA regulation.   The Federal  Food, Drug  and
 Cosmetic Act,  as  amended (the  "FFDC  Act"), 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.

 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.

 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.  Also,  under  the  new
 program for harmonization between Europe and the United States, the  Company
 is required  to meet  the requirements  of  the International  Committee  on
 Harmonization and  the ISO  13485 regulations,  for  OTC drugs  and  medical
 devices, respectively.   A company  can, under  certain circumstances  after
 application,  have  a   new  drug  approved   under  a   process  known   as
 centralization  rather  than  having  to  go  through  a  country-by-country
 approval in the European Union.

 Certain of the Company's  wound and skin care  products are registered  with
 the FDA as medical devices pursuant to the regulations under Section  510(k)
 of the FFDC Act (known  as Premarket Notification).   A medical device is  a
 product whose primary intended medical purpose, such as to cover a wound, is
 accomplished without a chemical or pharmacological action.  A medical device
 which is substantially equivalent to an existing product will be reviewed by
 the FDA and if clearance to market is  granted, then the device can be  sold
 in the United States  without additional developmental  studies.  A  medical
 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).  The Company  currently markets eight (8)  products which require  a
 prescription as medical devices.

 Other Regulatory Authorities.  The Company's advertising and sales practices
 are subject to regulation by the  Federal Trade Commission (the "FTC"),  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  (the "EPA"), as well as the  FDA
 and USDA.

 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.

 The  manufacturing,   processing,  formulating,   packaging,  labeling   and
 advertising of products  of the  Company's Consumer  Services Division,  are
 also subject to regulation  by one or more  federal agencies,  including the
 FDA, the FTC, the USDA and the EPA.  These activities are also regulated  by
 various agencies of the  states, localities and  foreign countries to  which
 the Company's products are distributed and  in which the Company's  products
 are sold.  The  FDA, in particular,  regulates the formulation,  manufacture
 and labeling of vitamin and other nutritional supplements.

 The Dietary Supplement Health  and Education Act  of 1994 ("DSHEA")  revised
 the provisions of the  FFDC Act concerning the  composition and labeling  of
 dietary supplements and, in the judgment of the Company, is favorable to the
 dietary supplement industry.  The legislation created a new statutory class,
 entitled dietary supplement, which includes vitamins, minerals, herbs, amino
 acids and other dietary  substances for human use  to supplement  the  diet.
 DSHEA grandfathered, with  certain limitations, dietary  ingredients on  the
 market before October 15, 1994.   A dietary supplement which contains a  new
 dietary ingredient, one not on the market before October 15, 1994,  requires
 evidence of a history of use  or other evidence of safety establishing  that
 it will reasonably be  expected to be  safe.  The  majority of the  products
 marketed by  the  Consumer  Services  Division  are  classified  as  dietary
 supplements under DSHEA.

 Both foods and dietary supplements are subject to the Nutrition Labeling and
 Education Act of 1990  (the "NLEA"), which prohibits  the use of any  health
 claim for foods, including dietary supplements,  unless the health claim  is
 supported by significant scientific agreement and is either pre-approved  by
 the FDA or the subject of substantial government scientific publications and
 a notification to the FDA.   To date, the FDA has  approved the use of  only
 limited health claims for dietary supplements.  However, among other things,
 DSHEA  amended,  for  dietary  supplements,  the  NLEA  by  providing   that
 statements of  nutritional  support may  be  used in  labeling  for  dietary
 supplements without  FDA  pre-approval if  certain  requirements,  including
 prominent disclosure on the label of the lack of FDA review of the  relevant
 statement, possession by  the marketer  of substantiating  evidence for  the
 statement and post-use notification  to the FDA, are  met.  Such  statements
 may describe how  particular nutritional supplements  affect the  structure,
 function or general well-being of  the body (e.g., "promotes  cardiovascular
 health").

 Advertising and label claims for dietary supplements and conventional  foods
 have been  regulated by  state and  federal authorities  under a  number  of
 disparate regulatory schemes.  There can  be no assurance that a state  will
 not interpret claims presumptively valid under federal law as illegal  under
 that state's regulations, or  that future FDA  regulations or FTC  decisions
 will not restrict the permissible scope of such claims.

 Governmental regulations in  foreign countries where  the Consumer  Services
 Division plans to commence or expand  sales may prevent or delay entry  into
 the market,  or  prevent  or  delay the  introduction  of,  or  require  the
 reformulation of,  certain of  the  Consumer Services  Division's  products.
 Compliance with  such  foreign  governmental regulations  is  generally  the
 responsibility of  the Consumer  Service Division's  distributors for  those
 countries.  These  distributors are independent  contractors over which  the
 Consumer Services Division has limited control.

 As a result of efforts to  comply with applicable statutes and  regulations,
 the  Consumer  Services  Division  has  from  time  to  time   reformulated,
 eliminated  or  relabeled  certain  of  its  products  and  revised  certain
 provisions of  its  sales and  marketing  program.   The  Consumer  Services
 Division  cannot  predict  the  nature  of  any  future  laws,  regulations,
 interpretations or applications, nor can it determine what effect additional
 governmental regulations or administrative orders, when and if  promulgated,
 would have on its business in the future.  They could, however, require  the
 reformulation of  certain products  to meet  new  standards, the  recall  or
 discontinuance of certain products not capable of reformulation,  additional
 record  keeping,  expanded  documentation  of  the  properties  of   certain
 products, expanded or different labeling, and/or scientific  substantiation.
  Any or all of such requirements could have a material adverse effect on the
 Company's results of operations and financial condition.

 Compliance with the  provisions of national,  state and local  environmental
 laws and regulations has not had a material adverse effect upon the  capital
 expenditures,  earnings,  financial   position,  liquidity  or   competitive
 position of the Company.

                        Patents and Proprietary Rights
                        ------------------------------

 As is  industry  practice,  the  Company has  a  policy  of  using  patents,
 trademarks and trade  secrets to  protect 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 26  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
 U.S. patent applications and  its counterparts in the  other  26  countries.
 The first  U.S.  patent  application in  this  first  series,  covering  the
 composition claims  of  acetylated  mannan derivatives,  matured  into  U.S.
 Patent No. 4,735,935 (the "935 Patent"), which was issued on April 5,  1988,
 and expired on April 5, 2005.  U.S. Patent No. 4,917,890 (the "890  Patent")
 was 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 U.S. Patent  No.
 4,959,214, and the second on October 30, 1990, as U.S. Patent No. 4,966,892.
  Foreign patents that are  counterparts to the  foregoing U.S. patents  have
 been granted in some of the member states of the European Union 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
 U.S. 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 U.S. patent  based
 on the second series was  issued on September 18,  1990, as U.S. 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  U.S. 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 has filed a number of divisional applications to these  patents,
 each dealing with specific  uses of acetylated  mannan derivatives.   Patent
 Cooperation Treaty applications based on  the parent U.S. applications  have
 been filed designating a number of 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).  A Patent Cooperation
 Treaty application  based on  the parent  U.S.  application has  been  filed
 designating a number of foreign countries where several of the patents  have
 issued.

 The Company  has obtained  patents in  the United  States (U.S.  Patent  No.
 5,760,102, issued on  June 2,  1998) and  Taiwan (Taiwan  Patent No.  89390,
 issued on August 21,  1997) related to  the uses of  a denture adhesive  and
 also a patent in  the United States relating  to methods for the  prevention
 and treatment of infections in animals (U.S. Patent No. 5,703,060, issued on
 December 30, 1997).

 The Company  obtained  a  patent  in the  United  States  (U.S.  Patent  No.
 5,902,796, issued on  May 11,  1999) related  to the  process for  obtaining
 bioactive material from Aloe vera L.  Also obtained was a U.S. patent  (U.S.
 Patent No. 5,925,357, issued on July 20, 1999) related to the process for  a
 new Aloe vera L. product that  maintains the complex carbohydrates with  the
 addition of other substances normally provided by "Whole Leaf Aloe."

 Additionally, the  Company obtained  a Japanese  letters-patent (Patent  No.
 2888249, having a Patent Registration Date of February 19, 1999) for the use
 of acemannan (a) in  a vaccine product; (b)  in enhancing natural kill  cell
 activity and in enhancing  specific tumor cell lysis  by white cells  and/or
 antibodies; (c)  in correcting  malabsorption  and mucosal  cell  maturation
 syndromes in man or  animals; and (d) in  reducing symptoms associated  with
 multiple sclerosis.

 The Company also received the grant of European Patent Application under No.
 0611304, having the  date of  publication and mention  of the  grant of  the
 patent of September 15, 1999.   This European Letters Patent claims the  use
 of acetylated mannan for the regulation of blood cholesterol levels and  for
 the removal of plaque in blood vessels.   A patent was also issued in  South
 Korea and Canada.

 In addition, the Company obtained an  Australian Patent (Patent No.  718631,
 having an Accepted Journal Date of April 20, 2000) and a South Korean Patent
 (No. 463469),  issued  December  16,  2004,  on  Uses  of  Denture  Adhesive
 Containing Aloe Extract.  On June 20, 2000, Singapore granted the Company  a
 patent on  Bioactive  Factors of  Aloe  Vera  Plants (P-No.  51748)  and  on
 February 6, 2004, under Patent No.  419354, South Korea issued a patent  for
 the same.

 The Company obtained on  September 25, 2002, a  European Patent (Patent  No.
 0884994) which was  validated in  Great Britain,  Germany (No.  69715827.6),
 France, Italy  and Portugal  associated with  the uses  of denture  adhesive
 containing Aloe vera L. extract.

 In addition, the Company  was issued on August  13, 2002, a Canadian  Patent
 (No.  2,122,604)  associated  with  the  process  for  preparation  of  aloe
 products.

 The Company also obtained on June 24, 2002, a Korean Patent (No. 343293) and
 on June 5, 2002, European Patent (No. 0705113) which was validated in  Great
 Britain, France, Germany (No.  69430746.7-08), Italy and Austria  associated
 with dried hydrogel from hydrophilic hygroscopic polymer.

 The Company also obtained, on May 28, 2003, a European Patent (No.  966294),
 which was validated  in Great Britain,  France, Italy,  Sweden, and  Germany
 (No. 69815071.6) associated with the bifurcated method to process aloe whole
 leaf.

 The Company  was also  issued, on  July  23, 2003,  a European  Patent  (No.
 965346), which was validated  in France, Great  Britain, Italy, and  Germany
 (No. 69133298.3), associated with uses  of acetylated mannan derivatives  in
 treating chronic respiratory disease.

 The Company  has  received several  patents  related to  the  drug  delivery
 technology   that   is   the   foundation   for   its   subsidiary   DelSite
 Biotechnologies, Inc.  The  first patent obtained was  in the United  States
 (U.S. Patent  No.  5,929,051,  issued  on July  27,  1999)  related  to  the
 composition and process  for a  new complex  carbohydrate (pectin)  isolated
 from Aloe vera L.

 The Company received  the grant of  two U.S. patents  (Patent No.  6,274,548
 issued August 14, 2001,  and Patent No. 6,313,103  issued November 6,  2001)
 associated with  the  use of  pectins  for purification,  stabilization  and
 delivery of certain growth  factors.  The Company  also received, on  August
 17, 2004, a U.S. patent (No. 6,777,000)  relating to the use of pectin  "in-
 situ" gelling  formulations  for  the  delivery  and  sustained  release  of
 physiologically active agents such as drugs and vaccines.  Also, the Company
 was issued, on  September 28, 2005,  a European Patent  (No. EP  1 086  141)
 relating to aloe pectins, process of  isolation and their use.  On  December
 21, 2005, the Company  was issued EP Patent  No. 1 607  407 that relates  to
 compositions and delivery of  bioactive substances.  On  April 4, 2006,  the
 Company was issued U.S. patent 7,022,683 for use of a specific class of aloe
 pectins in  pharmaceutical  applications.   On  May 17,  2006,  the  Company
 received a  Chinese  patent (CN  1531419)  on A  In  Situ Gel  Formation  of
 Pectins.  On  February 13, 2007,  the Company received  a Korean patent  No.
 587423 titled  "Aloe Pectins"  relating to  the composition  and process  of
 manufacturing novel pectins from Aloe vera  L.  Other U.S. PCT  applications
 on aloe  pectin and  its drug  delivery applications  are pending.   A  U.S.
 patent application on growth factor and protease enzyme is also pending.

 The Company has filed and 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.   The scope  of protection  which
 ultimately may be  afforded by the  patents and patent  applications of  the
 Company is difficult to quantify.   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.

 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.  To the Company's knowledge,  acetylated mannan derivatives do  not
 infringe on any valid, enforceable U.S.  patents.  A number of patents  have
 been issued to others with respect to  various extracts of the Aloe vera  L.
 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 L.-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, on 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.

 On December 15, 2004, DelSite filed an Opposition proceeding in the European
 Patent Office against EP Patent EP  0 975 367.   This EP patent was  granted
 March 31, 2004, and assigned to West Pharmaceutical Services Drug Delivery &
 Clinical Research  Centre  Limited  ("West").  A  similar  U.S.  Patent  No.
 6,432,440 issued to West on August  13, 2002, and similar West patents  have
 been granted or applications are pending in several non-European  countries,
 such as Australia, Japan, New Zealand, and South Africa.  The aforementioned
 patents have now been assigned to Archimedes Pharma.

 The claims  of  the  Archimedes  patents  are  directed  to  aqueous  liquid
 compositions for  delivering  drugs  which contain  therapeutic  agents  and
 pectins and  can  form therapeutic  agent-containing  gels when  applied  to
 mucosal surfaces.  The  Archimedes patents also claim  methods of using  and
 manufacturing the liquid pharmaceutical compositions, and the pharmaceutical
 gel compositions formed by "in-situ" gellation processes.

 DelSite also  desires  to clear  a  legal  path so  that  potential  DelSite
 products can be sold for administration in  liquid form in the future.   The
 objective of the DelSite opposition to the Archimedes EP patent is to  force
 legal revocation  of  the Archimedes  patent  in Europe,  or  a  significant
 narrowing of the Archimedes claims, by  legally demonstrating that, in  view
 of prior art not considered by  the patent examiners, the current claims  of
 the EP patent should not have  been granted and/or are invalid.   Completion
 of the EP opposition proceedings is anticipated to take as long as three  to
 six years.

 The Company has given the trade name Carrasyn[R] to certain of its  products
 containing acetylated mannans.  The Company  has filed a selected series  of
 domestic  and  foreign  trademark  applications  for  the marks  Manapol[R],
 Carrisyn[R],  Carrasyn[R]  and  CarraGauze[R].  Further,   the  Company  has
 registered the trade name Carrington[R] in the United States.  In 1999,  the
 Company obtained four additional registered trademarks in Brazil.

 In June 2000 the Company obtained  registration in the United States of  its
 mark AloeCeuticals[R] for its skin care and nutritional supplement products.

 In September 2002 the Company obtained registration in the United States  of
 its mark CaraKlenz[R] for its proprietary  wound cleanser product with  that
 name.

 In November 2003 the Company obtained  registration in the United States  of
 its mark  "DelSite and design[TM]"  for its research and development  of dry
 stabilization  and  delivery   systems  for  customers   in  the  field   of
 pharmaceuticals and diagnostic reagents.

 In August 2004 the Company obtained  registrations in Japan and in  November
 2004, South Korea of its mark GelVac[TM].

 In September 2004 the Company obtained registrations in the United States of
 its marks GelSite[R] and Salicept[R].

 In October 2004 the Company applied for a Canadian registration for the mark
 OraPatch[R].

 In  addition,  applications  for  the  registration  of  the mark GelVac[TM]
 are pending  in  the  United States.  In  June  2005,  the Company  obtained
 registration in Europe of its marks GelVac[TM] and Salicept[R].

 The registration for the mark OraPatch[R]  was issued in the U.S. in  August
 2006.  The mark Brace-Eez[R] has recently obtained a federal registration in
 the U.S.

                                  Employees
                                  ---------

 As of February 28, 2007, the Company  employed 260 persons, of whom 53  were
 engaged in the  operation and maintenance  of its  Irving, Texas  processing
 plant, 153 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, 105 were located in  the U.S., 153 in  Costa Rica, one in  Puerto
 Rico and one in Europe. The  Company considers relations with its  employees
 to be good.  The employees are not represented by a labor union.

                            Available Information
                            ---------------------

 The Company's Annual Reports on Form  10-K, Quarterly Reports on Form  10-Q,
 Current Reports  on Form  8-K and  other reports,  and amendments  to  these
 reports, that the  Company files  with or  furnishes to  the Securities  and
 Exchange Commission ("SEC") are  available free of  charge at the  Company's
 website www.carringtonlabs.com, as soon as reasonably practicable, after the
 Company electronically files  such reports with,  or furnishes such  reports
 to, the SEC. The posting of these reports on the Company's website does  not
 constitute incorporation by reference of the other information contained  on
 the website, and such other information on the Company's website should  not
 be considered part of such reports unless the Company expressly incorporates
 such other information by reference. The Company will also furnish copies of
 such reports free of charge upon  written request to the Company's  Investor
 Relations Department.

 Additionally, the Company's  corporate governance code  of business  conduct
 and ethics and the charters of the Company's Board Committees, including the
 Audit, Board Governance  and Nominating, Compensation  and Stock Option  and
 Executive Committees, are  available on the  Company's website. The  Company
 will also furnish  copies of such  information free of  charge upon  written
 request to  the Company's  Investor  Relations department.  Individuals  can
 contact the Company's Investor Relations Department at:

 Carrington Laboratories,  Inc., 2001  Walnut Hill  Lane, Irving,  TX  75038,
 Attention:  Maria Mitchell.


 ITEM 1A.  RISK FACTORS.
           -------------

 You should carefully  consider the following  risk factors,  in addition  to
 those discussed elsewhere in this Form  10-K, in evaluating our company  and
 our business.

 Risks Related to Our Business

 We may not achieve or sustain profitability.

 We incurred a net loss for the year ended December 31, 2006  of  $7,607,000.
 We reported a net loss of $5,336,000 for the year  ended  December 31, 2005.
 We reported nominal net income of  approximately $36,000 for the year  ended
 December 31, 2004.

 We rely heavily on outside sources  of funds to maintain our liquidity.  Our
 prospects  for  achieving  profitability   will  depend  primarily  on   how
 successful we are in executing our business plan to:

      *  increase revenues by offering innovative new products, growing
         existing product lines and continuing to offer exceptional customer
         service;

      *  increase profitability by continuing to improve operational
         efficiency, working capital management and modernization of
         equipment;

      *  enlarge and diversify our customer base to reduce dependence on a
         limited number of significant customers;

      *  develop and market our proprietary GelSite[R] technology;

      *  enter into strategic partnerships and collaboration arrangements
         related to our GelSite[R] drug delivery programs and product
         candidates; and

      *  continue to develop our preclinical product candidates and
         advance them to the point where they are available for strategic
         partnerships and collaboration arrangements.

 If we are not successful in executing our business plan, we may not  achieve
 or sustain profitability.

 We will require additional financing to  sustain our operations and  without
 it we  may not  be able  to continue  operations.   Our inability  to  raise
 additional working capital, or to raise it on terms which are acceptable  to
 us, or to raise it in a timely manner would negatively impact our ability to
 fund our  operations to  generate revenues,  and  to otherwise  execute  our
 business plan,  leading  to the  possible  reduction or  suspension  of  our
 operations or ultimately to our going out of business.

 At  December 31, 2006  and  December 31, 2005,  we had  operating cash  flow
 deficit of  $5.1 million  and  $3.4 million,  respectively;  and we  had  an
 operating cash flow of  $2.4 million  for  the year ended December 31, 2004.
 We have received a report from our independent registered public  accounting
 firm on our  consolidated financial statements  for our  fiscal  year  ended
 December 31, 2006 in which our auditors have included explanatory paragraphs
 indicating that our significant  net  losses and working capital  deficiency
 cause substantial doubt about our ability  to continue as a going concern.

 We are currently in default under our credit facility, due to our  inability
 to meet certain financial  covenants.  Historically,  our lender has  waived
 the events of non-compliance under the  terms of the facility.  However,  we
 believe that  it is  unlikely  that Comerica  will  continue to  grant  such
 waivers after the second  quarter of 2007, and  can make no assurances  that
 such  waivers  will  be  granted  for  events  of  non-compliance  occurring
 subsequent to May 31, 2007.  We  are  seeking additional funding that  would
 enable us to repay our indebtedness  under our credit facility and fund  our
 working capital obligations.  However, additional funds may not be available
 when required or on terms acceptable  to us.  If we  are unable to cure  our
 existing defaults under the credit facility, obtain waivers from our  lender
 or obtain additional  financing, our business  prospects, operating  results
 and financial condition may be materially and adversely affected to such  an
 extent that we are forced to restructure, sell some of our assets or curtail
 our operations.

 We are dependent on a limited number of customers.

 A few large customers account for most of  our revenue.  For the year  ended
 December 31, 2006,  sales to  Natural Alternatives,  Mannatech, Medline  and
 Wormser Corporation ("Wormser")  accounted for  approximately 13.5%,  10.3%,
 26.2% and 9.8%, respectively, of our total revenue.  During 2006 a new large
 customer, Wormser,  was  added to  our  client  base.  For  the  year  ended
 December 31,  2005, sales  to Natural  Alternatives, Mannatech  and  Medline
 accounted for  approximately 26.6%,  6.6% and  26.6%, respectively,  of  our
 total revenue. For the  year ended December 31,  2004, sales to those  three
 customers accounted  for 44.8%,  1.9% and  22.6% of  our total  revenue.  We
 expect that,  for the  foreseeable  future, sales  to  a limited  number  of
 customers will continue to  account, alone or in  the aggregate, for a  high
 percentage of our net revenues. Dependence on a limited number of  customers
 exposes us to the risk that order reductions from any one customer may  have
 a  material  adverse  effect  on  our  financial  position  and  results  of
 operations.  For instance, in 2006,  combined sales to Natural  Alternatives
 and Mannatech decreased  approximately $2.64 million,  or 28.5%, from  their
 2005 levels and  in 2005, combined  sales to these  two customers  decreased
 approximately $5.12 million, or 35.5%, from  their 2004 levels.  On  January
 25, 2007, we executed a three-year Supply and Trademark Licensing  Agreement
 with Mannatech.  The  agreement calls for  minimum purchase quantities  from
 Mannatech at fixed  price levels.   We  anticipate 2007  sales to  Mannatech
 under this  agreement  to  be  above the  minimum  levels  required  by  the
 agreement but, due to  inconsistency in the size  and timing of  Mannatech's
 orders, are uncertain as to by how  much sales to Mannatech will exceed  the
 contractual minimums.  Presently, we are  uncertain as to the future  levels
 of sales, if any, to Wormser. A significant decrease in orders from  Wormser
 would have a material adverse impact on our revenues and net income, as well
 as our ability to fund our continuing operations from cash flow.

 We may be subject to product liability exposure.

 We have recently  been (See Item  3. Legal  Proceedings regarding  voluntary
 product recall discussions), and could in the future be, subject to  product
 liability claims in  connection with  the use of  products that  we and  our
 licensees are currently manufacturing, testing or selling or that we and any
 licensees may  manufacture, test  or sell  in the  future. We  may not  have
 sufficient resources to satisfy any liability resulting from these claims or
 would be able  to have  its customers indemnify  or insure  us against  such
 claims. We  currently carry  product liability  insurance in  the amount  of
 $10,000,000, but that  coverage may not  be adequate in  terms and scope  to
 protect us against  material adverse effects  in the event  of a  successful
 product liability claim.

 We  will  need  significant  additional   funds  for  future  research   and
 development.

 Our research and development expenses for the years ended December 31, 2006,
 2005, 2004 were $5,760,000, $5,796,000, and $4,737,000, respectively.  Given
 our current level of  cash reserves and rate  of revenue generation, we  may
 not be able to advance fully the development of our products unless we raise
 additional cash through  financing from the  sale of  our securities  and/or
 through additional partnering agreements or  research grants, none of  which
 may be available on terms acceptable to us or at all.

 We will need significant funding to  pursue our overall product  development
 plans. In general, our products under development will require  significant,
 time-consuming  and  costly  research  and  development,  clinical  testing,
 regulatory approval  and significant  additional investment  prior to  their
 commercialization. The research  and development activities  we conduct  may
 not be successful; our products under  development may not prove to be  safe
 and effective; our clinical development work  may not be completed; and  the
 anticipated  products  may  not  be  commercially  viable  or   successfully
 marketed.

 The terms of our credit facility restrict our operational flexibility.

 Our credit facility  contains covenants that  restrict, among other  things,
 our ability to borrow money, make particular types of investments, including
 investments in our subsidiaries, or other restricted payments, swap or  sell
 assets, merge or consolidate, or make acquisitions. Default under our credit
 facility could allow the  lenders to declare all  amounts outstanding to  be
 immediately due and payable. We have pledged substantially all of our assets
 to secure the debt under our credit facility. If the lenders declare amounts
 outstanding under the credit facility to  be due, the lenders could  proceed
 against those assets. Any event of default, therefore, could have a material
 adverse effect on our business if the creditors determine to exercise  their
 rights and could cause us to be unable to repay all or a substantial portion
 of our then outstanding indebtedness. Our  credit facility also requires  us
 to maintain specified financial ratios. Our ability to meet these  financial
 ratios can be affected by events beyond our control.  On three occasions  in
 the past two years, and currently, we have been required to seek and  obtain
 waivers for failure  to satisfy certain  financial ratios  under our  credit
 facility. We may also incur future debt obligations that might subject us to
 restrictive covenants  that  could  affect  our  financial  and  operational
 flexibility, restrict our ability  to pay dividends on  our common stock  or
 subject us to other events of default. Any such restrictive covenants in any
 future debt  obligations  we incur  could  limit  our ability  to  fund  our
 businesses with  equity investments  or intercompany  advances, which  would
 impede our ability to operate or expand our business.

 From time to time  we may require  consents or waivers  from our lenders  to
 permit actions  that are  prohibited  by our  credit  facility. If,  in  the
 future, our  lenders refuse  to provide  waivers  of our  credit  facility's
 restrictive covenants and/or  financial ratios, then  we may  be in  default
 under our credit facility, and may be prohibited from making payments on our
 then outstanding indebtedness.

 We may be unable to generate the cash flow to service our debt obligations.

 Our business may not generate sufficient cash flow, and we may be unable  to
 borrow funds under our credit facility in an amount sufficient to enable  us
 to  service  our indebtedness  or to make  anticipated capital expenditures.
 Our ability to meet our expenses and debt obligations, to refinance our debt
 obligations and  to fund  planned capital  expenditures will  depend on  our
 future performance, which will be  affected by general economic,  financial,
 competitive, legislative, regulatory and other factors  beyond  our control.
 If we are  unable to  generate sufficient cash  flow from  operations or  to
 borrow sufficient  funds  in the  future  to service  our  debt, we  may  be
 required to sell  assets, reduce capital  expenditures, refinance  all or  a
 portion of our existing debt or obtain additional financing.  We may not  be
 able to  refinance our  debt, sell  assets  or borrow  more money  on  terms
 acceptable to us, if at all.

 We are  subject to  extensive governmental  laws  and regulations  that  may
 adversely affect the cost, manner or feasibility of doing business.

 We are subject  to regulation by  numerous governmental  authorities in  the
 United States and other countries. The  commercialization of certain of  our
 proposed products  will  require  approvals from  the  FDA,  and  comparable
 regulatory agencies in most foreign countries. To obtain such approvals, the
 safety and efficacy of the products  must be demonstrated through  extensive
 preclinical testing and human clinical trials.  The safety or efficacy of  a
 product, to  the extent  demonstrated in  preclinical  testing, may  not  be
 pertinent to the development of, or indicative of the safety or efficacy of,
 a product for the human market. In addition, the results of clinical  trials
 of a product  may not  be consistent  with results  obtained in  preclinical
 tests. Furthermore, there is no assurance that any product will be shown  to
 be safe and effective  or that regulatory approval  for any product will  be
 obtained on a timely basis, if at all.

 Certain of  our  proposed products  will  require governmental  approval  or
 licensing prior to  commercial use. Our  research, development,  preclinical
 and clinical trial activities, as well  as the manufacture and marketing  of
 any products that we may successfully  develop, are subject to an  extensive
 regulatory approval process by the FDA and other regulatory agencies abroad.
 The process  of obtaining  required regulatory  approvals  for some  of  our
 products is lengthy, expensive and  uncertain, and any regulatory  approvals
 may contain limitations on  the indicated usage  of a product,  distribution
 restrictions or  may be  conditioned on  burdensome post-approval  study  or
 other requirements, including the requirement that we institute and follow a
 special risk management plan to monitor and manage potential safety  issues,
 all of which may eliminate or  reduce the product's market potential.  Post-
 market evaluation of  a product could  result in  marketing restrictions  or
 withdrawal from the market.

 The results of preclinical and Phase 1 and Phase 2 clinical studies are  not
 necessarily indicative  of whether  a product  will demonstrate  safety  and
 efficacy in larger  patient populations, as  evaluated in  Phase 3  clinical
 trials. Additional adverse events that  could impact commercial success,  or
 even continued regulatory approval, might  emerge with more extensive  post-
 approval patient  use.  Future  United  States  or  foreign  legislative  or
 administrative acts could also prevent or  delay regulatory approval of  our
 or  our  licensees'  products.  Failure  to  obtain  requisite  governmental
 approvals or failure to obtain approvals of the scope requested could  delay
 or preclude us  and any  of our licensees  from marketing  our products,  or
 could limit the commercial use of the products, and thereby have a  material
 adverse effect on our liquidity and financial condition.

 We operate  in a  highly competitive  industry, and  our failure  to  remain
 competitive with our competitors, many of which have greater resources  than
 we do, could adversely affect our results of operations.

 The biopharmaceutical field  is expected to  continue to  undergo rapid  and
 significant technological change. Potential competitors in the United States
 and  abroad   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
 (in  areas  including  research  and  development,  manufacturing,  testing,
 obtaining regulatory approvals and marketing) than we have. 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  we to  develop,  refine, manufacture  and  market
 products that have application to the same indications as we are  exploring.
 We understand  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  in  markets  associated  with  products  we  currently  have  under
 development.  We compete against many companies that sell products that  are
 competitive with  our products,  with many  of  our competitors  using  very
 aggressive marketing efforts.   Many  of our  competitors are  substantially
 larger than we  are in  terms of sales  and distribution  networks and  have
 substantially greater financial and other resources. Our ability to  compete
 against these  companies  will  depend  in part  on  the  expansion  of  the
 marketing network for our products.

 The breadth, validity and enforceability of patents we have obtained  cannot
 be predicted.

 We attempt to  protect our  proprietary rights  by filing  U.S. and  foreign
 patent applications related  to our proprietary  technology, inventions  and
 improvements that are important to the development of the our business.  The
 patent positions of biotechnology and pharmaceutical companies can be highly
 uncertain and involve complex legal and factual questions, and therefore the
 breadth, validity and enforceability  of claims allowed  in patents we  have
 obtained cannot be predicted.

 Our pending applications or  patent applications in  preparation may or  may
 not be issued as patents in the future. Additionally, our existing  patents,
 patents pending  and  patents  that we  may  subsequently  obtain  will  not
 necessarily preclude competitors from developing products that compete  with
 products we have developed and thus would substantially lessen the value  of
 our proprietary rights.  We intend to  file additional patent  applications,
 when  appropriate,  relating  to  our  technologies,  improvements  to   our
 technologies and specific products we may develop. If any of our patents are
 challenged, invalidated, circumvented or held to be unenforceable, we  could
 lose the protection of  rights we believe to  be valuable, and our  business
 could be  materially  and adversely  affected.  Also, the  laws  of  certain
 foreign countries do  not protect our  intellectual property  rights to  the
 same extent as do the laws of the U.S.

 We also rely on  trade secrets to protect  our technology, especially  where
 patent protection  is  not believed  to  be appropriate  or  obtainable.  We
 protect  our   proprietary   technology   and   processes,   in   part,   by
 confidentiality agreements  with  our  employees,  consultants  and  certain
 contractors. These agreements  may not ultimately  provide us with  adequate
 protection in the event of unauthorized use or disclosure of confidential or
 proprietary information,  and,  in addition,  the  parties may  breach  such
 agreements or our agreements may be deemed unenforceable. Our trade  secrets
 may otherwise  become  known  to, or  be  independently  developed  by,  our
 competitors.

 We are dependent on key personnel and  the loss of any of these  individuals
 could have a material adverse effect on our operations.

 Our success depends  in large part  upon our ability  to attract and  retain
 highly  qualified  scientific,   manufacturing,  marketing  and   management
 personnel. We believe that we employ highly qualified personnel in all these
 areas. However, we face competition for such personnel from other companies,
 academic institutions, government entities  and other organizations. We  may
 not be successful in hiring or retaining the requisite personnel.

 Risks Related to Our Common Stock
 ---------------------------------

 We may be unable to maintain our listing on the Nasdaq Capital Market.

 Our common  stock currently  is listed  for trading  on the  Nasdaq  Capital
 Market. If we  are unable  to continue  to meet  Nasdaq's continued  listing
 standards, our  common  stock could  be  delisted from  the  Nasdaq  Capital
 Market.  For  example,  among  other  things,  we  could  fail  to  maintain
 compliance with the Nasdaq Capital Market listing requirements if we did not
 maintain minimum stockholder equity of at least $2.5 million as a result  of
 continuing  losses,  depending  upon  the  type  and  amount  of  additional
 financing, if any, secured by the Company in  2007.  If our common stock  is
 not listed on  the Nasdaq  SmallCap Market or  an exchange,  trading of  our
 common stock  will  be  conducted  in  the  over-the-counter  market  on  an
 electronic bulletin board  established for unlisted  securities or  directly
 through market makers in our common stock. If our common stock were to trade
 in the over-the-counter market, an investor would find it more difficult  to
 dispose of, or to  obtain accurate quotations for  the price of, the  common
 stock. A delisting  from the  Nasdaq Capital  Market and  failure to  obtain
 listing on another market  or exchange could subject  our securities to  so-
 called "penny stock rules" that impose additional sales practice and market-
 making requirements on  broker-dealers that sell  or make a  market in  such
 securities. Consequently, removal from the Nasdaq Capital Market and failure
 to obtain listing on another market or exchange could affect the ability  or
 willingness of broker-dealers to sell or  make a market in our common  stock
 and  the  ability of purchasers of our common stock to sell their securities
 in the secondary  market. Such  delisting could  also  adversely  affect our
 ability to obtain financing for the continuation of our operations and could
 result in the loss of confidence by investors.

 The market price  for our  common stock may  be volatile,  and many  factors
 could cause the market price of our common stock to fall.

 Many factors could cause the  market price of our  common stock to rise  and
 fall, including the following:

  *   variations in our quarterly results;

  *   announcements of technological innovations by us or by our competitors;

  *   introductions of new products or new pricing policies by us or by our
      competitors;

  *   acquisitions or strategic alliances by us or by our competitors;

  *   recruitment or departure of key personnel;

  *   the gain or loss of significant orders;

  *   the gain or loss of significant customers;

  *    changes in the estimates of our operating performance or changes in
       recommendations by any securities analysts that follow our stock; and

  *    market conditions in our industry, the industries of our customers, and
       the economy as a whole.

 Since our initial public  offering in 1983, the  market price of our  common
 stock has fluctuated over a wide range, and  it is likely that the price  of
 our common stock will fluctuate in  the future. Announcements of a  positive
 or negative nature regarding technical innovations, new commercial products,
 regulatory approvals,  patent or  proprietary rights  or other  developments
 concerning us or  our competitors  could have  a significant  impact on  the
 market price of our common stock.

 You may experience dilution  of your ownership interests  due to the  future
 issuance of  additional shares  of our  common stock,  which could  have  an
 adverse effect on our stock price.

 Future sales of shares of our  common stock by existing shareholders, or  by
 shareholders who receive shares of our common stock through the exercise  of
 options or warrants, the conversion of  preferred stock or otherwise,  could
 have an adverse effect on the  price of our common  stock.  Future sales  of
 substantial amounts of our common stock, or the perception that sales  could
 occur, could  have a  material adverse  effect on  the price  of our  common
 stock.

 We do not pay cash dividends.

 We have not paid any  cash dividends on our  common stock since our  initial
 public offering  in  1983  and do  not  anticipate  that we  will  pay  cash
 dividends in  the  foreseeable  future. Instead,  we  intend  to  apply  any
 earnings to the expansion and development of our business.

 Certain provisions of Texas law, our restated articles of incorporation  and
 our bylaws could make  it more difficult  for a third  party to acquire  us,
 discourage a takeover and adversely affect existing shareholders.

 Our restated articles  of incorporation and  the Texas Business  Corporation
 Act contain provisions that may have the effect of making more difficult  or
 delaying attempts by  others to  obtain control  of our  company, even  when
 these attempts may be in the  best interests of shareholders. These  include
 provisions limiting the  shareholders' powers  to remove  directors or  take
 action by  written  consent  instead of  at  a  shareholders'  meeting.  Our
 restated articles of  incorporation also authorize  our board of  directors,
 without shareholder  approval, to  issue one  or  more series  of  preferred
 stock, which could have voting and  conversion rights that adversely  affect
 or dilute the voting power of the  holders of common stock. Our bylaws  also
 include provisions that  divide our directors  into three  classes that  are
 elected for staggered  three-year terms  and that  establish advance  notice
 procedures with respect to  submissions by shareholders  of proposals to  be
 acted  on at  shareholder meetings  and  of nominations  of  candidates  for
 election  as  directors.  Texas  law  also  imposes  conditions  on  certain
 business combination transactions with "interested shareholders."

 We have also adopted a shareholder rights plan intended to encourage  anyone
 seeking to acquire  our company  to negotiate  with our  board of  directors
 prior to attempting a takeover. While the plan was designed to guard against
 coercive or unfair tactics to gain control of our company, the plan may have
 the effect of making  more difficult or delaying  any attempts by others  to
 obtain control of our company.

 These provisions and others that could be adopted in the future could  deter
 unsolicited takeovers  or  delay  or  prevent  changes  in  our  control  or
 management,  including transactions in  which shareholders  might  otherwise
 receive a premium  for their shares over then  current market prices.  These
 provisions  may  also   limit  the  ability   of  shareholders  to   approve
 transactions that they may deem to be in their best interests.


 ITEM 1B.  UNRESOLVED STAFF COMMENTS.
           -------------------------

           None.


 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,  except that the farm is not  adequate
 to supply  all  of the  Company's  needs for  Aloe  vera L.  leaves.    (See
 "Management's Discussion and Analysis of Financial Condition and Results  of
 Operations" for  more information  regarding the  Company's arrangements  to
 purchase Aloe vera L. leaves.)

 Walnut Hill Facility.   The Company's  corporate headquarters and  principal
 U.S. manufacturing facility occupy all of the 42,733 square foot office  and
 manufacturing building (the "Walnut Hill Facility"), which is situated on an
 approximate 6.6-acre  tract of  land  located in  the  Las Colinas  area  of
 Irving, Texas.  The  Company completed a sale  of this property in  December
 2005  for  $4,800,000  to private investors  and simultaneously entered into
 a  lease  of  the  land  and  the  building for  a  fifteen-year  term.  The
 manufacturing operations  occupy approximately  17,279  square feet  of  the
 facility, administrative offices occupy approximately 17,204 square feet and
 with an additional 8,250 square feet undeveloped.

 Laboratory and Warehouse Facility.  The Company leases a 51,200 square  foot
 building in  close  proximity to  the  Walnut  Hill facility  to  house  its
 Research and Development, Quality Assurance and Quality Control Departments.
 Laboratories and offices for DelSite are  also located in this facility.  In
 addition, the Company utilizes a portion of the building as warehouse space.
 The lease expires in June 2011.

 Warehouse and Distribution  Facility.  The  Company leases  a 58,130  square
 foot building in  close proximity  to the Walnut  Hill facility  for use  as
 additional warehouse space and for housing its distribution operations.  The
 lease expires in February 2008.

 Texas A & M University Research Park Facility.  DelSite leases 5,773  square
 feet of laboratory  and  office space  in the Texas A&M University  Research
 Park in  College Station,  Texas, under  a lease  which expires  May 2007.
 DelSite uses  this  facility primarily  for  vaccine delivery  research  and
 development.

 Costa Rica Facility.   The Company owns approximately  410 acres of land  in
 the Guanacaste province of  northwest Costa Rica.   This land is being  used
 for the farming of Aloe vera L. plants and  is the site for a 30,700  square
 foot processing plant to produce bulk pharmaceutical and injectable  mannans
 and freeze-dried purified extracts from Aloe  vera L. used in the  Company's
 operations.  The processing plant became  operational in 1993.  The  Company
 also produces liquid nutraceutical products and proprietary dental  products
 at this facility.


 ITEM 3.   LEGAL PROCEEDINGS.
           -----------------

 On August 26, 2005, the Company issued a voluntary recall of Medline-labeled
 alcohol-free mouthwash.  As  a result  of this recall,  Medline initiated  a
 voluntary recall  of Personal  Hygiene Admission  kits containing  the  same
 alcohol-free  mouthwash.  The  mouthwash,  which  passed  industry  standard
 testing at the time of release, was recalled due to the possibility that  it
 may contain Burkholderia cepacia.  The Company continues to coordinate  with
 the FDA and the Texas Department of Health in its recall efforts and in  the
 investigation of this matter.

 On January 11, 2006, a lawsuit was filed in Circuit Court of Etowah  County,
 Alabama styled as Sonya Branch and Eric Branch vs. Carrington  Laboratories,
 Inc.,  Medline  Industries, Inc.,  and   Gadsden  Regional Medical  Center.
 Plaintiffs alleged they were damaged by the mouthwash product.  The  amounts
 of damages were not specified.

 On April 25, 2006, a lawsuit was filed in Circuit Court for Davidson County,
 Tennessee styled  as Ralph  Spraggins, as  Administrator  of the  Estate  of
 Yvonne Spraggins vs. Southern Hills  Medical Center, Tristar Health  System,
 HCA Inc., HCA Health Services of  Tennessee, Inc., HCA Hospital  Corporation
 of America,  Medline Industries,  Inc.,  and Carrington  Laboratories,  Inc.
 Plaintiffs have alleged they were  damaged by the Company's  Medline-labeled
 alcohol-free mouthwash product and are seeking $2.0 million in  compensatory
 damages. The case was dismissed without prejudice on January 11, 2007.

 On August 28, 2006, a lawsuit was filed in United States District Court  for
 the Western  District of  Oklahoma styled  as Ruth  Ann Jones,  as  Personal
 Representative of the Estate of Harold Dean Jones, Deceased, Mary Adams  and
 Vera Anderson vs. Carrington Laboratories, Inc. and Medline Industries, Inc.
 Plaintiffs  alleged  they  were  damaged by  the  Company's  Medline-labeled
 alcohol-free mouthwash  product and  were seeking  an  amount in  excess  of
 $75,000 in damages.  The case was dismissed without prejudice on January 15,
 2007.

 On September 14, 2006, a lawsuit  was filed in United States District  Court
 for the  Northern  District of  Illinois  styled as  Mutsumi  Underwood,  as
 Personal Administrator  of the  Estate of  Ronald W.  Underwood vs.  Medline
 Industries, Inc. and Carrington Laboratories, Inc.  Plaintiffs have  alleged
 they were damaged  by the Company's  Medline-labeled alcohol-free  mouthwash
 product and are seeking an amount in excess of $75,000 in damages.

 On September  22, 2006,  a lawsuit  was  filed in  Circuit Court  for  Macon
 County, Tennessee styled as Donna Green,  Lois Bean, KHI Williams and  David
 Long   vs.  Carrington  Laboratories,  Inc.  and  Medline  Industries,  Inc.
 Plaintiffs have alleged they were  damaged by the Company's  Medline-labeled
 alcohol-free mouthwash product and are seeking $800,000 in compensatory  and
 exemplary damages.

 On November 2, 2006, a lawsuit was filed in Circuit Court of Etowah  County,
 Alabama styled  as Myra  Maddox, vs.  OHG of  Gadsden, Inc.,  d/b/a  Gadsden
 Regional Medical Center; Medline Industries, Inc.; Carrington  Laboratories,
 Inc.; Fictitious  Defendants  "1-15".   Plaintiffs  have alleged  they  were
 damaged by the mouthwash product.  The amounts of the damages have not  been
 specified.

 The Company has $10.0  million of product  liability insurance. The  Company
 and its insurance carrier intend to defend against each of these claims.

 On February  1,  2007, a  lawsuit  styled Glamourpuss,  Inc.  v.  Carrington
 Laboratories, Inc.,  was filed  in Dallas  County, Texas.   Plaintiffs  have
 alleged they  have  been  injured as  a  result  of acts  and  omissions  of
 Carrington in violation of the Texas Deceptive Trade Practices Act ("DTPA").
 Plaintiffs  are  seeking  $200,000  in  damages  plus  attorney's  fees  and
 expenses.

 The Company believes that Plaintiffs' claims  are without merit and  intends
 to vigorously defend against the claim.


 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.


                                   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 Capital Market under
 the symbol "CARN."  The  following table sets forth  the high and low  sales
 prices per share of the Common Stock for each of the periods indicated.

            Fiscal 2006                 High           Low
            -----------                 ----           ----
            First Quarter              $7.53          $4.42
            Second Quarter              6.84           3.44
            Third Quarter               4.65           3.02
            Fourth Quarter              4.24           2.76

            Fiscal 2005                 High            Low
            -----------                 ----           ----
            First Quarter              $7.40          $4.84
            Second Quarter              5.39           3.12
            Third Quarter               5.65           3.10
            Fourth Quarter              5.74           3.31

 At  March 19, 2007, there were  855 holders of  record (including  brokerage
 firms) of Common Stock and the  closing price of the Company's Common  Stock
 was $2.96.

 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.

                     Equity Compensation Plan Information
                     ------------------------------------
                                                        Number of
                     Number of          Weighted-       securities remaining
                     securities to      average         available for
                     be issued upon     exercise price  future issuance
                     exercise of        of outstanding  under equity
                     outstanding        options,        compensation plans
                     options, warrants  warrants and    (excluding securities
 Plan Category       and rights         rights          reflected in column a)
 -----------------------------------------------------------------------------
                          (a)               (b)                  (c)
 Equity compensation
 plans approved by
 security holders      1,700,586           $3.37              352,193


 Equity compensation
 plans not approved
 by security holders           0               0                    0
                       ---------            ----              -------
 Total                 1,700,586           $3.37              352,193
                       =========            ====              =======


 Performance Graph
 -----------------

 The following graph sets forth for the years indicated the cumulative  total
 shareholder return for the Company's Common Stock, the Nasdaq Stock Market -
 U.S. Index,  and  a  Company-constructed Peer  Group(2).    The  information
 reflected in the  graph was provided  to the Company  by Research  Holdings,
 Ltd. of San Francisco, California.

                 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
       Among Carrington Laboratories, Inc., The NASDAQ Composite Index,
                    A New Peer Group And An OldPeer Group


                      [ PERFORMANCE GRAPH APPEARS HERE ]


    * $100 invested on 12/31/00 in stock or index-including reinvestment
      of dividends.  Fiscal year ending December 31.


                                             Cumulative Total Return (1)
                                 ---------------------------------------------
                                 12/01   12/02   12/03   12/04   12/05   12/06
                                 -----   -----   -----   -----   -----   -----
 Carrington Laboratories, Inc.  100.00   89.13  403.53  600.39  463.27  279.02
 NASDAQ Composite               100.00   69.66   99.71  113.79  114.47  124.20
 New Peer Group (2)             100.00   54.60   57.72   54.38   68.60   79.06
 Old Peer Group (2)             100.00   96.90  125.10   96.79   91.79  103.45


 (1) Total return assuming reinvestment of dividends.  Assumes $100  invested
     on December 31, 2001  in the Company's  Common Stock,  The Nasdaq  Stock
     Market - U.S. Index.

 (2) The Peer Group comprises  the following companies:  Biomira, Inc.,  Cell
     Therapeutics   Inc.,   Cellegy    Pharmaceuticals    Inc.,    Collagenex
     Pharmaceuticals  Inc.,   Columbia   Labs  Inc.,   Depomed,  Inc.,   Dusa
     Pharmaceuticals  Inc.,  Dyadic  International,  Immunogen  Inc.,  Insite
     Vision  Inc.,  LaJolla  Pharma,  Nastech  Pharmaceutical  Inc.,  Natures
     Sunshine Products Inc., Quigley Corp., Regeneron Pharmaceuticals, Schiff
     Nutrition  International,  Inc.  (formerly  Weider  Nutrition), Sciclone
    Pharmaceuticals,   Inc.,    Spectrum   Pharmaceuticals,    Inc.,    Titan
    Pharmaceuticals Inc., Tutogen  Medical, Inc.,  Vertex Pharmaceutical  and
    Viropharma Inc.  The following companies were previously included in  the
    Company-constructed Peer  Group,  and have  been  omitted from  the  Peer
    Group:    Cubist   Pharmaceuticals,  Inc.,  Draxis   Health,  Inc.,   KOS
    Pharmaceuticals,   Inc.,   Onyx   Pharmaceuticals   Corp,   and    Forest
    Laboratories.   Our  Peer  Group was  changed  to  the  above  identified
    companies based  on the  determination  that such  companies serve  as  a
    better comparison for companies  competing in our  industry and are  more
    representative of our lines of business.


 ITEM 6. SELECTED 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, 2006, is derived from the consolidated
 financial statements of the  Company, of which the  statements for the  year
 ended December 31,  2002, has been  audited by Ernst  & Young  LLP, for  the
 years ended December  31, 2003,  2004 and 2005  have been  audited by  Grant
 Thornton LLP and for the year ended  December 31, 2006, has been audited  by
 Weaver and Tidwell, LLP.

                                                  Years ended December 31,
 (Dollars and numbers of shares in    -----------------------------------------
 thousands except per share amounts)  2006     2005     2004     2003     2002
 ------------------------------------------------------------------------------

 OPERATIONS STATEMENT INFORMATION:

 Revenues:
   Net product sales                $25,000  $24,038  $27,584  $26,636  $15,571
   Royalty income                       417    2,299    2,470    2,467    2,470
   Grant income                       1,989    1,624      767        -        -
                                     ------   ------   ------   ------   ------
 Total revenues                      27,406   27,961   30,821   29,103   18,041

 Costs and expenses:
   Cost of product sales             20,586   18,581   18,250   18,806   11,739
   Selling, general and
    administrative                    7,662    8,731    7,560    8,017    6,040
   Research and development             670      822      911      899    1,701
   Research and development,
    DelSite                           5,090    4,974    3,826    2,761    1,879
   Other expense (income), net           (9)    (131)     (92)    (123)      19
   Interest expense (income), net     1,014      301      205      249       41
                                     ------   ------   ------   ------   ------
  Income (loss) before income taxes  (7,607)  (5,317)     161   (1,506)  (3,378)
    Provision for income taxes            0       19      125        -        -
                                     ------   ------   ------   ------   ------
 Net income (loss)                  $(7,607) $(5,336) $    36 $(1,506)  $(3,378)
                                     ======   ======   ======   ======   ======
 Net income (loss) per common share
   - basic and diluted(1)           $ (0.70) $ (0.50) $  0.00 $ (0.15)  $ (0.34)
                                     ======   ======   ======   ======   ======

 BALANCE SHEET INFORMATION (as of December 31):

  Working capital                   $ 1,036  $ 6,975  $ 2,244  $ 3,019  $ 3,989
  Total assets                       13,998   21,989   23,017   22,784   22,159
  Total long-term debt and capital
   lease obligations, net of debt
   discount                           3,745    3,418    1,324    1,953    1,517
  Total shareholders' equity          4,192   11,508   13,371   12,619   13,689


 (1)  For a description of the calculation of basic and diluted net income
      (loss) per share, see Note Twelve to the consolidated financial
      statements.


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

                               Company Overview
                               ----------------

 The Company  is  a  research-based biopharmaceutical,  medical  device,  raw
 materials  and   nutraceutical   company   engaged   in   the   development,
 manufacturing and marketing of  naturally-derived complex carbohydrates  and
 other natural product therapeutics for the treatment of major illnesses, the
 dressing and management of wounds and nutritional supplements.  The  Company
 is comprised of  three business segments.   The  Company generates  revenues
 through the  sales of  prescription  and non-prescription  medical  products
 through its Medical Services Division.   It also generates revenues  through
 the  sales  of  consumer  and  bulk  raw  material  products  and  sales  of
 specialized product development and  manufacturing services to customers  in
 the  cosmetic  and  nutraceutical  markets  through  its  Consumer  Services
 Division.  In addition, the Company  generates revenues from research  grant
 awards through  its DelSite  subsidiary that  is  engaged in  the  research,
 development and marketing of the Company's proprietary GelSite[R] technology
 for controlled release and delivery of bioactive pharmaceutical ingredients.

 Products sold through the Medical Services Division include hydrogels, wound
 cleansers, hydrocolloids,  advanced wound  covering products,  incontinence-
 care products and two lines of  condition-specific products.  Many  products
 sold through this division contain the Company's proprietary,  medical-grade
 raw material,  Acemannan Hydrogel[TM].   The  Company regularly  engages  in
 development projects to create  line extensions and  other new products  for
 this category.  Products sold through the Consumer Services Division include
 Manapol[R] and other proprietary and  non-proprietary raw materials sold  to
 nutraceutical and cosmetic  customers; nutritional products  sold under  the
 AloeCeuticals[R] brand; skin care  products sold under  the Snow or  Sun[TM]
 brand and private-labeled products manufactured to customer  specifications,
 including powders,  creams,  liquids,  gels, lotions,  drinks,  tablets  and
 capsules for various customers.

 Prior to 1996, the Company generated most of its revenues from product sales
 in its Medical Services Division.  In 1996, the Company launched its line of
 raw materials, including  Manapol[R] powder, through  its Consumer  Services
 Division.  In 2001, the Company created its specialty manufacturing group to
 provide services  to cosmetic  and nutraceutical  markets, and  in  December
 2002, the  Company  acquired the  assets  of  the custom  division  of  CBI,
 resulting in increased revenues for the Consumer Services Division.

 In 2006, approximately 32% of the Company's revenues were generated  through
 product sales, services and royalties in its Medical Services Division, 61%,
 through sales of products and services in its Consumer Services Division and
 7% through U.S. Federal grant income in its DelSite research and development
 subsidiary.

 Sales to Natural Alternatives, Mannatech, Medline and a new large  customer,
 Wormser,  accounted  for  approximately   13.5%,  10.3%,  26.2%  and   9.8%,
 respectively, of our  total revenue.   In  2006, combined  sales to  Natural
 Alternatives and Mannatech decreased approximately $2.64 million, or  28.5%,
 from their 2005 levels  and in 2005, combined  sales to these two  customers
 decreased approximately $5.12 million, or 35.5%, from their 2004 levels.  On
 January 25, 2007, the Company and Mannatech entered into a three-year Supply
 and Trademark Licensing Agreement.  (See Note Nineteen - Subsequent Events).
  The agreement calls for minimum purchase quantities from Mannatech at fixed
 price levels.  The  Company anticipates 2007 sales  to Mannatech under  this
 agreement to be above the minimum levels required by the agreement but,  due
 to inconsistency in the size and timing of Mannatech's orders, is  uncertain
 as to by how much sales to Mannatech will exceed the contractual minimums.

 Revenues
 --------
                                                    Year-         Year-
                                                  over-Year     over-Year
                                                   Growth        Growth
                                2006      2005       ($)           (%)
 -----------------------------------------------------------------------
                                         ($ in thousands)

 Net product sales             $25,000  $24,038    $   962         4.0%
 Royalty income                    417    2,299     (1,882)      (81.9%)
 Grant income                    1,989    1,624        365        22.5%
                                ------   ------     ------        ----
 Total revenues                $27,406  $27,961    $  (555)       (2.0%)
                                ======   ======     ======        ====

 Grant Awards
 ------------

 In March 2004, DelSite received an SBIR grant award of up to $888,000 over a
 two-year period.  The grant has funded additional development of GelVac[TM],
 DelSite's intranasal vaccine delivery platform technology.  In January 2006,
 DelSite applied for and received a  six-month extension of time to  complete
 the approved work under this grant.  In November 2006, DelSite received  the
 permission to further extend  the grant to May  2007.  The research  covered
 under the grant has been completed  and the extension is mainly for  further
 expanding  the  development activities.  In  October 2004  DelSite  received
 notification of  a  $6 million  grant  over  a three-year  period  from  the
 National Institute of Allergy and Infectious Diseases.  The $6 million grant
 is funding the development of an inactivated influenza nasal powder  vaccine
 against the H5N1 strain, commonly known as bird flu, utilizing the Company's
 proprietary GelVac[TM]  delivery system.   The  grant  was awarded  under  a
 biodefense and SARS product development initiative  and is funding a  three-
 year preclinical program.

 The Company's costs and expenses generally fall into five broad  categories:
 cost of product sales; sales and distribution expenses in support of product
 sales; general  and administrative  expenses;  product support  and  DelSite
 research and development expenses.  In recent years, the Company has shifted
 a greater percentage of its overall research and development expenses to its
 DelSite subsidiary. General and administrative expenses represent  corporate
 infrastructure costs, such  as accounting, human  resources and  information
 systems, and executive  management expenses.  In addition  to its  operating
 expenses, the Company  also incurs interest  expense arising  from the  debt
 portion of its capital structure.

 Costs and Expenses
 ------------------
                                                    Year-         Year-
                                                  over-Year     over-Year
                                                   Growth        Growth
                                2006      2005       ($)           (%)
 -----------------------------------------------------------------------
                                         ($ in thousands)

 Cost of product sales         $20,586  $18,581    $2,005         10.8%
 Selling, general and            7,662    8,731    (1,069)       (12.2%)
   administrative
 Research and development          670      822      (152)       (18.5%)
 Research and development,       5,090    4,974       116          2.3%
   DelSite
 Other expenses (income)            (9)    (131)      122        (93.1%)
 Interest expense (income), net  1,014      301       713        236.9%

 Financing Transactions
 ----------------------

 On November 18, 2005, the Company sold $5,000,000 aggregate principal amount
 of 6.0% subordinated notes. The notes have  a term of four years and  mature
 on November 18, 2009. Interest on the notes is payable quarterly in arrears.
 In connection  with the  sale of  the  notes, the  purchasers of  the  notes
 received (i) Series A Common Stock  Purchase Warrants ("Series A  Warrants")
 to purchase an aggregate of 2,500,000 shares of the Company's common  stock,
 par value $.01 per share, and  (ii) Series B Common Stock Purchase  Warrants
 ("Series B Warrants") to  purchase an aggregate of  2,500,000 shares of  the
 Company's common stock.   The 5,000,000 warrants have  a fair value of  $4.8
 million and an allocated value of $2.7 million based on their relative  fair
 value with the associated debt, which was  recorded as a debt discount.   In
 addition, the placement  agent involved  in the  offering of  the notes  and
 warrants received  a Series  A Warrant  to purchase  200,000 shares  of  the
 Company's common stock. All of the Series A Warrants have an exercise  price
 of $5.00  per share,  are immediately  exercisable  and expire,  subject  to
 certain acceleration events relating to the closing stock price, on November
 18, 2009.  All of the Series B Warrants have an exercise price of $10.00 per
 share, are immediately exercisable and expire  on November 18, 2009.  As  of
 December 31, 2006,  there was $5,000,000  outstanding on the  notes with  an
 associated debt discount  of $2,254,000 for  a net  balance  of  $2,746,000.
 Additionally, the Company incurred $674,000 of  debt issue costs related  to
 this financing arrangement,  which will be  amortized over the  term  of the
 debt. As a  result of the  debt discount associated  with the  value of  the
 warrants the effective interest rate on this transaction was 30%.

 On December 23, 2005, the Company completed a sale and leaseback transaction
 involving its corporate headquarters and manufacturing operations located in
 Irving, Texas to the Busby Family Trust  and the Juice Trust, both of  which
 are assignees of the  original purchaser, none of  which are related to  the
 Company. The building  and land were  sold for a  total sale  price of  $4.8
 million. Net proceeds from the transaction  amounted to $4.1 million,  after
 deducting transaction-related costs and  retiring the mortgage note  related
 to the property. Simultaneously,  the Company agreed to  lease the land  and
 building from the purchaser for a period  of 15 years, subject to two  five-
 year renewal options.  The rental payment  for the first  five years of  the
 lease term is $470,000 per year and increases by 10.4% for each of the  next
 two five-year  increments.  Rent for  the  renewal terms  under  this  lease
 agreement will be the greater of 95% of the then current market rent or  the
 rent for the last year prior to renewal. The Company has provided the lessor
 a $100,000 letter of  credit which is used  as security on  the lease.   The
 Company has accounted for this lease as an operating lease.

 Cash Flow
 ---------
                                                    Year-         Year-
                                                  over-Year     over-Year
                                                   Growth        Growth
                                2006      2005       ($)           (%)
 -----------------------------------------------------------------------
                                         ($ in thousands)
 Net cash provided by (used
   in) operating activities    $(5,039) $(3,430)  $(1,609)       (46.9%)
 Net cash provided by (used
   in) investing activities       (383)   4,006    (4,389)      (109.6%)
 Net cash provided by
   financing activities             38    3,256    (3,218)       (98.8%)

 The decrease  in net  cash provided  by operating  activities was  primarily
 related to the $7.6 million net loss for the year as compared to net loss of
 $5.3 million in 2005.  The decrease in cash provided by investing activities
 is the result of a $383,000 investment in facilities and equipment in  2006,
 as compared to the 2005 disposal of assets in the sale/leaseback transaction
 with a book value of $4.6 million, which was partially offset by  investment
 in facilities and equipment of $610,000.  The decrease in net cash  provided
 by financing  activities reflects  proceeds of  $253,000 from  common  stock
 issuances offset in part by $215,000 in debt repayments in 2006 as  compared
 to the  sale of  $5.0  million 6%  subordinated  notes partially  offset  by
 principal payments on debt and capital lease obligations of $1.5 million and
 a cash payment for debt issue costs of $426,000 in 2005.

 The Company  utilizes the  cash flow  generated from  its manufacturing  and
 sales operations  and  borrowings to  fund  additional  capital  projects in
 support of manufacturing operations and to  fund the research  activities of
 its wholly-owned subsidiary,  DelSite.  DelSite,  which was incorporated  in
 2001, operates separately  from the Company's  product-support research  and
 development program and  is responsible  for the  research,  development and
 marketing of the Company's proprietary GelSite[R] technology for  controlled
 release and  delivery of  bioactive pharmaceutical  ingredients.   DelSite's
 business plan is to develop its data in support of it technologies and  then
 partner with  biotechnology and  pharmaceutical companies  to provide  novel
 delivery solutions for their drugs and vaccines.

 Key Performance Indicators
 --------------------------

 The following  table illustrates  the key  performance indicators  that  the
 Company uses to measure the performance and manage the business.

                                                   FISCAL YEARS ENDED
                                                   ------------------
                                                    2006        2005
                                                   ------      ------
                                                 (Dollars in thousands)
 Days Sales Outstanding:
   Accounts receivable                            $ 2,659     $ 2,679
   Fourth quarter sales                             6,739       5,809
   Divided by 90 days equals
     average daily sales                             74.9        64.5
                                                   ------      ------
   Accounts receivable divided by
     average daily sales equals
       days sales outstanding                        35.5        41.5
                                                   ======      ======
 Months Inventory on Hand:
   Inventory                                      $ 3,405     $ 4,705
   Fourth quarter cost of product sales             5,328       4,935
   Divided by 3 equals
     average monthly cost of product sales          1,776       1,645
                                                   ------      ------
   Inventory divided by average
     monthly cost of product sales equals
       Months inventory on hand                       1.9         2.9
                                                   ======      ======
 Current Ratio:
   Current assets                                 $ 7,097     $14,038
   Divided by
     current liabilities                            6,061       7,063
                                                   ------      ------
   Equals current ratio                              1.17        1.99
                                                   ======      ======
 Quick Ratio:
   Quick assets                                   $ 3,537     $ 8,941
   Divided by
     current liabilities                            6,061       7,063
                                                   ------      ------
   Equals quick ratio                                0.58        1.27
                                                   ======      ======
 Debt to Equity:
   Current liabilities                            $ 6,061     $ 7,063
   Long-term debt                                   3,745       3,418
                                                   ------      ------
   Total debt                                     $ 9,806     $10,481
   Divided by equity                                4,192      11,508
                                                   ------      ------
   Equals debt to equity                             2.34        0.91
                                                   ======      ======
 Long-Term Debt to Equity:
   Long-term debt                                 $ 3,745     $ 3,418
   Divided by equity                                4,192      11,508
                                                   ------      ------
   Equals long-term debt to
     equity                                          0.89        0.30
                                                   ======      ======
 Working Capital:
   Current assets                                 $ 7,097     $14,038
   Less current liabilities                         6,061       7,063
                                                   ------      ------
   Equals working capital                         $ 1,036     $ 6,975
                                                   ======      ======

                       Liquidity and Capital Resources
                       -------------------------------

 The Company's financial  statements have been  prepared on  a going  concern
 basis, which assumes the Company will  realize its assets and discharge  its
 liabilities  in  the  normal  course  of  business.  As  reflected  in   the
 accompanying consolidated  financial statements  and as  the result  of  its
 significant  investment  in  the  research  and  development  activities  of
 DelSite, the Company  incurred cumulative net  losses of  $12.9 million  and
 used cash  from operations  of $6.1  million during  the three  years  ended
 December 31, 2006.  The Company has historically depended on operating  cash
 flows, bank financing,  advances on royalty  payments under  certain of  its
 existing contracts  and equity  financing to  fund its  operations,  capital
 projects and research and development projects,  with the majority of  funds
 generated from operating cash flows.   The Company also has available to  it
 various leasing arrangements  for financing equipment  purchases, and it  is
 seeking  additional  grant  awards  and  other  potential  collaborative  or
 sponsorship funding for  DelSite projects and  potential licensing  revenues
 from DelSite projects.

 The following  table summarizes  the  Company's contractual  obligations  at
 December 31, 2006 (dollars in thousands):

                                              Payments Due by Period
                                      ---------------------------------------
                                      Less than   One to  Three to  More than
                                         One      Three     Five      Five
                               Total     Year     Years     Years     Years
 ----------------------------------------------------------------------------
 Contractual Obligations

 Notes Payable
   Line of Credit with
    Comerica Bank (8.75% at
    December 31, 2006)       $ 1,811   $ 1,811   $     -   $     -   $     -
   Private Placement note
    payable (6.0% at
    December 31, 2006)         5,000         -         -     5,000         -
   Swiss American Products
    note payable (6.0% at
    December 31, 2006)           400         -         -       400         -
   Bancredito note payable
    (U.S. prime plus 2.25%,
    10.5% at December
    31, 2006)                    592       103       227       210        52
   Other                           -         -         -         -         -
   Capital leases                224       110       109         5         -
   Operating leases           10,481     1,394     2,249     1,897     4,941
                              ------    ------    ------    ------    ------
   Total contractual
    obligations              $18,508   $ 3,418   $ 2,585   $ 7,512   $ 4,993
                              ======    ======    ======    ======    ======

 Sales to Natural Alternatives, Mannatech, Medline and Wormser accounted  for
 approximately 13.5%,  10.3%,  26.2% and  9.8%,  respectively, of  our  total
 revenue.  During 2006 a new large customer, Wormser, was added to our client
 base.   Further,  in  2006,  combined  sales  to  Natural  Alternatives  and
 Mannatech decreased approximately $2.64 million,  or 28.5%, from their  2005
 levels and  in  2005,  combined  sales  to  these  two  customers  decreased
 approximately $5.12 million, or 35.5%, from  their 2004 levels.  On  January
 25, 2007, the  Company and Mannatech  entered into a  three-year Supply  and
 Trademark Licensing Agreement.   (See Note Nineteen  -  Subsequent  Events).
 The agreement calls for minimum purchase quantities from Mannatech at  fixed
 price levels.  The  Company anticipates 2007 sales  to Mannatech under  this
 agreement to be above the minimum levels required by the agreement but,  due
 to inconsistency in the size and timing of Mannatech's orders, is  uncertain
 as to by how much sales to Mannatech will exceed the contractual minimums.

 At December 31, 2006 and 2005, the Company held cash  and  cash  equivalents
 of $878,000  and  $6,262,000,  respectively,  a decrease of $5,384,000.  The
 decrease was  primarily due  to the  losses from  operations of  $7,607,000,
 which  was  partially  offset  by   non-cash  items  for  depreciation   and
 amortization of fixed assets, debt  discount, debt-issue costs and  deferred
 revenue  of  $2,379,000.   (See  discussion  in  "Results  of  Operations.")
 Additionally, the  Company  utilized  $383,000 in  capital  expenditures  to
 acquire operating assets.   Customers with  significant accounts  receivable
 balances  at  the  end  of  2006  included  Mannatech  ($711,000),   Medline
 ($1,033,000) and Wormser ($329,000), and of these amounts $1,952,000 (94.2%)
 has been collected as of February 28, 2007.

 As reflected in the Company's consolidated financial statements, the Company
 incurred net  losses of  $2.16  million and  used  cash from  operations  of
 $806,000 during  the three  months ended  December 31,  2006.   The  Company
 projects  operating  deficits  for  fiscal  2007  before  consideration   of
 potential funding sources for this same period.

 At December 31, 2006, the Company's debt/equity ratio was 2.34 to 1.   After
 giving effect to  the borrowings  under the  Banco Nacional  line of  credit
 drawn  in  February 2007,  the Company's  debt/equity ratio was  2.70  to 1.
 Management believes  that  the  expected  cash  flows  from  operations  and
 licensing agreements and expected  revenues from government grant  programs,
 will provide the funds  necessary to service  its existing indebtedness  and
 finance  its  operations until  September 2007.  The  Company  is  currently
 engaged in efforts to restructure certain existing indebtedness in order  to
 increase  available  funds  on  a  near-term  basis,  and  is  also  seeking
 additional financing through public or private equity offerings,  additional
 debt financing, corporate  collaborations, or licensing  transactions.   The
 Company cannot  be certain  that additional  funding  will be  available  on
 acceptable terms,  or at  all.   If adequate  funds are  not available,  the
 Company may be required to delay, reduce  the scope of, or eliminate one  or
 more of the research or development programs or commercialization efforts.

 While management is confident that they will raise the capital necessary  to
 fund operations  and achieve  successful commercialization  of the  products
 under development, there can be no assurances in that regard.

 The Company has a line of credit with Comerica Bank Texas ("Comerica")  that
 provides for borrowings of up to $3 million based on the level of  qualified
 accounts receivable and inventory. The line  of credit is collateralized  by
 accounts receivable and inventory.  Borrowings under the line of credit bear
 interest at  the  bank's prime rate (8.25%  at December 31, 2006) plus 0.5%.
 As of December 31, 2006, there was $1,811,000 outstanding on the credit line
 with $839,000 of credit available for operations, net of outstanding letters
 of credit of  $350,000.  The line  of credit has  no expiration  date and is
 payable on demand.

 The Company's  credit  facilities  with  Comerica  require  the  Company  to
 maintain certain financial ratios.  The covenants and the Company's position
 at December 31, 2006 are as follows:

 Covenant                   Covenant Requirement   Company's Position
 ---------                  --------------------   ------------------
 Total net worth                $12,200,000             $3,994,247
 Current ratio                      1.60                   1.35
 Liquidity ratio                    1.75                   1.95

 Although the Company was not in  compliance with two of its  financial-ratio
 covenants under the Comerica  line of credit for  the period ended  December
 31, 2006, Comerica has waived the  events of non-compliance through May  31,
 2007.  The Company believes that it is unlikely that Comerica will  continue
 to grant such  waivers after the  second quarter of  2007, and  can make  no
 assurances that such waivers  will be granted  for events of  non-compliance
 occurring subsequent to May 31,  2007.  If the  Company is unable to  obtain
 such waivers and  the existing  covenant defaults  continue, Comerica  could
 accelerate the indebtedness under the Company's  credit facility as well  as
 all other debt that the Company has outstanding with Comerica, if any.   The
 Company is  presently seeking  additional funding  that would  enable it  to
 repay  its  indebtedness  under  the  Comerica  credit   facility  and  fund
 the  Company's  working capital obligations.  If  Comerica  accelerates  the
 indebtedness under  the  Company's  credit facility  prior  to  the  Company
 obtaining such additional funding, the Company would be forced to  refinance
 all  of  the  Comerica  indebtedness with  another lender.   Any  additional
 financing secured  by  the  Company or  the  Company's  refinancing  of  the
 Comerica credit facility will likely contain interest rates and terms  which
 are more burdensome for the Company than those presently in place under  the
 Comerica facility, resulting in an adverse impact on liquidity.

 On February 12, 2007, the Company entered into a credit facility with  Banco
 National of Costa Rica.  The facility provides for borrowings of up to $2.99
 million and is secured by the land  and buildings the Company owns in  Costa
 Rica. The proceeds from this transaction will be used to finance operations.
 For a more detailed discussion of the new credit facility see Note  Nineteen
 - "Subsequent Events."

 In September 2004, the Company received a loan of $350,000 from  Bancredito,
 a Costa  Rica bank,  with interest  and principal  to be  repaid in  monthly
 installments over eight years.   The interest rate on  the loan is the  U.S.
 Prime Rate  plus 2.5%  (10.75%).   The loan  is secured  by certain  of  the
 Company's equipment.  The  proceeds of the loan  were used in the  Company's
 operations.  As of December 31, 2006, there was $282,000 outstanding on  the
 loan.

 In March 2003, the  Company received a loan  of $500,000 from Bancredito,  a
 Costa Rica  bank,  with interest  and  principal  to be  repaid  in  monthly
 installments over eight years.  The  interest rate on  the loan is the  U.S.
 Prime Rate plus  2.0% (10.25%).  The loan  is  secured by a  mortgage on  an
 unused, 164-acre parcel of land  owned by the Company  in Costa Rica plus  a
 lien on specified oral patch production equipment.  The proceeds of the loan
 were used in the Company's operations.  As  of December 31, 2006, there  was
 $310,000 outstanding on the loan.

 In July 1998, the Company provided  a $187,000 cash advance to Rancho  Aloe,
 which is evidenced by a note receivable, due in installments, with  payments
 being made monthly based  upon farm production.   The Company also  advanced
 $300,000 to  Rancho  Aloe  in  November  1998  for  the  acquisition  of  an
 irrigation system to improve production on the farm and allow harvesting  of
 leaves  year-round.  In  the  fourth  quarter  of 1998,  the  Company  fully
 reserved all amounts  owed to  it by  Rancho Aloe,  in the  total amount  of
 $487,000, due to the start-up nature of the business.  In 2006, the  Company
 received payments totaling $9,000 from Rancho Aloe against the amount due.

 In December 2002, the Company acquired the assets of the custom division  of
 Cosmetic Beauty Innovations ("CBI") for $1.0  million plus a royalty on  the
 Company's sales to custom division customers for five years and $0.6 million
 for useable inventories.   The  royalty amount is  equal to  9.0909% of  the
 Company's net sales of  CBI products to CBI's  transferring customers up  to
 $6.6 million per year and 8.5% of the Company's net sales of CBI products to
 CBI's  transferring  customers  over  $6.6  million  per year.  The  Company
 recorded expenses of $308,000 and $262,000  in 2006 and 2005,  respectively,
 for  royalties due  under the agreement.  The CBI  custom division  provided
 product development and manufacturing services to customers in the  cosmetic
 and skin care markets.  Included in the purchase were intellectual property,
 certain inventories and specified pieces of equipment.  The Company provides
 services  to  these  customers   through  the  Consumer  Services   Division
 development and manufacturing  services group. The  Company began  producing
 products for the transferring CBI customers in February 2003 at its  Irving,
 Texas facility.

 The Company  anticipates  capital  expenditures  in  2007  of  approximately
 $348,000.  The expenditures  will primarily be  comprised of production  and
 laboratory equipment and facility modifications and will be financed through
 leases or out of the Company's operating cash flows.

 In March 2001,  the Board of  Directors authorized the  repurchase of up  to
 1,000,000 shares, or approximately 9.3% of the Company's outstanding  Common
 Stock, dependent on market conditions.   Under the authorization,  purchases
 of Common  Stock  may  be made  on  the  open market  or  through  privately
 negotiated transactions at such times and  prices as are determined  jointly
 by the Chairman of the Board  and the President of  the Company.  The  Board
 authorized the repurchase  program based on  its belief  that the  Company's
 stock is undervalued in light of the Company's future prospects and that  it
 would be  in  the best  interest  of the  Company  and its  shareholders  to
 repurchase some  of  its  outstanding shares.  Through  February  2007,  the
 Company had  repurchased 2,400  of its  outstanding Common  Stock under  the
 program.  The Company does not  presently expect to repurchase shares  under
 this program.

 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  pharmaceutical  products  and  therapeutic
 agents 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
 licensee's 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.

 The Company's common  stock currently is  listed for trading  on the  Nasdaq
 Capital Market.  If the  Company  is unable  to  continue to  meet  Nasdaq's
 continued listing standards,  its common stock  could be  delisted from  the
 Nasdaq Capital Market. For  example, among other  things, the Company  could
 fail  to  maintain  compliance  with  the  Nasdaq  Capital  Market   listing
 requirements if the Company does not maintain minimum stockholder equity  of
 at least $2.5 million as a  result of continuing losses, depending upon  the
 type and amount of additional financing,  if any, secured by the Company  in
 2007.  Such delisting could adversely affect the Company's ability to obtain
 financing for the  continuation of its  operations and could  result in  the
 loss of confidence by investors.

                        Off-Balance Sheet Arrangements
                        ------------------------------

 As of December 31, 2006, the Company  has outstanding a letter of credit  in
 the  amount  of  $250,000,  which  is  used  as  security  on the  lease for
 the Company's laboratory  and  warehouse  facility.  The  Company  also  has
 outstanding a letter of credit in the  amount of $100,000, which is used  as
 security  on  the  lease  for  the  Company's  corporate  headquarters   and
 manufacturing facility.

                            Results of Operations
                            ---------------------

 The information  presented  in  this financial  review  should  be  read  in
 conjunction with other financial  information provided throughout this  2006
 Annual Report. The following discussion of operating results focuses on  the
 Company's three  reportable business  segments: Medical  Services  Division,
 Consumer Services Division and DelSite.

 Net Revenue
 -----------
 Net revenues in 2006 were $27.4 million, a 2.0% decrease from $28.0  million
 in 2005.  The  sales decrease  of  $600,000 was  primarily  attributable  to
 reduced sales of bulk raw materials  to Mannatech and Natural  Alternatives,
 with a year-over-year  sales decrease  of $2.6 million,  as well  as a  $1.9
 million decrease in royalty  income in 2006 over  2005.  This was  partially
 offset by sales increases to other Consumer Services customers in the amount
 of $3.4 million, increased DelSite grant  revenue of $365,000 and  increased
 Medical Services revenue of $173,000.

 Net revenues in 2005 were $28.0 million, a 9.1% decrease from $30.8  million
 in 2004. The sales  decrease of $2.8 million  was primarily attributable  to
 reduced sales of bulk raw materials  to Mannatech and Natural  Alternatives,
 with a year-over-year decrease or $5.1  million.  This was partially  offset
 by sales increases  to other Consumer  Services customers in  the amount  of
 $1.3 million,  increased Delsite  grant revenue  of $857,000  and  increased
 Medical Services revenue of $152,000.

 Comparative net  revenue  information  related to  the  Company's  operating
 segments is shown in the following tables.

                                                          2006 vs. 2005
                                                             Change
                                           % of         ----------------
 Net Revenue                     2006      Total           $         %
 -----------                    ------     -----        ------     -----
 Medical Services Division     $ 8,834      32.2%      $(1,709)    (16.2%)
 Consumer Services Division     16,583      60.5%          789       5.0%
 DelSite                         1,989       7.3%          365      22.5%
                                ------     -----        ------     -----
   Total                       $27,406     100.0%      $  (555)     (2.0%)
                                ======     =====        ======     =====

                                                          2005 vs. 2004
                                                             Change
                                           % of         ----------------
 Net Revenue                     2005      Total           $         %
 -----------                    ------     -----        ------     -----
 Medical Services Division     $10,543      37.7%      $   152       1.5%
 Consumer Services Division     15,794      56.5%       (3,869)    (19.7%)
 DelSite                         1,624       5.8%          857     111.7%
                                ------     -----        ------     -----
   Total                        27,961     100.0%      $(2,860)     (9.3%)
                                ======     =====        ======     =====

 Medical Services Division revenues in 2006 decreased $1.7 million, or  16.2%
 from 2005, primarily due to a $1.9 million decrease in royalty revenue, down
 from $2.3 million in 2005 to $417,000 in 2006.  The royalty revenue decrease
 was due to  the expiration  of the original  five-year term  of the  Medline
 Distribution and Licensing Agreement in November 2005, and the commencing of
 the three-year extension period of the  agreement with its associated  lower
 royalties.   Revenues  from domestic  sales  of the  Division's  Carrington-
 branded wound  care products  decreased by  $429,000, or  11.3%, from  $3.79
 million in 2005 to  $3.36 million in 2006.   These decreases were  partially
 offset by $990,000 in the Division's international wound care product  sales
 in 2006, an increase of $278,000, or 39.1%, over 2005 levels.  This increase
 is related to increased demand in the European and South American markets of
 Carrington-branded wound  care products.  Sales  of  Medline-branded  dermal
 management products, which are sold to Medline under a non-exclusive  supply
 agreement entered into in 2000, were  $3.98 million in 2006, an increase  of
 $377,000, or 10.5%, over 2005 sales of $3.60 million.

 Medical Services Division revenues in 2005 increased $152,000, or 1.5%, from
 2004, primarily due to increased demand of Medline-branded dermal management
 products. Sales under this agreement totaled $3.60 million in 2005, compared
 to $2.97  million in  2004,  an  increase  of $630,000.  This  increase  was
 partially  offset  by  a  decrease  in  domestic  sales  of  the  Division's
 Carrington-branded wound care products from $4.10  million in 2004 to  $3.93
 million in 2005,  as Medline decreased  its inventory stock  levels at  year
 end, and by a decrease in  sales of the Division's international wound  care
 products from  $844,000  in 2004  to  $712,000  in 2005,  due  to  decreased
 European sales.  The Division also recorded royalty revenue of $2.30 million
 in 2005 versus $2.47  million in 2004,  a decrease of  $170,000, due to  the
 expiration of the original  five-year term of  the Medline Distribution  and
 Licensing Agreement in November 2005, and  the commencing of the  three-year
 extension period of the agreement with its associated lower royalties.

 The Company's Consumer Services Division recorded revenues of $16.58 million
 in 2006, an  increase of  $789,000, or 5.0%,  when compared  to revenues  of
 $15.79 million in  2005.  Sales  of bulk Manapol[R]  powder decreased  $2.42
 million in 2006  to $6.93  million, down  from $9.36  million in  2005.   In
 recent years the Division has sold bulk Manapol[R] to Mannatech and  Natural
 Alternatives under one-year, non-exclusive, supply and licensing agreements,
 which were renewed annually.  The  most recent contract expired on  November
 30,  2005,  and  was  not  renewed  by  Mannatech.   The  Division  supplied
 Manapol[R] during 2006 to both companies  on a non-contract, purchase  order
 basis.  On January 25, 2007, the Company and Mannatech entered into a three-
 year  Supply  and  Trademark  Licensing  Agreement.  (See  Note  Nineteen  -
 Subsequent Events).   The agreement  calls for  minimum purchase  quantities
 from Mannatech at fixed price levels.  The Company anticipates 2007 sales to
 Mannatech under this agreement  to be above the  minimum levels required  by
 the  agreement  but,  due  to  inconsistency  in  the  size  and  timing  of
 Mannatech's orders, is uncertain as to  by how much sales to Mannatech  will
 exceed the contractual minimums.   Total sales to  these two customers  were
 $6.64  million,  $9.29  million  and $14.41 million for the years 2006, 2005
 and 2004,  respectively.  Sales of  the Division's  specialty  manufacturing
 services business,  which  develops  and manufactures  a  variety  of  gels,
 creams, lotions and  drinks for  customers in  the cosmetic,  skin care  and
 nutraceutical markets, increased $3.26 million from $5.89 million in 2005 to
 $9.15 million in 2006, due mostly to the gain of a major new customer.

 In 2005, the Consumer Services Division  recorded a decrease in revenues  of
 $3.87 million, or 19.7%, to $15.79  million in 2005 from revenues of  $19.66
 million in 2004.  Sales of bulk Manapol[R] powder decreased $5.20 million to
 $9.36 million in 2005 from $14.56 million in 2004.  Sales for the Division's
 specialty manufacturing services business  increased $1.23 million to  $5.89
 million in 2005 from $4.66 million in 2004, due  to the gain of a major  new
 customer and the re-launch of a customer's product previously sold in  2003.
 Additionally,  sales  of  the  Division's  Aloeceuticals[R]  line of immune-
 enhancing dietary supplements increased by $105,000 to $547,000 in 2005 from
 $442,000 in 2004.

 The Company's  DelSite  subsidiary  recorded  an  increase  in  revenues  of
 $365,000, or 22.5%, to $1.99 million in 2006 over revenues of $1.62  million
 in 2005.  In 2006, $69,000 of  revenue was recognized under the SBIR  grant,
 awarded in March 2004,  as compared to $334,000  in 2005.  Additionally,  in
 2006 $1.92 million  of revenue  was recognized  under the  $6 million  NIAID
 grant for preclinical  development of  an intranasal  vaccine against  avian
 influenza.  Revenue in 2005 under this grant was $1.3 million. Approximately
 $2.7 million of funds remain to be drawn under this grant.

 In 2005, the Company's DelSite subsidiary  recorded an increase in  revenues
 of $857,000, or 112%, to $1.6 million versus revenues  of  $767,000 in 2004.
 In 2005, $334,000 of revenue was recognized under the SBIR grant, awarded in
 March 2004, as  compared to $447,000  in 2004.   Additionally, in 2005  $1.3
 million of  revenue was  recognized under  the $6  million NIAID  grant  for
 preclinical development of  an intranasal vaccine  against avian  influenza.
 Revenues recorded under this grant in 2004 were $320,000.

 Product-Related Gross Margin
 ----------------------------
 The  product-related  gross  margin  of  $4.83  million  in 2006  was  $2.93
 million, or 38.5%, decrease from 2005  levels.  This decrease reflected  the
 $1.9 million, or 81.9%, decrease in royalty revenue, which has no associated
 cost of goods sold.  Additionally,  the sales  mix in the Consumer  Services
 Division has shifted from bulk raw material sales, which traditionally carry
 a higher gross margin percentage, to specialty contract manufacturing sales.
 The  product-related gross margins of $7.76 million in 2005 reflect a  $4.04
 million, or 34.3%, decrease from 2004 levels.  This reduction reflected  the
 decreased revenue levels  for the Consumer  Services Division,  specifically
 sales of bulk raw materials,  plus unfavorable manufacturing variances  from
 manufacturing operations in Costa Rica attributable to decreased  Manapol[R]
 production in the second half of the year.

                                                           2006 vs. 2005
                                                              Change
                                                         ----------------
 Product-Related Gross Margin     2006      Total           $         %
 ----------------------------    ------     -----        ------     -----
 Medical Services Division      $   184       3.8%      $(1,958)    (91.4%)
 Consumer Services Division       4,646      96.2%         (968)    (17.2%)
                                 ------     -----        ------     -----
   Total                        $ 4,830     100.0%      $(2,926)    (37.7%)
                                 ======     =====        ======     =====

                                                           2005 vs. 2004
                                                              Change
                                                         ----------------
 Product-Related Gross Margin     2005      Total           $         %
 ----------------------------    ------     -----        ------     -----
 Medical Services Division      $ 2,142      27.6%      $  (408)    (16.0)%
 Consumer Services Division       5,614      72.4%       (3,640)    (39.3)%
                                 ------     -----        ------     -----
   Total                        $ 7,756     100.0%      $(4,048)    (34.3)%
                                 ======     =====        ======     =====

 Product-related gross  margin  for  the  Medical  Services  Division,  which
 includes $417,000 of royalty revenue for  2006, decreased 91.4% to  $184,000
 in 2006 from $2.14 million in 2005.  This reduction in 2006 is primarily the
 result of decreased royalty revenue, which  has no associated cost of  goods
 sold.

 In 2005, product-related  gross margin  for the  Medical Services  Division,
 which includes $2.30 million of royalty revenue for 2005 and 2004, decreased
 16.0% to $2.14 million from $2.55 million in 2004.  The reduction in 2005 is
 primarily the result of decreased royalty  revenue plus costs incurred as  a
 result of the mouthwash product recall.

 The Consumer Services Division reported a decline of $968,000, or 17.2%,  in
 product-related gross margin, decreasing to $4.65 million in 2006 from $5.61
 million in 2005.  The  decrease was primarily related  to the fact that  the
 sales mix  in the  Consumer  Services Division  has  shifted from  bulk  raw
 material sales, which traditionally carry a higher gross margin  percentage,
 to specialty contract manufacturing sales.

 In 2005, the Consumer Services Division reported a decline of $3.64 million,
 or 39.3%, in product-related  gross margin, decreasing  to $5.61 million  in
 2005, from $9.25 million in 2004.  The decrease was primarily related to the
 reduced  sales  of   bulk  Manapol[R]  powder   and  increased   unfavorable
 manufacturing variances  from the  operations in  Costa Rica  attributed  to
 reduced Manapol[R] production in the second half of the year.

 DelSite's 2006  and  2005  revenues were  $2.0  million  and  $1.6  million,
 respectively.  DelSite has no direct  cost of goods sold, only research  and
 development cost.

 Selling, General and Administrative Expenses
 --------------------------------------------
 The Company  experienced  a  decrease  of  12.2%  in  selling,  general  and
 administrative expenses during 2006.   These expenses totaled $7.66  million
 in 2006,  a decrease  of $1.07  million from  $8.73  million  in  2005.  The
 decrease was primarily related to $1.05  million in expense recorded as  the
 result of the settlement of  the Swiss American Products  ("Swiss-American")
 lawsuit, which was entered into on December 20, 2005. The agreement provided
 for, among  other things,  a cash  payment of  $400,000, the  issuance of  a
 promissory note  in  favor  of Swiss-American  with  an  original  principal
 balance of $400,000 and the issuance to Swiss-American of a Series C  Common
 Stock Purchase  Warrant  to  purchase  a total  of  200,000  shares  of  the
 Company's common stock, with a fair value of $248,000.  These items are more
 fully discussed in the notes to the consolidated financial statements.

 In 2005, the Company experienced an increase of $1.17 million, or 15.5%,  in
 selling, general and administrative expenses.  These expenses totaled  $8.73
 million versus $7.56 million in 2004.  The increase was primarily related to
 $1.05 million in  expense recorded as  the result of  the settlement of  the
 Swiss American Products lawsuit.

 Research and Development
 ------------------------
 In 2006, specialized  research and development  expenses in  support of  the
 Company's ongoing operations fell by 18.5%,  decreasing to $670,000 in  2006
 from $822,000 in  2005.   The decrease in  2006 was  a result  of lower  new
 product development research activities by the Company in 2006 as opposed to
 2005.

 In 2005, specialized  research and development  expenses in  support of  the
 Company's ongoing operations fell  by 9.8%, decreasing  to $822,000 in  2005
 from $911,000 in 2004.

 DelSite operates independently from  the Company's specialized research  and
 development program and  is responsible  for the  research, development  and
 marketing of the Company's proprietary Gelsite[R] technology for  controlled
 release and  delivery of  bioactive pharmaceutical  ingredients.   DelSite's
 expenses totaled  $5.09 million  in  2006, a  2.3%  increase over  the  2005
 expenditures of $4.97 million.  This increase  is  the result of  continuing
 product development efforts for its Gelvac[TM] intranasal delivery platform,
 as well as increased  business development efforts.   The 2005  expenditures
 were a 29.8% increase over the 2004 expenditures of $3.83 million.  The 2005
 increase was primarily due to expenses from  the first full year of work  on
 the preclinical, avian influenza vaccine grant program.

 Combined research  and development  expenses  totaled $5.76  million,  $5.80
 million and $4.74 million for the years 2006, 2005 and 2004, respectively.

 Other Expense (Income)
 ----------------------
 Other expense or income  primarily consists of  collections the Company  has
 received from Rancho Aloe against a fully reserved note receivable balance.
 Interest Expense

 Net interest  expense of  $1.01  million was  recorded  in 2006  versus  net
 interest expense of $301,000 in 2005.   The increase of $709,000 was due  to
 additional cash  interest  expense  of $324,000  related  to  the  financing
 entered into in  late 2005 in  the form of  $5.0 million  in 6%  subordinate
 notes, plus $437,000 of non-cash debt  discount amortization related to  the
 same financing, and $169,000 of non-cash debt-issue cost amortization.   Net
 interest expense  of  $301,000 was  recorded  in 2005  versus  net  interest
 expense of $205,000 in 2004.  The increase of $96,000 was due to the charge-
 off of unamortized debt-issue costs associated with the note retired as part
 of the  sale/leaseback of  the Company's  corporate headquarters,  plus  the
 amortization of new debt-issue  costs associated with the  sale of the  $5.0
 million 6% subordinate notes.

 Income Taxes
 ------------
 The Company incurred no foreign income tax expense related to the  Company's
 operations in Costa Rica in 2006 as a result of net losses  for  the period.
 In 2005, the Company incurred $19,000  of foreign income tax related to  the
 Company's operations in Costa Rica.  The tax  expense  was the result of  an
 income tax true-up  related to operations  in 2004.  The  Company  commenced
 operations in Costa Rica in July 1992  and was granted a 100% exemption  for
 the first twelve years  of operation and  a 50% exemption  for the next  six
 years of operation.  The Company's current tax rate in Costa Rica is 15% and
 will increase to 30% effective July 1, 2010.

 There was no benefit or expense for U.S. income taxes in 2006, 2005 or  2004
 as the Company has provided a valuation allowance against all U.S.  deferred
 tax asset  balances at  December 31  of  each year  due to  the  uncertainty
 regarding realization of the asset.

 Net Earnings and Earnings Per Share
 -----------------------------------
 The Company's net loss for 2006 was $7.61 million, or basic and diluted loss
 per share  of $0.70.   Net  loss was  $5.34 million  in 2005,  or basic  and
 diluted loss per share  of $0.50, compared  to a net  income of $36,000,  or
 basic and diluted earnings per share of  $0.00, in 2004.  Basic and  diluted
 average shares outstanding for 2006 were  10,855,448, compared to basic  and
 diluted average shares  outstanding for 2005  of 10,762,342,  and basic  and
 diluted average shares outstanding for  2004 of 10,590,062, and  11,171,305,
 respectively.  The increase in basic and diluted average shares  outstanding
 was primarily due to  employee share purchases  and additional stock  option
 grants.

 Impact of Inflation
 -------------------
 The Company does not believe that inflation has had a material impact on its
 results of operations.

 New Pronouncements
 ------------------
 In November  2004, the  FASB issued SFAS  No. 151  "Inventory Costs."   This
 Statement amends the guidance in ARB No. 43  to clarify  the accounting  for
 abnormal  amounts  of  idle  facility  expense,  freight, handling costs and
 wasted material.  This Statement requires that  those items be recognized as
 current  period charges regardless of whether they meet the criterion of "so
 abnormal." In addition, this Statement requires that the allocation of fixed
 production overheads  to  the  costs  of  conversion be based on  the normal
 capacity of the production facilities.  The provisions of  SFAS No.  151 are
 effective  for inventory costs incurred during fiscal years  beginning after
 June 15, 2005.  The Company anticipates no material effect from the adoption
 of SFAS No. 151.

 In December 2004,  the FASB issued SFAS No. 123(R), "Share-Based  Payments",
 which replaces SFAS No. 123  "Accounting for Stock-Based Compensation",  and
 supersedes  APB  Opinion  No. 25, "Accounting for Stock Issued to Employees"
 and amends SFAS No. 95, "Statement of Cash Flows."  SFAS No. 123(R) requires
 all  share-based  payments  to employees, including grants of employee stock
 options,  to  be  recognized  in  the  income  statement based on their fair
 values.  As such, pro forma disclosure in lieu of expensing  is no longer an
 alternative.  Beginning January 1, 2006,  the Company  adopted SFAS  123(R).
 The Company recorded expenses of $38,000 during the year ended  December 31,
 2006, under SFAS No. 123(R).

 In  May  2006,  the  State  of  Texas  passed  a  bill replacing the current
 franchise tax with a new  margin tax that will go into effect  on January 1,
 2008.  The  Company  estimates  that  the  new  margin  tax  will not have a
 significant  impact on tax expense or deferred tax assets and liabilities.

 In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"),  "Accounting
 for Uncertainty in Income  Taxes  -  an  interpretation  of  FASB  Statement
 No. 109." FIN  48 clarifies the accounting for uncertainty  in income  taxes
 recognized by prescribing  a recognition threshold and measurement attribute
 for financial  statement recognition and measurement of a tax position taken
 or expected to be taken in a tax return.  FIN 48 also provides  guidance  on
 recognition, classification,  interest and  penalties, accounting in interim
 periods, disclosure and transition.  FIN 48 is effective for years beginning
 after December 15, 2006.  The Company is in the process  of determining  the
 impact  of  this  Interpretation  on the Company's  consolidated   financial
 statements.

 In September 2006, the  FASB issued SFAS No.  157 "Fair Value Measurements."
 This  Statement  defines  fair value,  establishes a framework for measuring
 fair value,  and  expands  disclosure about  fair  value measurements.  SFAS
 No.  157  does  not  require  any  new  fair value measurements  but  rather
 eliminates  inconsistencies  in  guidance  found in various prior accounting
 pronouncements.  The  provisions  of  SFAS  No. 157 are effective for fiscal
 years  beginning  after  November 15, 2007,  and  will  apply to the Company
 starting in its 2008 fiscal year. The Company anticipates no material effect
 from the adoption of SFAS No. 157.

 In February 2007,  the FASB issued  SFAS  No.  159 "Fair  Value  Option  for
 Financial  Assets  and  Financial  Liabilities."  This statement's objective
 is  to  reduce  both  complexity in accounting for financial instruments and
 volatility  in earnings caused  by measuring related  assets and liabilities
 differently.  This  statement also  requires information  to be  provided to
 the readers of financial statements to explain the choice  to use fair value
 on earnings  and  to  display  the  fair value of the assets and liabilities
 chosen on the balance sheet. This statement is effective as of the beginning
 of an entity's  first  fiscal year beginning  after November 15,  2007.  The
 Company anticipates no material effect from the adoption of SFAS No. 159.

                          Critical Accounting Policies
                          ----------------------------

 The Company has  identified the following  accounting policies as  critical.
 The  Company's  accounting  policies  are more fully described  in Note  Two
 of the  Financial  Statements.  The preparation  of  consolidated  financial
 statements requires the Company to make estimates and judgments that  affect
 the reported  amounts of  assets, liabilities,  revenues and  expenses,  and
 related disclosure  of  contingent assets  and  liabilities. On  an  ongoing
 basis, the Company evaluates its estimates,  including those related to  bad
 debts and  inventories.  The  Company  bases  its  estimates  on  historical
 experience and  on  various  other  assumptions  that  are  believed  to  be
 reasonable under the circumstances, the results of which form the basis  for
 making judgments about the  carrying values of  assets and liabilities  that
 are not readily apparent from other sources.  Actual results may differ from
 these estimates under different assumptions or conditions.

 The Company records reductions to revenue  for estimated returns based  upon
 recent history.  Historical returns have been $27,000, $72,000 and  $144,000
 for the  years ending  December 31,  2006,  2005,  and  2004,  respectively.
 Accordingly, the Company has a $35,000 reserve recorded for customer returns
 at December 31, 2006. If market conditions were to decline or inventory  was
 in danger of expiring or becoming  obsolete, the Company may be required  to
 implement customer incentive offerings,  such as price discounts,  resulting
 in an incremental reduction of revenue at the time the incentive is offered.
 Additionally, if  demand  for  the  Company's  product  were  to  drop,  the
 Company's distributors may  request permission  from the  Company to  return
 product for credit causing a need  to re-evaluate and possibly increase  the
 reserve for product returns. The  Company maintains allowances for  doubtful
 accounts for estimated losses resulting from the inability of its  customers
 to make  required payments.  If the  financial  condition of  the  Company's
 customers were to deteriorate, resulting in  an impairment of their  ability
 to make payments, additional allowances may be required. The Company  writes
 down its  inventory for  estimated  obsolescence or  unmarketable  inventory
 equal to the  difference between  the cost  of inventory  and the  estimated
 market  value  based  upon  assumptions  about  future  demand  and   market
 conditions.   If actual  market conditions  are  less favorable  than  those
 projected by management, additional  inventory  write-downs may be required.
 The Company has provided a valuation allowance against the net deferred  tax
 assets, based on  available evidence that  the assets may  not be  realized,
 based on  the Company's  history  of losses  and  uncertainty as  to  future
 income.

                          Forward Looking Statements
                          --------------------------

 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 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", "will",  "would",  "should"  or
 words of similar import.  Such  forward-looking statements include,  but are
 not limited to, statements regarding the ability of local suppliers of  Aloe
 vera L. leaves in Costa  Rica to supply the  Company's need for leaves;  the
 condition,  capacity  and  adequacy  of  the  Company's  manufacturing   and
 laboratory facilities and equipment; the adequacy of the protection that the
 Company's patents provide  to the conduct  of its  business operations;  the
 adequacy of the  Company's protection of  its trade  secrets and  unpatented
 proprietary know-how; the Company's belief that the claims of the Plaintiffs
 identified under Item  3 of Part  I of this  report are  without merit;  the
 adequacy of the Company's  cash resources and cash  flow from operations  to
 finance its current operations; and the Company's intention, plan or ability
 to repurchase shares of its outstanding Common Stock, to initiate,  continue
 or complete clinical and other research  programs, to obtain financing  when
 it is needed, to fund its  operations from revenue 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 file additional patent applications,  to
 rely on  trade secrets,  unpatented proprietary  know-how and  technological
 innovation, to reach  satisfactory resolutions  of its  disputes with  third
 parties, to acquire sufficient quantities of Aloe vera L. leaves from  local
 suppliers at significant savings, to collect  the amounts owed to it by  its
 distributors, customers and  other third parties,  and to use  its tax  loss
 carryforwards before they expire, as well as 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  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, that one or more
 of the customers that the Company expects to purchase significant quantities
 of products from the Company may  fail to do so, that competitive  pressures
 may require the Company to lower the prices of or increase the discounts  on
 its products,  that the  Company's sales  of  products it  is  contractually
 obligated to purchase  from suppliers may  not be sufficient  to enable  and
 justify its  fulfillment of  those  contractual purchase  obligations,  that
 other parties who owe the Company substantial amounts of money may be unable
 to pay what they owe the Company, that the Company's patents may not provide
 the Company  with  adequate  protection, that  the  Company's  manufacturing
 facilities may be inadequate to meet demand, that the Company's distributors
 may be  unable  to market  the  Company's products  successfully,  that  the
 Company may not  be able to  resolve its disputes  with third  parties in  a
 satisfactory manner, that the Company may be unable to reach a  satisfactory
 agreement with other important suppliers, that  the Company may not be  able
 to use its tax loss carryforwards  before they expire, that the Company  may
 not have sufficient  financial resources necessary  to repurchase shares  of
 its outstanding Common  Stock, that the  Company may be  unable to  maintain
 effective internal controls over financial  reporting, that the Company  may
 not be able to attract or retain qualified personnel in key positions,  that
 the Company may not be able to generate sufficient cash flow to service  its
 debt obligations, and that the Company  may be unable to produce or  obtain,
 or may have to pay  excessive prices for, the  raw materials or products  it
 needs.

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


 ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
           ----------------------------------------------------------

                               Foreign Currency
                               ----------------

 The Company's manufacturing operation in Costa  Rica accounted for 21.0%  of
 cost  of  sales  for  the  year  ended  December  31,  2006.  The  Company's
 functional currency in  Costa Rica is  the  U.S. Dollar.  As  a result,  the
 Company's financial results could be significantly affected by factors  such
 as changes  in foreign  currency exchange  rates or  economic conditions  in
 Costa Rica.  When the U.S.  Dollar strengthens against the Costa Rica  Colon
 the  cost  of sales  decreases.  During 2006,  the exchange  rate from  U.S.
 Dollar to Costa Rica Colon increased by 3.8%  to  516 at  December 31, 2006.
 The effect  of an  additional 10%  strengthening in  the value  of the  U.S.
 Dollar relative to the Costa  Rica Colon in 2006  would have resulted in  an
 increase of $393,269 in gross profit.  The Company's sensitivity analysis of
 the effects  of changes  in foreign  currency  rates does  not factor  in  a
 potential change in sales levels or local currency prices.

 Sales  of  products  to foreign  markets comprised 5.9%  of sales  for 2006.
 These sales are generally denominated in U.S. Dollars.  The Company does not
 believe that changes  in foreign currency  exchange rates  or weak  economic
 conditions in foreign markets in which the Company distributes its  products
 would have a significant effect on  operating results.  If sales to  foreign
 markets increase in future periods, the effects could become significant.

 Changes in short-term interest rates on debt balances with variable interest
 rates could have an affect on the Company's earnings.  At December 31, 2006,
 a hypothetical one  percent increase in  interest rates would  result in  an
 increase in interest expense of $22,000 on an annual basis.

 For quantitative and  qualitative disclosures about  market risk related  to
 the supply  of  Aloe vera  L.  leaves, see  "Business  -  Raw  Materials and
 Processing."


 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
          -------------------------------------------

 The response to Item 8 is submitted as a separate section of this Form 10-K.
 See Item 15.


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

 On June 20, 2006, the Audit Committee of the Board of Directors approved the
 engagement of Weaver and Tidwell, LLP as the Company's independent  auditors
 for the fiscal year  ending December 31, 2006.  On  the same day, Weaver and
 Tidwell, LLP  formally  advised  the  Company  that  it  was  accepting  the
 position as the Company's independent auditors.  As previously  reported  on
 the Current Report on Form 8-K filed by the Company with the Securities  and
 Exchange  Commission  on  March 30, 2006,  Grant Thornton  LLP notified  the
 Company on March 29, 2006 that  it would decline to stand for  reappointment
 as the Company's independent registered public accounting firm for the  year
 ending December 31, 2006.  On May  15, 2006, Grant Thornton ceased to  serve
 as the Company's independent registered public accounting firm of record.

 During the fiscal years ended December  31, 2003, 2004 and 2005 and  through
 June 20, 2006, there were no  disagreements with Grant Thornton, LLP on  any
 matter of accounting principle  or practice, financial statement  disclosure
 or auditing scope or procedures or any reportable events.


 ITEM 9A.  CONTROLS AND PROCEDURES.
           -----------------------

 Management of the  Company, with the  participation of  its Chief  Executive
 Officer and  Chief Financial  Officer, evaluated  the effectiveness  of  the
 Company's disclosure controls and procedures.  Based on their evaluation, as
 of the end  of the period  covered by this  Form 10-K,  the Company's  Chief
 Executive Officer  and  Chief  Financial Officer  have  concluded  that  the
 Company's disclosure controls and procedures  (as defined in Rules 13a-15(e)
 and  15d-15(e)  under  the  Securities Exchange Act of 1934, as amended) are
 effective.

 There have been no changes in internal control over financial reporting, for
 the period covered  by this  report, that  have materially  affected or  are
 reasonably likely to materially affect, the Company's internal control  over
 financial reporting.


 ITEM 9B. OTHER INFORMATION.
          -----------------
 None.

                                   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",  "Corporate   Governance  and   Board  Committees",   "Executive
 Officers" and "Section 16(a)  Beneficial Ownership Reporting Compliance"  in
 the Company's definitive Proxy Statement relating to its 2007 annual meeting
 of shareholders, which will be filed  pursuant to Regulation 14A within  120
 days after the Company's fiscal year ended December 31, 2006.


 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
 2007 annual  meeting  of  shareholders, which  will  be  filed  pursuant  to
 Regulation 14A  within  120  days after  the  Company's  fiscal  year  ended
 December 31, 2006.


 ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND
            ---------------------------------------------------------------
            RELATED STOCKHOLDERS MATTERS.
            ----------------------------

 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  2007  annual  meeting   of
 shareholders, which will be filed pursuant to Regulation 14A within 120 days
 after the Company's fiscal year ended December 31, 2006.

 ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
           ----------------------------------------------

 The information,  if  any,  required by  Item  13  of Form  10-K  is  hereby
 incorporated by reference from the  information appearing under the  caption
 "Certain Transactions", if any, in the Company's definitive Proxy  Statement
 relating to its  2007 annual meeting  of shareholders, which  will be  filed
 pursuant to Regulation 14A within 120  days after the Company's fiscal  year
 ended December 31, 2006.


 ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.
           --------------------------------------

 The information required by Item 14  of Form 10-K is hereby incorporated  by
 reference from  the  information  appearing under  the  captions  "Principal
 Accountant Fees and  Services" in the  Company's definitive Proxy  Statement
 relating to its  2007 annual meeting  of shareholders, which  will be  filed
 pursuant to Regulation 14A within 120  days after the Company's fiscal  year
 ended December 31, 2006.


                                   PART IV
                                   -------

 ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
           ------------------------------------------

    (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 the
           financial statement schedule filed as a part of this Annual
           Report.

    (3)    Exhibits.

           Reference is made to the Index of Exhibits on pages E-1 through
           E-6 for a list of all exhibits to this report.

<PAGE>
                        CARRINGTON LABORATORIES, INC.
           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE


 Consolidated Financial Statements of the Company:

      Consolidated Balance Sheets --
           December 31, 2006 and 2005                             F-2

      Consolidated Statements of Operations -- years ended
           December 31, 2006, 2005, and 2004                      F-3

      Consolidated Statements of Shareholders' Equity --
           years ended December 31, 2006, 2005 and 2004           F-4

      Consolidated Statements of Cash Flows -- years ended
           December 31, 2006, 2005 and 2004                       F-5

      Notes to Consolidated Financial Statements                  F-6

      Financial Statement Schedule
           Valuation and Qualifying Accounts                      F-27

      Reports of Independent Registered Public Accounting Firms   F-28

<PAGE>

 Consolidated Balance Sheets
 (Amounts in thousands, except share and per share amounts)


                                                           December 31,
                                                      ----------------------
                                                        2006          2005
                                                      --------      --------
 ASSETS:
 Current Assets:
   Cash and cash equivalents                         $     878     $   6,262
   Accounts receivable, net of allowance for
    doubtful accounts of $306 and $329 at
    December 31, 2006 and 2005, respectively             2,659         2,679
   Inventories, net                                      3,405         4,705
   Prepaid expenses                                        155           392
                                                      --------      --------
 Total current assets                                    7,097        14,038

 Property, plant and equipment, net                      6,093         6,755
 Customer relationships, net                               199           392
 Other assets, net                                         609           804
                                                      --------      --------
 Total assets                                        $  13,998     $  21,989
                                                      ========      ========
 LIABILITIES AND SHAREHOLDERS' EQUITY:
 Current Liabilities:
   Line of credit                                    $   1,811     $   1,812
   Accounts payable                                      1,324         2,092
   Accrued liabilities                                   1,820         1,585
   Current portion of long-term debt and
    capital lease obligations                              203           188
   Deferred revenue                                        903         1,386
                                                      --------      --------
 Total current liabilities                               6,061         7,063

 Long-term debt and capital lease obligations,
   net of debt discount                                   3,745        3,418

 Commitments and contingencies

 SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value, 30,000,000 shares
    authorized, 10,896,524 and 10,805,725 shares
    issued at December 31, 2006 and 2005,
    respectively                                           109           108
   Capital in excess of par value                       57,475        57,185
   Accumulated deficit                                 (53,389)      (45,782)
   Treasury stock at cost, 2,400 shares
    at December 31, 2006 and 2005                           (3)           (3)
                                                      --------      --------
 Total shareholders' equity                              4,192        11,508
                                                      --------      --------
 Total liabilities and shareholders' equity          $  13,998     $  21,989
                                                      ========      ========

       The accompanying notes are an integral part of these statements.

<PAGE>

 Consolidated Statements of Operations
 (Amounts in thousands, except per share amounts)


                                                 Years Ended December 31,
                                               ----------------------------
                                                2006       2005       2004
                                               ------     ------     ------
 Revenues:
  Net product sales                           $25,000    $24,038    $27,584
  Royalty income                                  417      2,299      2,470
  Grant income                                  1,989      1,624        767
                                               ------     ------     ------
 Total net revenues                            27,406     27,961     30,821

 Cost and expenses:
  Cost of product sales                        20,586     18,581     18,250
  Selling, general and administrative           7,662      8,731      7,560
  Research and development                        670        822        911
  Research and development, DelSite             5,090      4,974      3,826
  Other income                                     (9)      (131)       (92)
  Interest expense, net                         1,014        301        205
                                               ------     ------     ------
 Net income (loss) before income taxes         (7,607)    (5,317)       161
 Provision for income taxes                         0         19        125
                                               ------     ------     ------
 Net income (loss)                            $(7,607)   $(5,336)   $    36
                                               ======     ======     ======

 Basic and diluted earnings (loss) per
   share                                      $ (0.70)   $ (0.50)   $  0.00
                                               ======     ======     ======

 Basic shares outstanding                      10,855     10,762     10,590

 Diluted shares outstanding                    10,855     10,762     11,171


        The accompanying notes are an integral part of these statements.

<PAGE>
<TABLE>

 Consolidated Statements of Shareholders' Equity
 For the Years Ended December 31, 2006, 2005, and 2004
 (Amounts in thousands)


                       Common Stock    Capital in                Treasury Stock
                      --------------   Excess of   Accumulated   --------------
                      Shares  Amount   Par Value     Deficit     Shares  Amount   Total
                      ------   -----     ------      -------     ------   -----   ------
 <S>                   <C>    <C>       <C>         <C>          <C>     <C>     <C>
 January 1, 2004      10,385  $  104    $53,000     $(40,482)         2  $   (3) $12,619

 Issuance of common
  stock for employee
  stock purchase plan     56       -        163            -          -       -      163
 Issuance of common
  stock for stock
  option plan            281       3        550            -          -       -      553
 Net income                -       -          -           36          -       -       36
                      ------   -----     ------      -------     ------   -----   ------
 December 31, 2004    10,722     107     53,713      (40,446)         2      (3)  13,371

 Issuance of common
  stock for employee
  stock purchase plan     41       -        156            -          -       -      156
 Issuance of common
  stock for stock
  option plan             43       1         83            -          -       -       84
 Issuance of warrants
  in private placement
  debt offering            -       -      2,985            -          -       -    2,985
 Issuance of warrants
  in Swiss American
  Products settlement      -       -        248            -          -       -      248
 Net loss                  -       -          -       (5,336)         -       -   (5,336)
                      ------   -----     ------      -------     ------   -----   ------
 December 31, 2005    10,806     108     57,185      (45,782)         2      (3)  11,508

 Issuance of common
  stock for employee
  stock purchase plan     23       -         86            -          -       -       86
 Issuance of common
  stock for stock
  option plan             68       1        166            -          -       -      167
 Share based
  compensation expense     -       -         38            -          -       -       38
 Net loss                  -       -          -       (7,607)         -       -   (7,607)
                      ------   -----     ------      -------     ------   -----   ------
 December 31, 2006    10,897  $  109    $57,475     $(53,389)         2  $   (3) $ 4,192
                      ======   =====     ======      =======     ======   =====   ======

     The accompanying notes are an integral part of these statements.

</TABLE>
<PAGE>

 Consolidated Statements of Cash Flows
 (Amounts in thousands)
                                                     Years Ended December 31,
                                                    --------------------------
                                                     2006      2005      2004
                                                    ------    ------    ------
 Operating activities:
  Net income (loss)                                $(7,607)  $(5,336)  $    36
    Adjustments to reconcile net income (loss)
     to net cash provided by (used in)
     operating activities:
    Provision for bad debts                            179       243        48
    Provision for inventory obsolescence               473       318       205
    Depreciation and amortization                    1,357     1,238     1,241
    Legal settlement                                     -       647         -
    Share-based compensation expense                    38         -         -
    Amortization of debt discount                      437         -         -
  Changes in operating assets and liabilities:
    Accounts receivable                               (159)      403      (275)
    Inventories                                        827      (409)    1,141
    Prepaid expenses                                   237      (195)       56
    Other assets                                       195        62        46
    Accounts payable and accrued liabilities          (533)      675      (639)
    Deferred revenue                                  (483)   (1,076)      553
                                                    ------    ------    ------
 Net cash provided by (used in) operating
  activities                                        (5,039)   (3,430)    2,412

 Investing activities:
  Disposal of property, plant, and equipment
   in sale/leaseback transaction                         -     4,616         -
  Purchases of property, plant and equipment          (383)     (610)   (2,172)
                                                    ------    ------    ------
 Net cash provided by (used in) investing
  activities                                          (383)    4,006    (2,172)

 Financing activities:
  Borrowings on line of credit                           -         -       300
  Payments on line of credit                            (1)      (75)        -
  Proceeds from debt issuances                           -     2,263       350
  Proceeds from warrant issuances                        -     2,737         -
  Principal payments on debt and capital
   lease obligations                                  (214)   (1,483)   (1,096)
  Issuances of common stock                            253       240       716
  Debt issuance costs                                    -      (426)        -
                                                    ------    ------    ------
 Net cash provided by financing activities              38     3,256       270

 Net increase (decrease) in cash and cash
  equivalents                                       (5,384)    3,832       510
                                                    ------    ------    ------
 Cash and cash equivalents at beginning of year      6,262     2,430     1,920
                                                    ------    ------    ------
 Cash and cash equivalents at end of year          $   878   $ 6,262    $2,430
                                                    ======    ======    ======
 Supplemental disclosure of cash flow information
  Cash paid during the year for interest           $   465   $   260    $  225
  Cash paid during the year for income taxes             -   $   140         -
  Non-cash warrant issue to broker                       -   $   248         -
  Property plant and equipment
    acquired under capital leases                  $   119   $   104         -


        The accompanying notes are an integral part of these statements.

<PAGE>

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 NOTE ONE. BUSINESS

 Carrington  Laboratories,   Inc.  (the   "Company")  is   a   research-based
 biopharmaceutical, medical device, raw  materials and nutraceutical  company
 engaged in the development, manufacturing and marketing of naturally-derived
 complex  carbohydrates  and  other  natural  product  therapeutics  for  the
 treatment of  major illnesses,  the dressing  and management  of wounds  and
 nutritional supplements.

 The Company's Medical Services Division offers a comprehensive line of wound
 management  products   to  hospitals,   nursing  homes,   alternative   care
 facilities, cancer  centers, home  health care  providers  and managed  care
 organizations.  The Company and Medline Industries, Inc. ("Medline") entered
 into a Distributor and License Agreement dated November 3, 2000, under which
 the Company  granted to  Medline the  exclusive  right, subject  to  certain
 limited exceptions, to distribute all of  the Company's wound and  skin care
 products (the "Products") in the United States, Canada, Puerto Rico  and the
 U.S. Virgin Islands for a term of  five years that began  December 1,  2000.
 The agreement  provides that  Carrington will  continue  to manufacture  its
 existing line of Products and sell them to Medline at specified  prices. The
 prices, which were generally  firm for the first  two years of the  contract
 term, are thereafter subject to adjustment  not more than once each  year to
 reflect increases in manufacturing cost.

 The agreement also grants Medline a  nonexclusive license to use  certain of
 the Company's trademarks in connection with the marketing of  the  Products.
 In addition, it permits Medline, if it so elects, to use those trademarks in
 connection with the marketing of various Medline products and other products
 not manufactured by the Company (collectively, "Other Products").

 The agreement required Medline  to pay the Company  a base royalty  totaling
 $12,500,000 in quarterly  installments that  began on  December 1, 2000  and
 ended on September 1,  2005.  In  addition to the  base royalty, if  Medline
 elects to  market any  of the  Other  Products under  any of  the  Company's
 trademarks, Medline must pay  the Company a royalty  of between one  percent
 and five percent of Medline's aggregate annual net sales of the Products and
 the Other Products, depending on the  amount of the net sales.   The Company
 and Medline amended the Distributor and  License Agreement in April  2004 to
 extend the term  of the agreement  through November 30,  2008.  The  amended
 agreement specified an advance payment of $1,250,000, which the  Company has
 received.

 The Company entered into a Supply Agreement with Medline  effective December
 1,  2000,  which  among  other  things,  provides  that  the   Company  will
 manufacture Medline-brand dermal management products.  The  Supply Agreement
 is co-terminus with the amended Distributor and License Agreement.

 The Consumer  Services  Division markets  or  licenses bulk  raw  materials,
 specialty manufacturing services and finished consumer products.   Principal
 sales of  the  Division  are bulk  raw  materials  which are  sold  to  U.S.
 manufacturers who include  the high quality  extracts from  Aloe vera L.  in
 their finished products.

 The Company formed a  subsidiary, DelSite Biotechnologies, Inc.,  in October
 2001 as a vehicle  to further the development  and commercialization of  its
 new proprietary complex carbohydrate  (GelSite[R] polymer) that the  Company
 is developing for use as a drug and vaccine delivery system.

 In December 2002, the Company entered  into an agreement to  acquire certain
 assets of the Custom Division of Creative Beauty Innovations,  Inc. ("CBI"),
 including  specialized  manufacturing  customer   information,  intellectual
 property and equipment.  CBI  is a privately-held  manufacturer of skin  and
 cosmetic products with operations in Fort Worth, Texas.

 Under the agreement,  the  Company paid  CBI  $1.6 million,  including  $0.6
 million for inventory of CBI. In  addition, for the five-year  period ending
 in December 2007, the Company agreed  to pay CBI an amount equal  to 9.0909%
 of its net sales of CBI products to CBI's transferring customers up  to $6.6
 million per  year  and 8.5%  of  its net  sales  of  CBI products  to  CBI's
 transferring customers  over $6.6  million per  year.   The acquired  assets
 include equipment  and  other physical  property  previously used  by  CBI's
 Custom Division to  compound and package  cosmetic formulations of  liquids,
 creams, gels and lotions into bottles, tubes or cosmetic  jars.  The Company
 uses these assets in a substantially  similar manner.  The  Company provides
 services  to  these  customers  through  the  Consumer  Services  Division's
 development and manufacturing services group.  The Company recorded $100,000
 for the purchase  of equipment  and $980,000  for the  purchase of  customer
 relationship intangibles in connection with the acquisition.

 The Company's products are produced at its plants in Irving, Texas and Costa
 Rica. A  portion of  the Aloe  vera  L. leaves  used for  manufacturing  the
 Company's products are  grown on a  Company-owned farm in  Costa Rica.   The
 remaining leaves are  purchased from  other producers in  Central and  South
 America.

 The accompanying financial statements have been prepared on a  going concern
 basis, which assumes the Company will  realize its assets and  discharge its
 liabilities  in  the  normal  course  of  business.  As  reflected   in  the
 accompanying consolidated  financial statements  and as  the  result of  its
 significant  investment  in  the  research  and  development  activities  of
 DelSite, the Company  incurred cumulative  net losses of  $12.9 million  and
 used cash  from operations  of $6.1  million during  the  three years  ended
 December 31, 2006. The  Company projects a net  loss for fiscal 2007  before
 consideration of  potential  funding sources  for  this same  period.  These
 conditions raise doubt about  the Company's ability to  continue as a  going
 concern.

 Funding  of  the  Company's   working  capital  requirements  has   resulted
 principally from operating cash  flows, bank financing, advances  on royalty
 payments under  certain  of  its  existing contracts  and  debt  and  equity
 financing. In  November 2005,  the Company  closed  a $5.0  million  private
 placement of term notes due in December 2009 and warrants with 16 investors.
 In February 2007,  Sabila Industrial, S.A., a wholly-owned subsidiary of the
 Company, entered into  a revolving  credit facility with  Banco Nacional  de
 Costa Rica for $2,990,000, which matures in February 2010, and borrowed $1.5
 million under the facility. These transactions are described  throughout the
 footnotes.

 The Company has $1.0 million  available under its Comerica  credit facility,
 provided however, the  Company's current  accounts receivable and  inventory
 balances (which provide security for  borrowed funds) are not  sufficient to
 permit any additional borrowings  at this time.   The Company also has  $1.5
 million available under  its Banco  Nacional credit facility.   The  Company
 believes  that  the  expected  cash  flows  from  operations  and  licensing
 agreements and expected revenues from government grant programs will provide
 the funds necessary  to service  its existing indebtedness  and finance  its
 operations until September 2007.

 The Company is currently engaged in efforts to restructure  certain existing
 indebtedness in order to increase available funds on a near-term  basis, and
 it also intends  to seek  additional financing  during the  next six  months
 through  one  or  more  public  or  private  equity  offerings,   additional
 debt financings, corporate collaborations,  or  licensing transactions.  The
 Company cannot  be certain  that additional  funding  will be  available  on
 acceptable terms,  or at  all.  If adequate  funds  are not  available,  the
 Company may be required to delay,  reduce the scope of, or eliminate  one or
 more of its research or development programs or commercialization efforts.

 There are  currently no  commitments  in place  for  these debt  and  equity
 transactions, nor  can  assurances be  given  that  such financing  will  be
 available. While the  Company is confident  that it  will raise the  capital
 necessary to fund operations and achieve successful commercialization of the
 products under development, there can be  no assurances in that  regard. The
 financial statements do  not include  any adjustments  that may  arise as  a
 result of this uncertainty.


 NOTE TWO. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 PRINCIPLES OF CONSOLIDATION.  The consolidated financial  statements include
 the  accounts  of  Carrington  Laboratories,  Inc.,  and   its  wholly-owned
 subsidiaries.   All  intercompany   accounts  and  transactions   have  been
 eliminated in consolidation.

 CASH  EQUIVALENTS.   The  Company's   policy  is  that  all   highly  liquid
 investments purchased with  a maturity of  three months or  less at date  of
 acquisition  are  considered  to   be  cash  equivalents  unless   otherwise
 restricted.   None of  the cash  equivalents are  restricted  for any  years
 presented.

 INVENTORY.  Inventories are recorded at the lower of cost  (first-in, first-
 out) or market.   The Company records a  reserve for inventory  obsolescence
 based on an analysis of slow moving and expired products.

 PROPERTY, PLANT AND EQUIPMENT.   Property, plant and equipment  are recorded
 at   cost  less  accumulated  depreciation.   Buildings   and  improvements,
 furniture  and fixtures  and  machinery  and equipment  are  depreciated  on
 the straight-line  method  over  their   estimated  useful lives.  Leasehold
 improvements and equipment under capital leases are amortized over the terms
 of the respective leases or the estimated lives of the assets,  whichever is
 less.  Expenditures for  maintenance and repairs are  charged to expense  as
 incurred.

 LONG-LIVED ASSETS.  The Company reviews long-lived assets, including finite-
 lived intangible  assets  for  impairment  whenever  events  or  changes  in
 circumstances indicate that the carrying amount may not be recoverable.   If
 the sum of  the expected  future undiscounted cash  flows is  less than  the
 carrying amount  of the  asset,  a loss  is  recognized for  the  difference
 between the fair value and carrying value of the asset.  There  have been no
 impairment charges recorded in the years presented.

 CUSTOMER RELATIONSHIPS.  In connection with the CBI acquisition described in
 Note One, the Company recorded  a finite-lived intangible asset  of $980,000
 for  customer  relationships  acquired.   The  Company  is  amortizing  this
 intangible asset over five  years, which is based  on the estimated life  of
 the customer relationships.  Future amounts  paid to the sellers based  on a
 percentage of  sales  of CBI  products  as described  in  Note One  will  be
 recorded as  an expense  in  the same  period  the corresponding  sales  are
 recorded.  The Company recorded expenses of $308,000, $262,000,  $271,000 in
 2006, 2005 and 2004, respectively, for  royalties due under  the  agreement.
 The Company recorded  expense for  amortization of the  intangible asset  of
 approximately $193,000  in  each  of the  years  2006,  2005 and  2004,  and
 accumulated amortization of $781,000, $588,000 and $395,000 at  December 31,
 2006, 2005 and 2004, respectively.  Amortization expense over the  next year
 is expected to be approximately $200,000.

 TRANSLATION   OF   FOREIGN   CURRENCIES.    The  functional   currency   for
 international operations (Costa Rica) is 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  amortization,  which  are
 translated at  historical rates.   Translation  adjustments and  transaction
 gains or losses are recognized in the consolidated statement of operations.

 REVENUE RECOGNITION.  The  Company recognizes revenue  for product sales  at
 the time of shipment when title to the goods transfers and collectibility is
 reasonably assured, net of a reserve for estimated returns.   Royalty income
 is recognized over the period of the licensing and royalty agreement.  Grant
 income is  recognized  ratably as  the  grant budget-approved  expenses  are
 incurred.

 DEFERRED REVENUE.  Deferred  revenue is primarily  related to the  licensing
 and royalty agreement with Medline and represents amounts received in excess
 of amounts amortized to royalty income.

 INCOME TAXES. The Company uses the liability method of accounting for income
 taxes. Under this method, deferred income taxes are recorded to  reflect the
 tax consequences  of  differences  between  the  tax  basis  of  assets  and
 liabilities and the  financial reporting  basis.   Valuation allowances  are
 provided against net deferred  tax assets when it  is more likely than  not,
 based on available evidence, that assets may not be 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.

 FREIGHT COSTS.  Shipping costs incurred  by the Company are included  in the
 consolidated statement of operations in selling, general  and administrative
 expenses and were approximately $1,099,000, $1,032,000 and $914,000  for the
 years ended December 31, 2006, 2005 and 2004, respectively.

 ADVERTISING COSTS.   Advertising  costs, included  in  selling, general  and
 administrative, are  expensed as  incurred and  were approximately  $28,000,
 $136,000 and $240,000 for the years ended 2006, 2005 and 2004, respectively.

 STOCK-BASED COMPENSATION.  On January 1, 2006, the Company adopted  the fair
 value  recognition  provisions  of  Financial  Accounting   Standards  Board
 ("FASB") Statement No. 123(R), "Share-Based Payment", ("SFAS 123(R)"). Prior
 to January 1, 2006, the Company accounted for share-based payments under the
 recognition and measurement provisions of  APB Opinion No. 25,   "Accounting
 for Stock Issued to Employees"  ("APB 25"), and related  Interpretations, as
 permitted  by   FASB  Statement   No.  123,   "Accounting  for   Stock-Based
 Compensation" ("SFAS 123").  In accordance with APB 25, no compensation cost
 was required to be recognized for options granted that had an exercise price
 equal to the  market value of  the underlying  common stock  on the date  of
 grant.

 The Company adopted  SFAS 123(R)  using the  modified-prospective-transition
 method. Under this transition method, compensation cost recognized in future
 interim and annual reporting periods includes: (1) compensation cost for all
 share-based payments granted prior to, but  not yet vested as of  January 1,
 2006, based on the  grant-date fair value estimated  in accordance with  the
 original provisions of SFAS  123, and (2) compensation  cost for all  share-
 based payments granted subsequent  to January 1, 2006,  based on the  grant-
 date fair value estimated in accordance with the provisions of  SFAS 123(R).
 The results for the prior periods have not been restated.

 NET INCOME (LOSS) PER SHARE.  Basic net income (loss) per share  is based on
 the weighted-average number of shares of common stock outstanding during the
 year.  Diluted net income (loss) per share includes the effects  of options,
 warrants and convertible securities unless the effect is antidilutive.   The
 Company uses its weighted-average close price of its stock for the reporting
 period to determine the dilution of  its stock options and  warrants related
 to its EPS calculation.

 USE OF ESTIMATES.   The  preparation of financial  statements in  conformity
 with accounting  principles  generally  accepted in  the  United  States  of
 America 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.  These  estimates  include accounts  receivable bad  debt,
 inventory obsolescence and  return reserves.   Actual  results could  differ
 from those estimates.

 FAIR VALUE OF FINANCIAL  INSTRUMENTS.  The carrying  value of the  Company's
 cash and cash equivalents, accounts receivable, accounts payable and accrued
 liabilities estimate fair value  due to their  relative  short-term  nature.
 The majority of the Company's debt approximates fair value due to the nature
 of the floating interest  rates being charged.   The fair value of  the $5.0
 million note payable  is approximately  $4.0 million, based  on a  valuation
 calculation using a market interest rate of 12.5%.

 NEW PRONOUNCEMENTS.   In  November  2004,  the  FASB  issued  SFAS  No.  151
 "Inventory Costs."   This statement  amends the guidance  in ARB  No. 43  to
 clarify the  accounting  for  abnormal amounts  of  idle  facility  expense,
 freight, handling costs and wasted  material.  This statement  requires that
 those items be recognized  as current period  charges regardless of  whether
 they meet  the criterion  of "so  abnormal."   In  addition, this  statement
 requires that the allocation of fixed  production overheads to the  costs of
 conversion be based on  the normal capacity of  the  production  facilities.
 The provisions of SFAS  No. 151 are effective  for inventory costs  incurred
 during fiscal years beginning after June 15, 2005.  Adoption of SFAS No. 151
 had no material effect on the Company.

 In December 2004, the FASB  issued SFAS No. 123(R),  "Share-Based Payments",
 which replaces SFAS No.  123 "Accounting for Stock-Based  Compensation", and
 supersedes APB Opinion No.  25, "Accounting for  Stock Issued to  Employees"
 and amends SFAS No. 95, "Statement of Cash Flows."  SFAS No. 123(R) requires
 all share-based payments  to employees, including  grants of employee  stock
 options, to  be recognized  in  the income  statement  based on  their  fair
 values.  As such, pro forma disclosure in lieu of expensing is  no longer an
 alternative.  The new  standard is effective in  the first annual  reporting
 period beginning  after June  15, 2005.   The  Company  recorded expense  of
 $38,000 during the year ended December 31, 2006, under SFAS No. 123(R).

 In May  2006,  the  State of  Texas  passed  a bill  replacing  the  current
 franchise tax with a new margin  tax that will go into effect  on January 1,
 2008. The  Company  estimates  that the  new  margin  tax will  not  have  a
 significant impact on tax expense or deferred tax assets and liabilities.

 In July 2006, the FASB issued Interpretation No. 48 ("FIN  48"), "Accounting
 for Uncertainty  in  Income Taxes  -  an  interpretation of  FASB  Statement
 No. 109." FIN 48 clarifies  the accounting for  uncertainty in income  taxes
 recognized by prescribing a recognition threshold and  measurement attribute
 for financial statement recognition and measurement of a tax  position taken
 or expected to be taken  in a tax return.  FIN 48 also provides  guidance on
 recognition, classification, interest and  penalties, accounting in  interim
 periods, disclosure and transition. FIN 48 is effective for  years beginning
 after December 15, 2006. The  Company is in the  process of determining  the
 impact of  this  Interpretation  on  the  Company's  consolidated  financial
 statements.

 In September 2006, the FASB issued SFAS No. 157 "Fair Value  Measurements."
 This Statement defines  fair value,  establishes a  framework for  measuring
 fair  value,  and  expands  disclosure about fair value measurements.   SFAS
 No.  157  does  not  require  any  new  fair  value measurements but  rather
 eliminates inconsistencies in  guidance  found  in various  prior accounting
 pronouncements.  The  provisions of SFAS  No. 157  are effective for  fiscal
 years beginning  after November  15, 2007,  and will  apply  to the  Company
 starting on  its 2008  fiscal year.   The  Company  anticipates no  material
 effect from the adoption of SFAS No. 157.

 In February  2007, the  FASB issued  SFAS  No. 159  "Fair Value  Option  for
 Financial Assets and Financial  Liabilities."  This statements  objective is
 to reduce  both  complexity  in accounting  for  financial  instruments  and
 volatility in earnings  caused by measuring  related assets and  liabilities
 differently.  This statement also requires information to be provided to the
 readers of financial statements to explain  the choice to use fair  value on
 earnings and to display the fair value of the assets and  liabilities chosen
 on the balance sheet.  This statement is effective as of the beginning of an
 entity's first fiscal year beginning after  November 15, 2007.   The Company
 anticipates no material effect from the adoption of SFAS No. 159.


 NOTE THREE.  INVENTORIES

 The following summarizes the components of inventory at December 31, 2006
 and 2005, in thousands:

                                                 2006          2005
 ---------------------------------------------------------------------------
 Raw materials and supplies                    $2,478        $2,652
 Work-in-process                                  319           322
 Finished goods                                 1,511         2,522
 Less obsolescence reserve                       (903)         (791)
 ---------------------------------------------------------------------------
 Total                                         $3,405        $4,705
 ---------------------------------------------------------------------------


 NOTE FOUR.  PROPERTY, PLANT AND EQUIPMENT

 Property, plant and  equipment consisted of  the following  at December  31,
 2006 and 2005, in thousands:

                                                         Estimated
                                  2006        2005      Useful Lives
 ---------------------------------------------------------------------------
 Land                           $   151     $   151
 Buildings and improvements       2,709       2,702     7 to 25 years
 Furniture and fixtures             839         773     4 to  8 years
 Machinery and equipment         10,989      10,754     3 to 10 years
 Leasehold improvements           1,332       1,327     3 to 10 years
 Equipment under capital leases     427         490           5 years
 ---------------------------------------------------------------------------
 Total                           16,447      16,197
 Less accumulated depreciation
   and amortization              10,354       9,442
 ---------------------------------------------------------------------------
 Property, plant and
   equipment, net               $ 6,093     $ 6,755
 ---------------------------------------------------------------------------

 The net book  value for equipment  under capital leases  as of December  31,
 2006 and 2005, was $292,000 and $355,000, respectively.

 The net  book  value of  property,  plant and  equipment  in Costa  Rica  at
 December 31, 2006 and 2005 was $3,822,000 and $4,209,000, respectively.


 NOTE FIVE.  ACCRUED LIABILITIES

 The following summarizes  significant components of  accrued liabilities  at
 December 31, 2006 and 2005, in thousands:

                                             2006           2005
 ---------------------------------------------------------------------------
 Accrued payroll                           $  293        $  215
 Accrued insurance                             83           166
 Accrued taxes                                178           117
 Accrued professional fees                    152           260
 Accrued rent                                 230           165
 Accrued interest                              95            37
 Accrued product recall costs                 415           251
 Other                                        374           374
 ---------------------------------------------------------------------------
 Total                                      $1,820       $1,585
 ---------------------------------------------------------------------------


 NOTE SIX.  LINE OF CREDIT

 The Company has a line of credit with Comerica Bank Texas ("Comerica")  that
 provides for borrowings of up to $3 million based on the level of  qualified
 accounts receivable and inventory. The line  of credit is collateralized  by
 accounts receivable and inventory.  Borrowings under the line of credit bear
 interest at the bank's prime rate (8.25%  at December 31, 2006)  plus  0.5%.
 As of December 31, 2006, there was $1,811,000 outstanding on the credit line
 with $839,000 of credit available for operations, net of outstanding letters
 of credit of  $350,000. The line  of credit has  no expiration  date and  is
 payable on demand.

 The Company's  credit  facilities  with  Comerica  require  the  Company  to
 maintain certain financial ratios.  The covenants and the Company's position
 at December 31, 2006 are as follows:

 Covenant                   Covenant Requirement   Company's Position
 ---------                  --------------------   ------------------
 Total net worth                $12,200,000             $3,994,247
 Current ratio                      1.60                   1.35
 Liquidity ratio                    1.75                   1.95

 The total net worth, current ratio and liquidity ratio covenant amounts  and
 the Company's position are calculated as defined in the credit agreement, as
 amended. The covenant  amounts for these  ratios will remain  at these  same
 fixed amounts until maturity.   Although the Company  was not in  compliance
 with two of its financial-ratio covenants under the Comerica line of  credit
 for the period ended  December 31, 2006, Comerica  has waived the events  of
 non-compliance through May 31, 2007.

 The Company believes  that it  is unlikely  that Comerica  will continue  to
 grant such  waivers  after the  second  quarter of  2007,  and can  make  no
 assurances that such waivers  will be granted  for events of  non-compliance
 occurring subsequent to May 31,  2007.  If the  Company is unable to  obtain
 such waivers and  the existing  covenant defaults  continue, Comerica  could
 accelerate the indebtedness under the Company's  credit facility as well  as
 all other debt that the Company has outstanding with Comerica, if any.   The
 Company  is  presently  seeking  additional  funding  that  would  enable it
 to  repay  its  indebtedness under  the Comerica  credit  facility and  fund
 the  Company's working  capital  obligations.  If  Comerica  accelerates the
 indebtedness under  the  Company's  credit facility  prior  to  the  Company
 obtaining such additional funding, the Company would be forced to  refinance
 all  of  the  Comerica  indebtedness with  another lender.   Any  additional
 financing secured  by  the  Company or  the  Company's  refinancing  of  the
 Comerica credit facility will likely contain interest rates and terms  which
 are more burdensome for the Company than those presently in place under  the
 Comerica facility, resulting in an adverse impact on liquidity.


 NOTE SEVEN.  LONG-TERM DEBT

 In March 2003, the  Company received a loan  of $500,000 from Bancredito,  a
 Costa Rica  bank,  with interest  and  principal  to be  repaid  in  monthly
 installments over eight years.   The interest rate on  the loan is the  U.S.
 Prime Rate (8.25%) plus 2.0%.  As  of December 31, 2006, there was  $310,000
 outstanding on the loan.

 In September 2004, the Company received a loan of $350,000 from  Bancredito,
 a Costa  Rica bank,  with interest  and principal  to be  repaid in  monthly
 installments over eight years.   The interest rate on  the loan is the  U.S.
 Prime Rate (8.25%) plus 2.5%.  As  of December 31, 2006, there was  $282,000
 outstanding on the loan.

 Both the loans through Bancredito are secured by land and equipment in Costa
 Rica (with a carrying value of approximately $660,000).

 On November 18, 2005, the Company sold $5,000,000 aggregate principal amount
 of 6.0% subordinated notes. The notes  mature, subject to certain  mandatory
 prepayments discussed below, on November 18, 2009. Interest on the notes  is
 payable quarterly in arrears.  The notes require mandatory prepayment of all
 principal and interest in the event  that the holder of such note  exercises
 its Series A Warrant, which was also  issued as part of the transaction,  in
 full.  The  note is subordinate  to the Company's  indebtedness to  Comerica
 Bank and certain  other indebtedness.   As of December  31, 2006, there  was
 $5,000,000 outstanding  on the  note with  an  associated debt  discount  of
 $2,254,000 for a net balance of  $2,746,000.  The 5,000,000 warrants have  a
 fair value of $4.8 million as  determined by independent appraisers, and  an
 allocated  value  of  $2.7 million, which  was recorded as  a debt discount.
 Additionally, the Company incurred $674,000 of  debt issue costs related  to
 this financing  arrangement, which  will be  amortized using  the  effective
 interest method over the term of the debt.  As a result of the debt discount
 associated with the value of the  warrants.  The effective interest rate  on
 the debt is 30%.

 On December 20, 2005, the Company  entered into a settlement agreement  with
 Swiss-American Products,  Inc.  ("Swiss-American")  and G.  Scott  Vogel  to
 resolve all claims  related to  a lawsuit  filed by  Swiss-American in  June
 2001. The  settlement agreement  provides for,  among other  things, a  cash
 payment of $400,000 and the issuance of a promissory note in favor of Swiss-
 American with an  original principal balance  of $400,000.  The  note  bears
 interest at the rate  of 6.0% per annum,  payable quarterly in arrears,  and
 all outstanding principal  is due and  payable in full,  subject to  certain
 mandatory prepayments  discussed  below,  on December  20,  2009.  The  note
 requires mandatory prepayment  of all principal  and interest  in the  event
 that the holder of such note exercises its Series C Warrant, which was  also
 issued  as  part  of  the  settlement  agreement,  in  full.   The  note  is
 subordinate to the Company's indebtedness to Comerica Bank and certain other
 indebtedness.  As of  December 31, 2006, there  was $400,000 outstanding  on
 the note.

 The following summarizes annual maturities at December 31, 2006, in
 thousands:

                 2007                        $   107
                 2008                            112
                 2009                          5,517
                 2010                            125
                 2011                             86
                 Thereafter                       52
                                              ------
                 Subtotal                      5,999
                 Debt Discount                (2,254)
                                              ------
                 Total                       $ 3,745
                                              ======


 NOTE EIGHT.  COMMON STOCK

 SHARE PURCHASE RIGHTS PLAN.   The Company has  a share purchase rights  plan
 which provides, among  other rights,  for the  purchase of  common stock  by
 existing common  stockholders at  significantly  discounted amounts  in  the
 event a person or group acquires or  announces the intent to  acquire 15% or
 more of the Company's  common stock. The  rights expire  in  2011 and may be
 redeemed at any time at the option of  the Board of Directors for $.001  per
 right.

 EMPLOYEE STOCK PURCHASE PLAN.   The Company has  an Employee Stock  Purchase
 Plan under  which employees  may purchase  shares  of the  Company's  common
 stock.  Prior  to January  1, 2006, employees  purchased shares  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  each month.   Effective January  1, 2006,  the
 purchase price is 95% of the market  price of the Company's common stock  on
 the last business  day of  each month.   A  maximum of  1,250,000 shares  of
 common stock was reserved for purchase under this Plan.  As of December  31,
 2006, a total of  991,507 shares had been  purchased by employees at  prices
 ranging from $0.77 to $29.54 per share.

 STOCK OPTIONS.   The Company has  an incentive stock  option plan which  was
 approved by the shareholders in 2004 under which incentive stock options and
 nonqualified stock options may be granted to employees, consultants and 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 must be granted  at a price no less than  110%
 of the market value.  Employee options are normally granted for terms of  10
 years.  Options granted in 2006 vest at  the rate of 50% per year  beginning
 in the first  anniversary of the  grant date. Options  granted in 2005  were
 100% vested on December 20, 2005. Options granted in 2004 vested at the rate
 of 50% per year beginning on the  first anniversary of the grant date,  with
 the remaining  50%  receiving  accelerated vesting  on  December  20,  2005.
 Options to  non-employee directors  have terms  of ten  years and  are  100%
 vested on the grant date. The Company has reserved 500,000 shares of  Common
 Stock for issuance under  this plan.   As of December  31, 2006, options  to
 purchase 93,700 shares were available for future grants under the plan.

 The Company also has  an incentive stock option  plan which was approved  by
 the  shareholders  in   1995  under  which   incentive  stock  options   and
 nonqualified stock options were granted  to employees, consultants and  non-
 employee directors.  Options were 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 were required to be granted at a price no less
 than 110% of the market value.   Employee options were normally granted  for
 terms of 10 years.  Options  granted through 2001 had various vesting  rates
 and all such  options still outstanding  were fully vested  at December  31,
 2005.  Options granted subsequent to 2001 vested at the rate of 50% per year
 beginning on  the  first anniversary  of  the  grant date  and  all  options
 outstanding received accelerated vesting on December  20, 2005.  Options  to
 non-employee directors have terms  of ten years and  are 100% vested on  the
 grant date.  The Company has  reserved 2,250,000 shares of Common Stock  for
 issuance under this plan.  The Plan expired on April 1, 2005, after which no
 additional grants have been or  may be made under  the plan.  In  accordance
 with the  provisions of  the plan,  all options  issued under  the plan  and
 outstanding on  the expiration  date of  the plan  shall remain  outstanding
 until the earlier of their exercise, forfeiture or lapse.

 Beginning January 1, 2006, the Company was required to adopt the  provisions
 of Statement  of  Financial  Accounting Standards  No.  123(R)  "Share-Based
 Payment" ("SFAS  123(R)"), which  requires  the recognition  of  stock-based
 compensation associated  with  stock  options as  an  expense  in  financial
 statements.  The primary purpose of  the vesting acceleration was to  reduce
 the non-cash compensation expense  that would have  been recorded in  future
 periods following the  Company's adoption of  SFAS 123(R).   As a result  of
 accelerating these options in  advance of the adoption  of SFAS 123(R),  the
 Company reduced  the pre-tax  stock option  expense  it would  otherwise  be
 required to record by $162,500 in 2006 and an estimated reduction  of $4,400
 in 2007.

 STOCK-BASED COMPENSATION.   The Company  adopted the  provisions of  revised
 Statement  of  Financial  Accounting  Standards  No.  123  ("SFAS  123(R)"),
 "Share-Based  Payment,"  including   the  provisions  of  Staff   Accounting
 Bulletin No. 107 ("SAB 107")  on January 1,  2006, the  first day  of  2006,
 using  the  modified  prospective  transition  method  to  account  for  the
 Company's  employee  share-based   awards.  The   valuation  provisions   of
 SFAS 123(R) apply to new  awards and to awards  that are outstanding at  the
 effective date and subsequently modified or cancelled.  The Company's  Board
 of Directors approved  the acceleration of  the vesting  on all  outstanding
 unvested options held by  officers and employees  under the incentive  stock
 option plan as of  December 18, 2005.   The primary  purpose of the  vesting
 acceleration was to reduce the non-cash compensation expense that would have
 been recorded in  future periods following  the Company's  adoption of  SFAS
 123(R).  The Company's consolidated financial statements as of  December 31,
 2006 and  for  the  year  ended December 31,  2006  reflect  the  impact  of
 SFAS 123(R). In accordance with the modified prospective transition  method,
 the Company's consolidated financial statements  for prior periods were  not
 restated to reflect, and do not include, the impact of SFAS 123(R).

 Share-based compensation expense recognized during a period is based on  the
 value of  the  portion of  share-based  payment awards  that  is  ultimately
 expected  to  vest  during  the  period.  Share-based  compensation  expense
 recognized in the  consolidated statement  of operations  for 2006  includes
 compensation  expense  for  share-based  payment  awards  granted  in  2006,
 expenses are amortized under the straight-line attribution method. As share-
 based compensation  expense  recognized  in the  consolidated  statement  of
 operations for 2006 is based on  awards ultimately expected to vest, it  has
 been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures  to
 be estimated at the time of  grant and revised, if necessary, in  subsequent
 periods if  actual  forfeitures  differ from  those  estimates.  Pre-vesting
 forfeitures were estimated  to be  approximately 0%  for the  grant made  to
 employees on January 5, 2006 and 6% for  grant made to employees on May  18,
 2006, based on our historical experience.

 The adoption of SFAS 123(R) resulted in incremental share-based compensation
 expense of  $38,000 in  the year  ended December 31,  2006. The  incremental
 share-based compensation caused the net loss before income taxes and the net
 loss to increase by the same amount and did not affect the basic and diluted
 loss per share. Total compensation expense related to both of the  Company's
 share-based awards, recognized under SFAS 123(R), for 2006 were comprised of
 the following:

                                                          2006
                                                         ------
 Selling, general and administrative expense            $    13
 Research and development expense                            25
                                                         ------
 Share-based compensation expense before taxes               38
 Related income tax benefits                                  -
 Share-based compensation expense                       $    38
                                                         ======
 Net share-based compensation expense per common
   share - basic and diluted                            $  0.00

 The entire portion of the share-based  compensation expense in 2006 is  from
 incentive stock option  grants.  As  of December 31,  2006, the Company  has
 $78,000 of  total  unrecognized  compensation  cost  related  to  non-vested
 options granted  under  the Company's  stock  option  plan.   That  cost  is
 expected to  be  recognized over  a  weighted average  period  of  seventeen
 months.  Since  the Company  has a net  operating loss  carry-forward as  of
 December 31, 2006, no excess tax benefits for the tax deductions related  to
 share-based  awards  were  recognized  in  the  consolidated  statement   of
 operations. Additionally, no incremental  tax benefits were recognized  from
 stock  options   exercised  in   2006  that   would  have   resulted  in   a
 reclassification to reduce net cash provided by operating activities with an
 offsetting  increase  in   net  cash  provided   by  financing   activities.
 Compensation  expense  relating  to  employee  share-based  awards  was  not
 recognized in the years ended December 31, 2005 and 2004.

 Prior to January 1,  2006, the Company accounted  for share-based awards  to
 employees using the  intrinsic value  method in  accordance with  Accounting
 Principles Board Opinion No. 25, " Accounting for Stock Issued to  Employees
 "  and  related  interpretations  and   provided  the  required  pro   forma
 disclosures of SFAS 123.

 The following table  summarizes the pro  forma effect on  the Company's  net
 income (loss) and per share data if  the Company had applied the fair  value
 recognition provisions of SFAS 123 to share-based employee compensation  for
 2005 and 2004.

 ---------------------------------------------------------------------------
                                              2005         2004
 ---------------------------------------------------------------------------
 Net income (loss) (in thousands):
   As reported                              $(5,336)     $    36
   Less:  Stock-based compensation
     expense determined under fair
     value-based method                      (1,055)      (1,496)
                                             ------       ------
   Pro forma net loss                       $(6,391)     $(1,460)
                                             ======       ======

   Basic and diluted shares outstanding      10,762       10,590

 Net income (loss) per share:
   Basic and diluted as reported            $ (0.50)     $  0.00
   Basic and diluted pro forma                (0.59)       (0.14)
 ---------------------------------------------------------------------------

 For employee stock options granted in 2005 and 2004, the Company  determined
 pro forma compensation expense  under the provisions  of SFAS 123 using  the
 Black-Scholes  model  and   the  following   assumptions:  (1) an   expected
 volatility of  61.9%  and  79.2%,  respectively,  (2) an  expected  term  of
 5 years, (3) a risk-free interest rate of 4.35% and 3.51%, respectively, and
 (4) an expected dividend  yield of 0%.  The weighted average  fair value  of
 options  granted  in  2005   and  2004  was   $2.22  and  $3.11 per   share,
 respectively.

 During 2006 the Company made two stock option grants to employees, with  one
 on January 5, 2006,  and the other on  May 18, 2006.   Both of these  grants
 were made to employees under  the 2004 plan and  the Company's policy is  to
 issue new shares upon the exercise of stock options.

 Summaries of stock options outstanding and changes during 2006 are presented
 below.

                                                        Weighted
                                             Weighted    Average
                                             Average    Remaining
                                 Number      Exercise   Contractua   Aggregate
                                   of        Price Per    l Term     Intrinsic
                                 Shares        Share    (in Years)     Value
 -----------------------------------------------------------------------------
 Balance, January 1, 2004         1,625        $2.82
 Granted                            632        $4.66
 Forfeited                         (204)       $4.95
 Exercised                         (231)       $1.62
 -----------------------------------------------------------------------------
 Balance, December 31, 2004       1,822        $3.38
 Granted                            226        $3.95
 Forfeited                         (192)       $4.31
 Exercised                          (42)       $1.98
 -----------------------------------------------------------------------------
 Balance, December 31, 2005       1,814        $3.39
 Granted                             55        $3.92
 Forfeited                         (100)       $4.69
 Exercised                          (68)       $2.40
 -----------------------------------------------------------------------------
 Balance, December 31, 2006       1,701        $3.37        5.4      $(884,500)


 Vested and expected to
 vest in the future,
 December 31, 2006                1,701        $3.37        5.4      $(884,500)
 -----------------------------------------------------------------------------

 Exercisable, December 31, 2006   1,649        $3.35        5.1      $(824,500)
 -----------------------------------------------------------------------------

 Exercisable, December 31, 2005   1,814        $3.39
 -----------------------------------------------------------------------------

 Exercisable, December 31, 2004   1,440        $3.13
 -----------------------------------------------------------------------------

 The aggregate intrinsic value in the  table above represents the total  pre-
 tax intrinsic value, based  on the Company's closing  common stock price  of
 $2.85 on December  31, 2006, which  would have been  received by the  option
 holders had all option  holders exercised their options  on that date.   The
 weighted average grant-date fair values of options granted during 2006, 2005
 and 2004  were $2.24,  $2.22 and  $3.11 per share,  respectively. The  total
 intrinsic value of options exercised during 2006 was $119,000, based on  the
 differences in  market  prices on  the  dates  of exercise  and  the  option
 exercise prices.

 The fair value of each option award is estimated on the date of grant  using
 the Black-Scholes-Merton option pricing  model ("Black-Scholes model")  that
 uses the assumptions noted in the following table. Expected volatilities are
 based on  historical volatility  of the  Company's  common stock  and  other
 factors. The  expected term  of  options granted  is  based on  analyses  of
 historical employee termination  rates and option  exercises. The  risk-free
 interest rates are based on the U.S. Treasury yield for a period  consistent
 with the expected term of the option in effect at the time of the grant.

 Assumptions used in the Black-Scholes model for options granted during 2006,
 2005 and 2004 were as follows:

                                                2006       2005       2004
                                               ------     ------     ------
 Expected volatility                             61.9%      61.9%      79.2%
 Average expected term in years                   5.0        5.0        5.0
 Risk-free interest rate (zero coupon             5.1%      4.35%      3.51%
   U.S. Treasury Note)
 Expected dividend yield                            0%         0%         0%

 The  following  table  summarizes  information  concerning  outstanding  and
 exercisable stock options as of December 31, 2006:

                         Options Outstanding            Options Exercisable
                   --------------------------------   -----------------------
                               Weighted
                                Average    Weighted                  Weighted
     Range of       Number     Remaining   Average                   Average
     Exercise        Out-     Contractual  Exercise     Number       Exercise
      Prices       standing  Life in Years   Price    Exercisable     Price
 ----------------------------------------------------------------------------
 $ 7.50 - $ 7.50       25         0.01       $7.50         25         $7.50
 $ 5.30 - $ 3.85      968         6.27       $4.51        916         $4.55
 $ 2.50 - $ 1.75      341         2.80       $2.06        341         $2.06
 $ 1.50 - $ 1.05      367         4.32       $1.29        367         $1.29
                    -----                               -----
                    1,701         5.35       $3.37      1,649         $3.35
                    =====                               =====

 STOCK WARRANTS.   From time  to time, the  Company has  granted warrants  to
 purchase common  stock  to  the Company's  research  consultants  and  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.

 On November 18, 2005, the Company sold $5,000,000 aggregate principal amount
 of 6.0% subordinated notes.  In connection  with the sale of the notes,  the
 purchasers of the notes received (i) Series A Common Stock Purchase Warrants
 to purchase an aggregate of 2,500,000 shares of the Company's common  stock,
 par value $.01 per share, and  (ii) Series B Common Stock Purchase  Warrants
 to purchase an aggregate of 2,500,000 shares of the Company's common  stock.
 The 5,000,000 warrants  have a fair value of $4.8 million, as determined  by
 an independent appraisal, and an allocated value of $2.7 million, which  was
 recorded as a debt discount.   In addition, the placement  agent involved in
 the offering  of the  notes and  warrants  received a  Series A  Warrant  to
 purchase 200,000 shares of the Company's common stock, with  a fair value of
 $248,000.  All of the Series A Warrants have an exercise price of $5.00  per
 share,  are  immediately   exercisable  and  expire,   subject  to   certain
 acceleration events relating  to the closing  stock  price,  on November 18,
 2009.  All of  the Series B Warrants  have an exercise  price of $10.00  per
 share, are immediately exercisable and expire on November 18, 2009.

 On December 20, 2005, the Company  entered into a settlement agreement  with
 Swiss-American and G. Scott Vogel to resolve all claims related to a lawsuit
 filed by Swiss-American  in June 2001.   The  settlement agreement  provides
 for, among other things, the issuance to Swiss-American of a Series C Common
 Stock Purchase  Warrant  to  purchase  a total  of  200,000  shares  of  the
 Company's common stock, with a fair value of $248,000, and with an  exercise
 price per  share  equal to  $5.00  and  which expires,  subject  to  certain
 acceleration events relating  to the closing  stock price,  on November  18,
 2009.

 COMMON STOCK RESERVED.   At  December 31, 2006,  the  Company  had  reserved
 a  total  of  7,454,779 common shares  for future issuance  relating to  the
 employee stock purchase plan, stock option plan and warrants.


 NOTE NINE.  COMMITMENTS AND CONTINGENCIES

 On August 26, 2005, the Company issued a voluntary recall of Medline-labeled
 alcohol-free mouthwash.   As a result  of this recall,  Medline initiated  a
 voluntary recall  of Personal  Hygiene Admission  kits containing  the  same
 alcohol-free  mouthwash.  The  mouthwash,  which  passed  industry  standard
 testing at the time of release, was recalled due to the possibility that  it
 may contain Burkholderia cepacia.  The Company continues to coordinate  with
 the FDA and the Texas Department of Health in its recall efforts and in  the
 investigation of this matter.  The Company has accrued at December 31, 2006,
 $415,000 as a reserve for costs incurred related to this product recall.

 On January 11, 2006, a lawsuit was filed in Circuit Court of Etowah  County,
 Alabama  styled as Sonya Branch and Eric Branch vs. Carrington Laboratories,
 Inc., Medline  Industries, Inc.,  and   Gadsden  Regional  Medical  Center.
 Plaintiffs alleged they were damaged by the mouthwash product.  The  amounts
 of damages were not specified.

 On April 25, 2006, a lawsuit was filed in Circuit Court for Davidson County,
 Tennessee styled  as Ralph  Spraggins, as  Administrator  of the  Estate  of
 Yvonne Spraggins vs. Southern Hills  Medical Center, Tristar Health  System,
 HCA Inc., HCA Health Services of  Tennessee, Inc., HCA Hospital  Corporation
 of America,  Medline Industries,  Inc.,  and Carrington  Laboratories,  Inc.
 Plaintiffs have alleged they were  damaged by the Company's  Medline-labeled
 alcohol-free mouthwash product and are seeking $2.0 million in  compensatory
 damages.  The case was dismissed without prejudice on January 11, 2007.

 On August 28, 2006, a lawsuit was filed in United States District Court  for
 the Western  District of  Oklahoma styled  as Ruth  Ann Jones,  as  Personal
 Representative of the Estate of Harold Dean Jones, Deceased, Mary Adams  and
 Vera Anderson vs. Carrington Laboratories, Inc. and Medline Industries, Inc.
 Plaintiffs  alleged  they  were  damaged by  the  Company's  Medline-labeled
 alcohol-free mouthwash  product and  were seeking  an  amount in  excess  of
 $75,000 in damages.  The case was dismissed without prejudice on January 15,
 2007.

 On September 14, 2006, a lawsuit  was filed in United States District  Court
 for the  Northern  District of  Illinois  styled as  Mutsumi  Underwood,  as
 Personal Administrator  of the  Estate of  Ronald W.  Underwood vs.  Medline
 Industries, Inc. and Carrington Laboratories, Inc.  Plaintiffs have  alleged
 they were damaged  by the Company's  Medline-labeled alcohol-free  mouthwash
 product and are seeking an amount in excess of $75,000 in damages.

 On September  22, 2006,  a lawsuit  was  filed in  Circuit Court  for  Macon
 County, Tennessee styled as Donna Green,  Lois Bean, KHI Williams and  David
 Long  vs.  Carrington  Laboratories,  Inc.  and   Medline  Industries,  Inc.
 Plaintiffs have alleged they were  damaged by the Company's  Medline-labeled
 alcohol-free mouthwash product and are seeking $800,000 in compensatory  and
 exemplary damages.

 On November 2, 2006, a lawsuit was filed in Circuit Court of Etowah  County,
 Alabama styled  as Myra  Maddox, vs.  OHG of  Gadsden, Inc.,  d/b/a  Gadsden
 Regional Medical Center; Medline Industries, Inc.; Carrington  Laboratories,
 Inc.;  Fictitious  Defendants  "1-15".  Plaintiffs  have  alleged  they were
 damaged  by the mouthwash product.  The amounts of the damages have not been
 specified.

 The Company has $10.0  million of product  liability insurance. The  Company
 and its insurance carrier intend to defend against each of these claims.

 On February  1,  2007, a  lawsuit  styled Glamourpuss,  Inc.  v.  Carrington
 Laboratories, Inc.,  was filed  in Dallas  County, Texas.   Plaintiffs  have
 alleged they  have  been  injured as  a  result  of acts  and  omissions  of
 Carrington in violation of the Texas Deceptive Trade Practices Act ("DTPA").
 Plaintiffs  are  seeking  $200,000  in  damages  plus  attorney's  fees  and
 expenses.

 The Company believes that Plaintiffs' claims  are without merit and  intends
 to vigorously defend against the claim.

 On December 23, 2005, the Company completed a sale and leaseback transaction
 involving its corporate headquarters and manufacturing operations located in
 Irving, Texas to the Busby Family Trust  and the Juice Trust, both of  which
 are assignees of the  original purchaser, none of  which are related to  the
 Company. The building  and land were  sold for a  total sale  price of  $4.8
 million. Net proceeds from the transaction  amounted to $4.1 million,  after
 deducting transaction-related costs and  retiring the mortgage note  related
 to the  property.  The  Company  recorded  a  gain  on  the  transaction  of
 approximately $30,000, which is being amortized  over the term of the  lease
 described below.  Simultaneously, the Company  agreed to lease the land  and
 building from the purchaser for a period  of 15 years, subject to two  five-
 year renewal options.  The rental payment  for the first  five years of  the
 lease term is $470,000 per year and increases by 10.4% for each of the  next
 two five-year  increments.  Rent for  the  renewal terms  under  this  lease
 agreement will be the greater of 95% of the then current market rent or  the
 rent for the last year prior to renewal.  The Company has accounted for this
 lease as an operating lease.

 The Company  conducts  a significant  portion  of its  operations  from four
 office/ warehouse/distribution/laboratory facilities under operating leases.
 In addition,  the  Company leases  certain office equipment  under operating
 leases and certain manufacturing and transportation  equipment under capital
 leases.  Future minimum lease payments  under noncancelable operating leases
 and the  present  value  of future  minimum  capital  lease  payments as  of
 December 31, 2006 were as follows, in thousands:

                                                Capital    Operating
                                                 Leases      Leases
 ---------------------------------------------------------------------
 2007                                             $  110     $ 1,394
 2008                                                 71       1,168
 2009                                                 38       1,081
 2010                                                  5       1,106
 2011                                                  0         791
 Thereafter                                            0       4,941
 ---------------------------------------------------------------------
 Total minimum lease payments                     $  224     $10,481
                                                              ======
 Amounts representing interest                       (21)
                                                   -----
 Present value of capital lease obligations          203
 Less current portion of capital lease obligations   (96)
                                                   -----
 Obligations under capital lease agreements,
  excluding the current portion                   $  107
                                                   =====

 Total rental expense under operating leases was $1,544,000, $1,035,000,  and
 $881,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

 From time to time in the normal course  of business, the Company is a  party
 to  various  matters involving  claims or  possible  litigation.  Management
 believes the ultimate resolution of these  matters will not have a  material
 adverse effect on the Company's financial position or results of operations.

 The Company has  outstanding a letter  of credit in  the amount of  $250,000
 which is used  as security  on the lease  for the  Company's laboratory  and
 warehouse facility.  The Company has  outstanding a letter of credit in  the
 amount of $100,000 which is used as security on the lease for the  Company's
 corporate headquarters and manufacturing facility.


 NOTE TEN.  INCOME TAXES

 The tax effects  of temporary  differences that  gave rise  to deferred  tax
 assets at December 31, 2006, 2005 and 2004 were as follows, in thousands:

                                                2006       2005       2004
 ----------------------------------------------------------------------------
 Net operating loss carryforward             $ 13,829   $ 11,488   $  9,274
 Research and development
   and other credits                              174        185        343
 Property, plant and equipment                    160         18        210
 Inventory                                        344        317        341
 Foreign tax credits                              144        144        125
 Other, net                                        53         52         55
 Bad debt reserve                                 247        255        198
 Deferred income                                  290        449        827
 ACI Stock Valuation                              204        204        204
 Accrued liability                                 27          4         16
 Less - Valuation allowance                   (15,472)   (13,116)   (11,593)
                                               ------     ------     ------
                                              $     0    $     0    $     0
                                               ======     ======     ======

 The  Company  has  provided  a  valuation  allowance  against   the   entire
 net  deferred  tax  asset  at  December 31, 2006, 2005  and  2004 due to the
 uncertainty as to the realization of the asset.

 The Company incurred $0, $19,000, and $125,000 of foreign income tax expense
 related to the Company's  operations in Costa Rica  in 2006, 2005 and  2004,
 respectively.

 The provision (benefit) for income taxes  varies from the federal  statutory
 rate as follows (in thousands):

                                                 2006       2005       2004
                                               ------     ------     ------
 Taxes (benefit) at federal statutory rate    $(2,586)   $(1,814)   $    55
 Permanent differences                             13         14         13
 Unbenefitted foreign income taxes                  -         19        125
 Unbenefitted foreign losses                      151        252          -
 Prior year adjustments                            55       (114)         -
 Expired and unbenefitted net
   operating loss carryforwards                     -          -     (5,575)
 Expired research and development                  11        158        (42)
 Other                                              -        (19)        82
 Change in valuation allowance credits          2,356      1,523      5,467
                                               ------     ------     ------
 Total tax provision                          $     0    $    19    $   125
                                               ======     ======     ======

 At December 31, 2006,  the Company had net  operating loss carryforwards  of
 approximately $40.7 million for federal income tax purposes, which begin  to
 expire in 2009,  and research and  development tax  credit  carryforwards of
 approximately $174,000, which  began to  expire in  2006, all  of which  are
 available to offset  federal income taxes  due in future  periods.  All  net
 operating loss carryforwards will expire between the  year 2009 and the year
 2025.


 NOTE ELEVEN.  CONCENTRATIONS OF CREDIT RISK

 Financial instruments that potentially expose the Company to  concentrations
 of  credit  risk  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 four customers.  Sales to Natural Alternatives International,  Inc.,
 ("Natural Alternatives"),  a customer  in  the Consumer  Services  Division,
 accounted  for  14%,  27%,  and 45% of the Company's net sales in 2006, 2005
 and  2004,  respectively.  Accounts  receivable  from  Natural  Alternatives
 represented 0% and 10% of gross accounts receivable at December 31, 2006 and
 2005, respectively.  Sales to  Wormser Corporation, ("Wormser"), a  customer
 in the  Consumer Services  Division, accounted  for 10%,  0% and  0% of  the
 Company's  net  sales  in  2006,  2005  and  2004,  respectively.   Accounts
 receivable from Wormser represented 12% and 0% of gross accounts  receivable
 at December 31,  2006 and  2005, respectively.   Sales  to Mannatech,  Inc.,
 ("Mannatech"), a customer in the  Consumer Services Division, accounted  for
 10%, 7%  and  2%  of  the  Company's net  sales  in  2006,  2005  and  2004,
 respectively.  Accounts receivable from Mannatech represented 26% and 21% of
 gross accounts  receivable at  December 31,  2006  and  2005,  respectively.
 Sales to Medline  Industries, Inc., ("Medline")  a customer  in the  Medical
 Services Division, accounted  for 26%, 27%  and 23% of  the Company's  sales
 during 2006, 2005 and 2004, respectively.  Accounts receivable from  Medline
 represented 38%  and  32% of  the  Company's gross  accounts  receivable  at
 December 31, 2006 and 2005, respectively.  The Company performs initial  and
 ongoing  credit  evaluations  of  new  and  existing  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.

 Accounts are considered past due after  contractual terms (net 30 days)  and
 are written-off after extensive  collection efforts  and  nine months  time.
 The following table summarizes the allowance for doubtful accounts  activity
 for the period ended December 31, 2006 and 2005, in thousands.

            Balance at Beginning    Charges to                Balance at End
                of Period           Expenses      Deductions    of Period
 ---------------------------------------------------------------------------
 A/R Reserve-2006    $329             $179           $202          $306
 A/R Reserve-2005    $162             $243           $ 76          $329


 NOTE TWELVE.  NET INCOME (LOSS) PER SHARE

 The Company  calculates basic  earnings (loss)  per  share by  dividing  net
 earnings (loss)  by  the  weighted average  number  of  shares  outstanding.
 Diluted earnings (loss) per  share reflect the  impact of outstanding  stock
 options and warrants during the periods  presented using the treasury  stock
 method. The following  table provides a  reconciliation of the  denominators
 utilized in the calculation of basic  and diluted earnings (loss) per  share
 with the amounts rounded to the nearest thousands, except per share amounts:

                                                 2006       2005       2004
                                                ------     ------     ------
 Net income (loss)                             $(7,607)   $(5,336)   $    36
 Basic earnings (loss) per share:
   Weighted average number of
     common shares outstanding                  10,855     10,762     10,590
     Basic per share amount                    $ (0.70)   $ (0.50)   $  0.00
                                                ======     ======     ======
 Diluted earnings (loss) per share:
   Weighted average number of
     common shares outstanding                  10,855     10,762     10,590
   Dilutive effect of stock options and
      warrants                                       0          0        581

   Diluted weighted average number of
     common shares outstanding                  10,885     10,762     11,171
   Diluted per share amount                    $ (0.70)   $ (0.50)   $  0.00
                                                ======     ======     ======

 At December 31, 2006,  all of the Company's  1,700,586 common stock  options
 and 5,400,000 warrants were  excluded from its  diluted earnings  per  share
 calculation as their effect was antidilutive  due to the Company's net  loss
 for the year.

 At December 31, 2005,  all of the Company's  1,814,081 common stock  options
 and 5,400,000 warrants were  excluded from its  diluted earnings  per  share
 calculation as their effect was antidilutive  due to the Company's net  loss
 for the year.

 At December 31, 2004,  691,787 common stock options  were excluded from  the
 diluted earnings per share calculation using a weight-average close price of
 $4.34 per share, as their effect was antidilutive.


 NOTE THIRTEEN.  REPORTABLE SEGMENTS

 Based on the economic characteristics of the Company's business  activities,
 the nature  of  its products,  customers  and  markets it  serves,  and  the
 performance evaluation by management and  the Company's Board of  Directors,
 the Company  has  identified  three reportable  segments:  Medical  Services
 Division, Consumer Services Division and DelSite.

 The Medical Services Division sells a  comprehensive line of wound and  skin
 care medical products  and provides manufacturing  services to customers  in
 medical products  markets.   These products  are  primarily sold  through  a
 domestic,  sole  source  distributor,  where  the  products  are  ultimately
 marketed to hospitals,  nursing homes, alternative  care facilities,  cancer
 centers,   home  health  care  providers  and  managed  care  organizations.
 International sales  of these  products account  for less  than 10%  of  the
 Division's consolidated net  sales for the  years ended  December 31,  2006,
 2005, and 2004.

 The Consumer Services Division sells and licenses consumer products and bulk
 raw materials  that  utilize  the Company's  patented  complex  carbohydrate
 technology into the consumer health and  beauty care products markets.   The
 Division also  sells finished  products,  provides product  development  and
 manufacturing services  to  customers  in  the  cosmetic  and  nutraceutical
 markets.  These products are primarily sold domestically, with international
 sales accounting for less than 10% of the Division's consolidated net  sales
 for the years ended December 31, 2006, 2005, and 2004.

 DelSite is  a  research  and  development  subsidiary  responsible  for  the
 research, development and marketing of the Company's proprietary  GelSite[R]
 technology for controlled release  and delivery of bioactive  pharmaceutical
 ingredients.   Revenues  for DelSite  currently  consist of  research  grant
 awards.

 Prior to January 1, 2004, the Company reported its results in two  segments:
 Medical Services Division  and Caraloe, Inc.   The  Caraloe activities  have
 been renamed  the Consumer  Services  Division.   In  addition, due  to  the
 growing significance  of DelSite's  operations, in  2004 the  Company  began
 reporting DelSite as a separate segment.  DelSite was previously reported as
 part of the corporate operations category.

 The Company evaluates performance and allocates resources based on profit or
 loss from operations before income taxes.

 Net revenues represent revenues from external  customers.  Assets which  are
 used in  more  than  one segment  are  reported  in the  segment  where  the
 predominant use  occurs. Total  cash  for the  Company  is included  in  the
 Corporate Assets figure.  The accounting policies for segments are the  same
 as described in Note Two.

 The segment data for the years ended  December 31, 2006, 2005 and 2004  were
 as follows:

                                                 2006       2005       2004
                                                ------     ------     ------
 Net revenues:
   Medical Services Division                   $ 8,834    $10,543    $10,391
   Consumer Services Division                   16,583     15,794     19,663
   DelSite                                       1,989      1,624        767
                                                ------     ------     ------
                                               $27,406    $27,961    $30,821
                                                ======     ======     ======
 Income (loss) before income taxes
   Medical Services Division                   $(3,821)   $(2,673)   $(1,861)
   Consumer Services Division                     (365)       706      5,081
   DelSite                                      (3,421)    (3,350)    (3,059)
                                                ------     ------     ------
                                               $(7,607)   $(5,317)   $   161
                                                ======     ======     ======
 Identifiable assets:
   Medical Services Division                   $ 4,739    $ 4,487    $ 6,094
   Consumer Services Division                    6,400      8,636     12,129
   DelSite                                       1,251      1,428      1,978
   Corporate                                     1,608      7,438      2,816
                                                ------     ------     ------
                                               $13,998    $21,989    $23,017
                                                ======     ======     ======
 Capital expenditures:
   Medical Services Division                   $    89    $     0    $     0
   Consumer Services Division                      154        419        278
   DelSite                                         140        191      1,894
                                                ------     ------     ------
                                               $   383    $   610    $ 2,172
                                                ======     ======     ======
 Depreciation and amortization:
    Medical Services Division                  $   234    $   197    $   244
    Consumer Services Division                     638        595        711
    DelSite                                        485        446        286
                                                ------     ------     ------
                                               $ 1,357    $ 1,238    $ 1,241
                                                ======     ======     ======


 NOTE FOURTEEN.  RELATED PARTY TRANSACTIONS

 At December 31, 2006, the  Company had a 21.5%  interest in a company  which
 was formed in  1998 to acquire  and develop a  5,000-acre tract  of land  in
 Costa Rica  to be  used for  the  production of  Aloe  vera L.  leaves,  the
 Company's  primary  raw  material.  The  Company's  initial  investment  was
 written off in  1998 and  no additional investments  have been  made or  are
 expected to  be made.   The  Company has  no influence  on the  business  or
 operating decisions  of  this  company  and  receives  no  timely  financial
 information.  Additionally, $9,000  and $132,675 were collected in 2006  and
 2005, respectively,  from  this  company against  the  fully  reserved  note
 receivable balances. The  Company is accounting  for its  investment on  the
 cost basis.  The Company purchases Aloe vera L. leaves from this company  at
 prices the  Company  believes  are  competitive  with  other  sources.  Such
 purchases totaled $127,000, $888,000 and $1,447,000 in 2006, 2005, and 2004,
 respectively.

 On November 18, 2005, the Company sold $5,000,000 aggregate principal amount
 of 6.0% subordinated notes. The notes have  a term of four years and  mature
 on November 18, 2009. Interest on the notes is payable quarterly in arrears.
 In connection  with the  sale of  the  notes, the  purchasers of  the  notes
 received (i)  Series  A  Common  Stock  Purchase  Warrants  to  purchase  an
 aggregate of 2,500,000 shares of the Company's common stock, par value  $.01
 per share, and (ii) Series B  Common Stock Purchase Warrants to purchase  an
 aggregate of 2,500,000 shares of the  Company's common stock.  In  addition,
 the placement  agent involved  in the  offering of  the notes  and  warrants
 received a Series  A Warrant  to purchase  200,000 shares  of the  Company's
 common stock. All of the Series A  Warrants have an exercise price of  $5.00
 per share,  are  immediately  exercisable and  expire,  subject  to  certain
 acceleration events relating  to the closing  stock  price,  on November 18,
 2009.  All of  the Series B Warrants  have an exercise  price  of $10.00 per
 share, are immediately  exercisable and expire  on  November 18,  2009.  The
 majority of the purchasers  of the notes were  existing shareholders  of the
 Company's common stock.   On  November 18, 2005,  immediately preceding  the
 transaction, the  largest individual  investor held  6.3% of  the  Company's
 outstanding shares and collectively the group held 16.4%.


 NOTE FIFTEEN.  DEFERRED REVENUE

 Pursuant to the Distributor and License  Agreement with Medline, as  amended
 on April 9,  2004, the Company  received, subject to  certain refund  rights
 more specifically described in the Amendment, an additional $1.25 million of
 royalties, paid upon the signing of  the Amendment, in consideration of  the
 extended  term  of  the  Distributor  and  License  Agreement.  The  Company
 continues to recognize royalty income under this agreement, as amended, on a
 straight-line  basis.   At  December 31,  2006,  the  Company  had  received
 $799,000 more  in royalties  than  it had  recognized  in income,  which  is
 included in deferred revenue on the balance sheet.


 NOTE SIXTEEN.  UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

 The unaudited  selected quarterly  financial data  below reflect  the  years
 ended December 31, 2006 and 2005, respectively.

 (Amounts in thousands, except per share amounts)
 ---------------------------------------------------------------------------
 2006                       1st Quarter  2nd Quarter 3rd Quarter 4th Quarter
 ---------------------------------------------------------------------------
 Net revenue                   $7,487       $6,524      $6,656      $6,739
 Cost of product sales          5,600        5,043       4,615       5,328
 Net income (loss)             (1,532)      (2,155)     (1,764)     (2,156)
 Basic and diluted income
   (loss) per share            $(0.14)      $(0.20)     $(0.16)     $(0.20)

 ---------------------------------------------------------------------------
 2005                       1st Quarter  2nd Quarter 3rd Quarter 4th Quarter
 ---------------------------------------------------------------------------
 Net revenue                   $8,182       $8,337      $5,633      $5,809
 Cost of product sales          4,872        4,718       4,056       4,935
 Net income (loss)                (80)          87      (1,574)     (3,769)
 Basic and diluted income
   (loss) per share            $(0.01)      $ 0.01      $(0.15)    $ (0.35)


 NOTE SEVENTEEN.  SUPPLY CONCENTRATION

 Commodities or components  used in the  Company's production processes  that
 can  only be  obtained from a single  supplier could potentially expose  the
 Company to risk of production interruption should the supplier be unable  to
 deliver the necessary materials  in a timely manner.   The Company  utilizes
 alcohol as a key part of its production process in Costa Rica.  The  Company
 engages the services of an alcohol refinery company, located adjacent to its
 facility,  to repurify the  alcohol  used  in  its  production  utilizing  a
 distillation  process.   The  purified  alcohol  is  then  returned  to  the
 Company's inventory for further  use.  The Company  is unaware of any  other
 providers of this service in Costa Rica.  Senior managers from the Company's
 Costa Rica  operations  meet  regularly with  owners  and  managers  of  the
 refinery company to discuss operational issues.


 NOTE EIGHTEEN.  EMPLOYEE BENEFIT PLANS

 The Company  has  a  401(k)  Plan  to  provide  eligible  employees  with  a
 retirement savings plan.  All employees  are eligible to participate in  the
 plan if they are age 21 years or older.  Company matching contributions  are
 made dollar for dollar  up to 3%  of pay and  50% for contributions  greater
 than 3%  of pay  but not  in excess  of 5%  of pay.   The  Company may  make
 discretionary contributions upon direction of the  Board of Directors.   The
 Company's contribution expense for the years  ended December 31, 2006,  2005
 and 2004 was approximately $143,000, $138,000 and $129,000, respectively.


 NOTE NINETEEN.  SUBSEQUENT EVENTS

 On  January 25, 2007, the Company  and Mannatech entered  into a  three-year
 Supply and Trademark License Agreement.  Under the non-exclusive  agreement,
 the Company  will supply  the trademarked  ingredient Manapol[R]  powder  to
 Mannatech for a period of up to three years with minimum purchase quantities
 at fixed price levels for the  first twenty-four months. Quantities for  the
 final twelve months of the agreement are  to be negotiated 90 days prior  to
 the expiration of the twenty-fourth month.

 On February 12, 2007, Sabila Industrial, S.A., a wholly-owned subsidiary  of
 the Company, entered into a revolving credit facility with Banco Nacional de
 Costa Rica for $2,990,000, which matures in February 2010.  Borrowings under
 the facility bear interest at  6-month LIBOR plus a  margin of 3.0%, with  a
 minimum rate of 6%; are secured by  land and buildings owned by Sabila,  and
 are guaranteed by a principal executive officer of the Company.

 The  loan  agreement  contains  customary  representations,  warranties  and
 covenants. Under the terms  of the agreement, Sabila  may borrow amounts  at
 its discretion, with  each advance under  the credit  facility considered  a
 separate loan with a six-month maturity date.  Borrowings under the facility
 must be reduced to zero for  a minimum of two  consecutive weeks in each  52
 week period during the term of the facility.

 On  February 13,  2007,  Sabila  borrowed  $1,500,000  under  the  facility.
 Borrowings  under the  facility  will be  used  for  the  general  corporate
 purposes of Sabila and its affiliates, but loans under the facility are non-
 recourse to the Company.

<PAGE>

 Financial Statement Schedule
 Valuation and Qualifying Accounts
 (In thousands)

  Description                         Additions
                                   ----------------
                         Balance   Charged  Charged
                           at         to      to                   Balance
                        Beginning  Cost and  Other                 at End
                        of Period  Expenses Accounts  Deductions  of Period
 ---------------------------------------------------------------------------
 2006
 ---------------------------------------------------------------------------
 Bad debt reserve         $  329    $  179   $   -     $  202      $   306
 Inventory reserve           791       473       -        361          903
 Reserve Aloe & Herbs
   non-current notes and
   investments included
   in other assets             2         7       -          9            -
 Reserve for returns          35         -       -          -           35
 ---------------------------------------------------------------------------
 2005
 ---------------------------------------------------------------------------
 Bad debt reserve         $  162    $  243   $   -     $   76      $   329
 Inventory reserve           819       318       -        346          791
 Reserve Aloe & Herbs
   non-current notes
   and investments included
   in other assets           135         -       -       133             2
 Reserve for returns          35         -       -         -            35
 ---------------------------------------------------------------------------
 2004
 ---------------------------------------------------------------------------
 Bad debt reserve         $  181    $   48   $   -     $   67      $   162
 Inventory reserve           735       205       -        121          819
 Reserve Aloe & Herbs
   non-current notes
   and investments included
   in other assets           227         -       -         92          135
 Reserve for returns          35         -       -          -           35

<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 Shareholders and Board of Directors
   Carrington Laboratories, Inc.


 We have audited the accompanying consolidated  balance sheet  of  Carrington
 Laboratories, Inc. and subsidiaries as of December 31, 2006, and the related
 consolidated statements of operations, shareholders' equity  and  cash flows
 for the year then ended.  These consolidated financial  statements  are  the
 responsibility of the Company's management. Our responsibility is to express
 an opinion on these consolidated financial statements based on our audit.

 We  conducted  our  audit  in  accordance  with  the standards of the Public
 Company  Accounting  Oversight  Board  (United  States).   Those   standards
 require that we plan  and  perform the audit to obtain reasonable  assurance
 about whether  the  consolidated  financial  statements are free of material
 misstatement.  The Company is not required to have,  nor were we engaged  to
 perform an audit  of its internal  control  over  financial  reporting.  Our
 audit  included  consideration  of internal control over financial reporting
 as  a  basis  for  designing  audit  procedures  that are appropriate in the
 circumstances,  but  not  for  the  purpose  of expressing an opinion on the
 effectiveness of the Company's internal control  over  financial  reporting.
 Accordingly,  we express no  such opinion.  An audit  includes examining, on
 a  test  basis,  evidence  supporting  the amounts  and disclosures  in  the
 consolidated  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 audit provides a reasonable basis for our opinion.

 In our opinion,  the  consolidated financial statements  referred  to  above
 present  fairly,  in  all  material  respects,  the  consolidated  financial
 position of Carrington Laboratories, Inc. and subsidiaries  as  of  December
 31, 2006,  and  the consolidated  results  of  their  operations  and  their
 consolidated  cash  flows  for  the  year  then  ended,  in conformity  with
 accounting principles  generally accepted in the United States of America.

 The  accompanying  consolidated  financial  statements  have  been  prepared
 assuming  that  the Company will continue as a going  concern.  As discussed
 in Note  One  to  the  consolidated  financial  statements,  the Company has
 reported  significant  losses  from  operations   and   requires  additional
 financing  to  fund  future operations.  These  conditions raise substantial
 doubt about  its ability to continue as a going concern.  Management's plans
 regarding those matters  also are described  in Note  One.  The consolidated
 financial statements  do  not include  any  adjustments  that  might  result
 from the outcome of this uncertainty.

 Our audit was conducted for the purpose of forming an  opinion on the  basic
 consolidated financial  statements taken as a whole.  The  related financial
 statement Schedule II is presented for purposes of additional  analysis  and
 is not a required part of the basic consolidated financial statements.  This
 schedule  has been subjected to the auditing procedures applied in the audit
 of  the  basic  consolidated  financial statements and,  in our  opinion, is
 fairly stated in all material respects in relation to the basic consolidated
 financial statements taken as a whole.

 /s/ WEAVER AND TIDWELL, L.L.P.

 Dallas, Texas
 April 2, 2007

<PAGE>


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 Shareholders and Board of Directors
   Carrington Laboratories, Inc.


 We have audited the accompanying consolidated  balance  sheet of  Carrington
 Laboratories, Inc. and subsidiaries as of December 31, 2005, and the related
 consolidated statements  of operations, shareholders' equity and cash  flows
 for the periods ended December 31, 2005 and 2004. 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 the standards of the Public
 Company Accounting Oversight Board (United States).  Those standards require
 that  we  plan and perform  the  audit to obtain reasonable  assurance about
 whether  the  financial statements are free  of material misstatement.   The
 Company is  not required to have,  nor were we  engaged to perform  an audit
 of  its  internal control  over  financial  reporting.  Our  audit  included
 consideration of internal control over financial  reporting as  a  basis for
 designing  audit  procedures that are appropriate in the circumstances,  but
 not for the  purpose of expressing  an  opinion on  the effectiveness of the
 Company's internal control over financial reporting. Accordingly, we express
 no  such  opinion.  An  audit  also  includes  examining,  on  a test basis,
 evidence supporting the amounts and disclosures in the financial statements,
 assessing  the  accounting  principles  used  and significant estimates made
 by  management,  as  well  as evaluating  the  overall  financia l 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  consolidated  financial
 position  of  Carrington Laboratories, Inc. and subsidiaries as  of December
 31,  2005,  and  the  consolidated  results  of  their  operations and their
 consolidated cash flows for the periods ended  December 31, 2005  and  2004,
 in  conformity  with  accounting principles generally accepted in the United
 States of America.

 Our audit was conducted for the purpose of forming an  opinion on the  basic
 consolidated financial  statements taken as a whole.  The related  financial
 statement  Schedule II is presented for purposes of additional analysis  and
 is not a required part of the basic consolidated financial statements.  This
 schedule  has been subjected to the auditing procedures applied in the audit
 of  the  basic  consolidated  financial  statements and,  in our opinion, is
 fairly stated in all material respects in relation to the basic consolidated
 financial statements taken as a whole.


 /s/ Grant Thornton LLP

 Dallas, Texas
 March 1, 2006

<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:  April 2, 2007               By: /s/ Carlton E. Turner, Ph.D., D.Sc.
                                    ----------------------------------------
                                    Carlton E. Turner, President,
                                    Chief Executive Officer and Director

      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.


 /s/ Carlton E. Turner         President, Chief Executive       April 2, 2007
 -------------------------         Officer and Director
 Carlton E. Turner, Ph.D.      (principal executive officer)
 D.Sc.


 /s/ Robert W. Schnitzius      Vice President and Chief         April 2, 2007
 -------------------------        Financial Officer
 Robert W. Schnitzius          (principal financial and
                                 accounting officer)


 /s/ Ronald R. Blanck                 Director                  April 2, 2007
 -------------------------
 Ronald R. Blanck, D.O.


 /s/ R. Dale Bowerman                 Director                  April 2, 2007
 -------------------------
 R. Dale Bowerman


 /s/ George DeMott                    Director                  April 2, 2007
 -------------------------
 George DeMott


 /s/ Thomas J. Marquez                Director                  April 2, 2007
 -------------------------
 Thomas J. Marquez


 /s/ Edwin Meese, III                 Director                  April 2, 2007
 -------------------------
 Edwin Meese, III


 /s/ Selvi Vescovi                    Director                  April 2, 2007
 Selvi Vescovi


<PAGE>

                             INDEX TO EXHIBITS
                             -----------------

                                                                 Sequentially
 Exhibit                                                           Numbered
 Number                            Exhibit                           Page
 ------      ---------------------------------------------------     ----
   3.1       Restated Articles of Incorporation of Carrington
             Laboratories, Inc. (incorporated by reference to
             Exhibit 3.1 to Carrington's 1999 Annual Report on
             Form 10-K).

   3.2       Statement of Change of Registered Office and
             Registered Agent of Carrington Laboratories, Inc.
             (incorporated by reference to Exhibit 3.2 to
             Carrington's 1999 Annual Report on Form 10-K).

   3.3       Statement of Resolution Establishing Series D
             Preferred Stock of Carrington Laboratories, Inc.
             (incorporated by reference to Exhibit 3.3 to
             Carrington's 1999 Annual Report on Form 10-K).

   3.4       Bylaws of Carrington Laboratories, Inc., as
             amended through March 3, 1998 (incorporated
             herein by reference to Exhibit 3.8 to
             Carrington's 1997 Annual Report on Form 10-K).

   4.1 *     Form of certificate for Common Stock of
             Carrington Laboratories, Inc

   4.2       Rights Agreement dated as of September 19, 1991
             between Carrington Laboratories, Inc. and
             Ameritrust Company National Association
             (incorporated by reference to Exhibit 4.2 to
             Carrington's 1999 Annual Report on Form 10-K).

   4.3       Amended and Restated Rights Agreement dated
             October 15, 2001, between Carrington
             Laboratories, Inc. and American Stock Transfer
             & Trust Company, as successor Rights Agent
             (incorporated by reference to Exhibit 4.1 to the
             Company's Form 8-A/A Post-Effective Amendment No.
             2).

   4.4       Amendment No. 1 to the Amended and Restated
             Rights Agreement, dated effective as of December
             17, 2003, between Carrington Laboratories, Inc.
             and American Stock Transfer & Trust Company, as
             Rights Agent (incorporated by reference to
             Exhibit 4.2 to the Company's Form 8-A/A Post-
             Effective Amendment No. 3).

   4.5       Form of 6% Subordinated Promissory Note due
             November 18, 2009 dated November 18, 2005 between
             Carrington and several investors (incorporated by
             reference to Exhibit 4.1 to Carrington's Form 8-K
             as filed with the SEC on November 22, 2005).

   4.6       Form of Series A Common Stock Purchase Warrant
             dated November 18, 2005 between Carrington
             Laboratories, Inc. and several investors
             (incorporated by reference to Exhibit 4.2 to
             Carrington's Form 8-K as filed with the SEC on
             November 22, 2005).

   4.7       Form of Series B Common Stock Purchase Warrant
             dated November 18, 2005 between Carrington
             Laboratories, Inc. and several investors
             (incorporated by reference to Exhibit 4.3 to
             Carrington's Form 8-K as filed with the SEC on
             November 22, 2005).

   4.8       6% Subordinated Promissory Note due December 20,
             2009 dated December 20, 2005 between Carrington
             and Swiss American Products, Inc. (incorporated
             by reference to Exhibit 4.1 to Carrington's Form
             8-K as filed with the SEC on December 22, 2005).

   4.9       Form of Series C Common Stock Purchase Warrant
             dated November 22, 2005 between Carrington and
             Swiss American Products, Inc. (incorporated by
             reference to Exhibit 4.2 to Carrington's Form 8-K
             as filed with the SEC on December 22, 2005).

  10.1 +     Employee Stock Purchase Plan of Carrington
             Laboratories, Inc., as amended through June 15,
             1995 (incorporated by reference to Exhibit 10.9
             to Carrington's 1999 Annual Report on Form 10-K).

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

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

  10.4 #     Distributor and License Agreement dated November
             3, 2000 between Carrington Laboratories, Inc.
             and Medline Industries, Inc. (incorporated by
             reference to Exhibit 10.1 to Carrington's
             Quarterly Report on Form 10-Q for the quarter
             ended September 30, 2000).

  10.5 #     Supply Agreement dated November 3, 2000 between
             Carrington Laboratories, Inc. and Medline
             Industries, Inc. (incorporated by reference to
             Exhibit 10.2 to Carrington's Quarterly Report on
             Form 10-Q for the quarter ended September 30,

  10.6       Lease Agreement dated January 22, 2001 between
             Plazamerica, Inc and Carrington Laboratories,
             Inc. (incorporated by reference to Exhibit 10.84
             to Carrington's 2000 Annual Report on Form 10-K).

  10.7 +     Employee Stock Purchase Plan of Carrington
             Laboratories, Inc., as amended through May 17,
             2001 (incorporated by reference to Exhibit 10.1
             to Carrington's Quarterly Report on Form 10-Q for
             the quarter ended June 30, 2001).

  10.8 +     1995 Stock Option Plan of Carrington
             Laboratories, Inc., as Amended and Restated
             Effective January 15, 1998 and further amended
             through May 17, 2001 (incorporated by reference
             to Exhibit 10.2 to Carrington's Quarterly Report
             on Form 10-Q for the quarter ended June 30,
             2001).

  10.9       Credit Agreement dated as of September 1, 2002,
             between Carrington Laboratories, Inc. and
             Comerica Bank.

  10.10      Advance Formula Agreement dated as of September
             1, 2002, between Carrington Laboratories, Inc.,
             and Comerica Bank, Caraloe, Inc., and DelSite
             Biotechnologies, Inc.

  10.11      Amendment to Distributor and License Agreement
             and Supply Agreement between Carrington
             Laboratories, Inc., and Medline Industries, Inc.
             (incorporated by reference to Exhibit 10.1, filed
             on Carrington's Form 8-K on April 22, 2004).

  10.12      2004 Stock Option Plan of Carrington
             Laboratories, Inc., (incorporated by reference to
             Exhibit 4.1 to Carrington's Form S-8 Registration
             Statement (No. 333-118303) filed with the SEC on
             August 17, 2004).

  10.13      Employee Stock Purchase Plan as amended through
             May 20, 2004 of Carrington Laboratories Inc.
             (incorporated by reference to Exhibit 4.1 to
             Carrington's Form S-8 Registration Statement (No.
             333-118304) filed with the SEC on August 17, 2005).

  10.14      Certificate of Pledge between Sabila Industrial,
             S.A., a Costa Rica Corporation and wholly-owned
             subsidiary of Carrington Laboratories, Inc., and
             Banco Credito Agricola de Cartago dated August 6,
             2004 (incorporated by reference to Exhibit 10.1
             to Carrington's Quarterly Report on Form 10-Q for
             the quarter ended September 30, 2004).

  10.15      Amendment dated October 15, 2004 and effective as
             of July 1, 2004, to Credit agreement and Advanced
             Formula Agreement dated September 1, 2002,
             between Carrington Laboratories, Inc., and
             Comerica Bank, Caraloe, Inc., and DelSite
             Biotechnologies, Inc. (incorporated by reference
             to Exhibit 10.1, filed on Carrington's Form 8-K
             on October 21, 2004).

  10.16      Manufacturing Agreement between Sabila
             Industrial, S.A., a Costa Rica Corporation
             and wholly-owned subsidiary of Carrington
             Laboratories, Inc., and Miradent Products
             of Costa Rica, S.A., dated January 21, 2005
             (incorporated by reference to Exhibit 10.34 to
             Carrington's Form 10-K as filed with the SEC on
             March 28, 2005).

  10.17      One-year extension of the Strategic Collaboration
             Agreement between Carrington Laboratories, Inc.,
             and Southern Research Institute, dated January
             25, 2005 (incorporated by reference to Exhibit
             10.1 to Carrington's Form 8-K as filed with the
             SEC on February 22, 2005).

  10.18#     Supply Agreement dated June 1, 2005 between
             MedTrade Products, Ltd., and Carrington
             Laboratories, Inc., (incorporated by reference
             to Exhibit 10.1 filed on Carrington's quarterly
             report on Form 10-Q for the quarter ended June
             30, 2005).

  10.19      Purchase and Sale Agreement dated October 20,
             2005, between Carrington and Rainier Capital
             Management, L.P. (incorporated by reference to
             Exhibit 99.3 to Carrington's Form 8-K as filed
             with the SEC on December 29, 2005).

  10.20      Promissory Note and Warrant Purchase Agreement
             dated November 18, 2005 between Carrington
             Laboratories, Inc. and several investors
             (incorporated by reference to Exhibit 10.1 to
             Carrington's Form 8-K as filed with the SEC on
             November 22, 2005).

  10.21      Placement Agent Agreement dated October 7, 2005,
             between Carrington and Stonewall Securities, Inc.
             (incorporated by reference to Exhibit 10.2 to
             Carrington's Form 8-K as filed with the SEC on
             November 22, 2005).

  10.22      Amendment to Placement Agent Agreement effective
             October 7, 2005, between Carrington and Stonewall
             Securities, Inc. (incorporated by reference to
             Exhibit 10.3 to Carrington's Form 8-K as filed
             with the SEC on November 22, 2005).

  10.23      Settlement Agreement and Mutual Release of All
             Claims dated as of December 20, 2005, by and
             among Swiss American Products, Inc., G. Scott
             Vogel and Carrington (incorporated by reference
             to Exhibit 10.1 as filed with SEC on Carrington's
             Form 8-K on December 22, 2005).

  10.24      Master Lease Agreement among the Busby Family
             Trust and the Juice Trust (Landlords) and
             Carrington (Tenant) (incorporated by reference
             to Exhibit 99.2 to Carrington's Form 8-K as filed
             with the SEC on December 29, 2005).

  10.25      First Amendment to Purchase and Sale Agreement
             dated November 21, 2005 between Carrington and
             Ranier Capital Management, L.P. (incorporated by
             reference to Exhibit 99.4 to Carrington's Form
             8-K as filed with the SEC on December 29, 2005).

  10.26 +    Employee Stock Purchase Plan of Carrington
             Laboratories, Inc., Amendment No. 2 dated
             December 29, 2005 and effective as of January 1,
             2006 (incorporated by reference to Exhibit 10.35
             to Carrington's Form 10-K as filed with the SEC
             on March 31, 2006).

  10.27 #    Trademark License and Supply Agreement dated
             January 25, 2007, between Carrington
             Laboratories, Inc., and Mannatech, Incorporated
             (incorporated by reference to Exhibit 99.1 to
             Carrington's Form 8-K as filed with the SEC on
             January 31, 2007).

  10.28      On February 12, 2007, Sabila Industrial, S.A.,
             a wholly-owned subsidiary of Carrington
             Laboratories, Inc., entered into a revolving
             credit facility with Banco Nacional de Costa
             Rica.

  16.1       Letter of Grant Thornton LLP dated March 30,
             2006, addressed to the Securities and Exchange
             Commission (incorporated by reference to Exhibit
             16.1 to Carrington's Form 8-K as filed with the
             SEC on March 30, 2006).

  21.1 *     Subsidiaries of Carrington.

  23.1 *     Consent of Weaver and Tidwell L.L.P.

  23.2 *     Consent of Grant Thornton LLP

  31.1 *     Certification of Chief Executive Officer Required
             by Rule 13a-14(a)(17 CFR 240.13a-14(a).

  31.2 *     Certification of Chief Financial Officer Required
             by Rule 13a-14(a)(17 CFR 240.13a-14(a).

  32.1 *     Certification of Chief Executive Officer Pursuant
             to 18 U.S.C. Section 1350, as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002.

  32.2 *     Certification of Chief Financial Officer Pursuant
             to 18 U.S.C. Section 1350, as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002.


 *    Filed herewith.
 #    Application has been made to the Securities and Exchange Commission for
      confidential treatment of certain provisions of this exhibit.  Omitted
      material for which confidential treatment has been requested has been
      filed with the Securities and Exchange Commission.
 +    Management contract or compensatory plan.