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, 2005

 [ ] 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
         -------------------    ------------------------------------
                 None

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

      Indicate by check mark 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 an accelerated  filer,
 or non-accelerated filer (as defined in Rule 12b-2 of the 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 $43,374,789,  computed by reference  to the  price at  which
 common equity was sold on June 30, 2005 of $4.50 per share.

      Indicate the number of shares outstanding  of each of the  Registrant's
 classes of common  stock, as  of the  latest practicable  date:   10,810,855
 shares of Common Stock, par value $.01 per share, were outstanding on  March
 20, 2006.

                     DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant's proxy statement for its annual meeting of
 shareholders to be held on May 18, 2006 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:

 *    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 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.

 In response  to changing  market conditions  and  to improve  the  Company's
 competitive position,  the  Company  decided during  2000  to  redirect  the
 distribution of its Medical Services products from multiple distributors  to
 a single source  distributor.   As a result  of this  decision, the  Company
 entered into  an  exclusive  Distributor  and  License  Agreement  effective
 December 1, 2000 with Medline Industries,  Inc. ("Medline").  The  agreement
 provides that the Company will continue to manufacture its existing line  of
 products and  sell them  to Medline  at specified  prices.   The prices  are
 subject to adjustment not more than  once each year to reflect increases  in
 manufacturing cost.   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. The  base royalties  are
 amortized, on a  straight-line basis,  over the term  of the  contract.   In
 addition to the base royalty, if Medline elects to market any other products
 under any  of the  Company's  trademarks, Medline  must  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.  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 as additional base royalty, which the  Company
 received in 2004.

 The  Company   maintains  dual  control  with  Medline  Industries  Inc.  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 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  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.

 The Medical Services Division also produces Acemannan Immunostimulant[TM], a
 biologic 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.  The
 SaliCept[R] line is  supported by  dedicated sales  representatives and  the
 Company is actively seeking a strategic sales/distribution partner for  this
 line.

                          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  complex
 carbohydrate technology.  The premier product  is Manapol[R] powder, a  bulk
 raw  material  that  contains  greater than  60% polymeric  polysaccharides.
 Manapo1[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.

 In  1997,   the  Company  signed  a  non-exclusive  supply  agreement   with
 Mannatech, Inc. ("Mannatech") to supply Manapol[R] powder.  In 2003, Natural
 Alternatives International,  Inc. ("Natural  Alternatives") was  added as  a
 party to the supply agreement as a manufacturing supplier for Mannatech  and
 purchaser of the Manapol[R] powder from  the Company.  This contract was not
 renewed in November 2005.  The Company is still supplying Manapol[R]  powder
 to  both  companies  on  a  non-contract,  purchase  order  basis,  but  the
 consistency in size and timing of orders from these customers has  decreased
 materially since the expiration of the supply agreement and continues to  be
 unpredictable.  As a result of the purchase order nature of these sales, the
 Company is presently uncertain as to the future levels of sales, if any,  to
 these two customers.  In 2005, combined sales  to  Natural Alternatives  and
 Mannatech decreased approximately  $5.1 million  or  35.5%  from their  2004
 levels.   Additionally,  the Company  has  continued its  focused  marketing
 effort to identify potential new Manapo1[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 was created in  June
 2001 to  concentrate  efforts of  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 $262,000,  $271,000
 and $383,000 in 2005, 2004 and  2003, 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.aloevera.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   complex
 carbohydrate, which was isolated 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

 In 2002, DelSite  formed a  strategic collaboration  with Southern  Research
 Institute, Inc. of Birmingham, Alabama,  ("Southern Research") to assist  in
 the  development  of  an  injectable  drug  delivery  system  based  on  the
 GelSite[R] polymer.  Southern  Research is  an  independent,  not-for-profit
 center for scientific research affiliated with the University of Alabama  at
 Birmingham. Under the  three-year collaborative  agreement, DelSite  retains
 all product  rights  plus  intellectual  property  rights  to  its  existing
 technology as well as any discoveries made by DelSite or Southern  Research,
 either jointly or  individually, as a  result of any  project undertaken  as
 part of the  agreement.  Southern Research will receive  fees and  royalties
 when undertaking  certain  specified  projects  on  behalf  of  DelSite.  In
 addition, a second five-year collaborative agreement with Southern  Research
 was signed  in April  2003.  Under this  agreement  the two  companies  will
 jointly develop an  injectable long-term  delivery system  for proteins  and
 peptides.   The  companies  will  jointly  own  intellectual  property  that
 originates  from  this  relationship.   In  January  2005,  the   three-year
 collaborative agreement was extended through January 26, 2006, and  Southern
 Research  transferred   both   agreements  to   its   affiliate,   Brookwood
 Pharmaceuticals, Inc.  During the past four years, DelSite has continued  to
 advance and grow  its internal  development capabilities  for drug  delivery
 technologies. The Company has  decided not to  renew the 2002  Collaborative
 Agreement that expired on  January 26, 2006 but  will continue to work  with
 Brookwood under the Agreement signed in April of 2003.

 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   additional
 development of the  GelVac[TM] intranasal powder  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 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 completed the first of the three milestones of this  program
 in October 2005 on schedule.

                           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 $5,796,000, $4,737,000 and $3,660,000  on
 research  and  development  in  fiscal 2005,  2004  and 2003,  respectively.
 Research activities associated with DelSite accounted  for 86% of the  2005,
 81% of the 2004 and 75% of the 2003 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 2006, 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  FDA for mucosal applications  of
 its GelSite[R] polymer technology in September, 2005.

                            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,  the  Company intends  to support  its  existing products  and  new
 products with  clinical studies  that will  support the  product  claims and
 indications for  use  and thereby  demonstrate  the product's  features  and
 benefits.  The Company initiated several such studies in 2005 and intends to
 initiate several such clinical studies during 2006.

                       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 peptide
 System                          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              Manapol[R]/Calcium Enriched        Clinical
     Product                                                        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  extracts  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 49 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
 2006.

 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, 2005, Rancho Aloe was providing an average of 74% 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.

 On January 21,  2005, the Company's  wholly-owned subsidiary  in Costa  Rica
 entered into a Manufacturing Agreement with Miradent Products of Costa  Rica
 ("Miradent"). Under the terms of the agreement, the Company will manufacture
 proprietary dental products for  Miradent for a period  of five years.   The
 Company recorded only marginal  revenue in 2005  due to start-up  production
 delays with the proprietary dental products. As of January 2006 the  Company
 has entered normal production for two products.

                                 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 U.S.,  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  the  applications  are
 pending.

 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.

 Also, the  Company was  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.   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 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] powder,
 Carrisyn[R],  Carrasyn[R]  and  CarraGauze[R].   Further,  the  Company  has
 registered the trademark AVMP[TM] Powder and 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 acquired  a U.S.  registration for  the  mark
 Orapatch[TM] as well as a Canadian application from the same mark.

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

                                  Employees
                                  ---------

 As of February 28, 2006, the Company  employed 263 persons, of whom 54  were
 engaged in the  operation and maintenance  of its  Irving, Texas  processing
 plant, 147 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, 114 were located in  the U.S., 147 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 in the year  ended  December 31, 2005  of $5,336,000.
 We reported nominal net income of  approximately $36,000 for the year  ended
 December 31, 2004.  We incurred  a net  loss for the year ended December 31,
 2003 of $1,506,000.

 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 are dependent on a limited number of customers.

 Three large customers account  for most of our  revenue.  For the year ended
 December 31, 2005, Natural Alternatives, Mannatech and Medline accounted for
 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
 approximately 44.8%, 1.9% and 22.6%, repectively, of our total revenue.  For
 the year ended December 31, 2003,  sales to those  three customers accounted
 for approximately 35.6%, 3.4% and 24.9%, respectively, 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 2005, combined  sales to  Natural Alternatives
 and Mannatech decreased  approximately  $5.1 million  or  35.5%  from  their
 2004 levels.  Presently, we are  uncertain as to  the future levels of sales
 if any,  to these two customers.   A further significant decrease  in orders
 from  these  two  customers  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, 2005,
 2004, 2003 were $5,796,000, $4,737,000, and $3,660,000 respectively.   Given
 our current level of  cash reserves and rate  of revenue generation, we  may
 not be able to fully advance 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 which 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 which 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 National Market.

 Our common stock  currently is  listed for  trading on  the Nasdaq  National
 Market. If  we are  unable to  continue to  meet Nasdaq's  original  listing
 standards, our  common stock  could be  delisted  from the  Nasdaq  National
 Market. If our common stock  is delisted, we would  likely seek to list  our
 common stock on the Nasdaq SmallCap Market, the American Stock Exchange,  or
 on a regional stock exchange. Listing on such other market or exchange could
 reduce the liquidity for our common stock. 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 National Market  and failure to obtain listing  on
 such other  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  National  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.

 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  authorizes 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 foot undeveloped.

 Laboratory and  Warehouse Facility.   In  June 2001,  the Company  leased  a
 51,200 square foot building in close  proximity to the Walnut Hill  facility
 for a ten-year term 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 Company relocated those  functions
 to this facility in  the third quarter  of 2001.   During 2004, the  Company
 completed a 3,000 square  feet expansion of the  DelSite facilities at  this
 location.

 Warehouse and Distribution Facility.  In February 2003, the Company leased a
 58,130 square  foot  building  for  a term  of  five  years  for  additional
 warehouse  space.  In  addition,  the  Company  relocated  its  distribution
 operations to this new facility.

 Texas A & M University Research Park Facility.  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 for a term of 24  months.
 DelSite  will use 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  as the site for a 30,700  square
 foot processing plant to produce bulk pharmaceutical and injectable  mannans
 and  freeze-dried  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 June 22, 2001, a lawsuit styled Swiss-American Products, Inc. v. G. Scott
 Vogel and Carrington  Laboratories Inc., Cause  No. 01-5163-A, was  filed in
 the 193rd Judicial  District Court  of Dallas  County, Texas.   On  June 25,
 2001, the  Company  was served  with  this lawsuit,  an  Ex Parte  Temporary
 Restraining Order, and  an Order  Appointing Independent Third  Party Expert
 Pursuant to  Temporary Restraining  Order.   The suit  alleges,  among other
 things, that  Mr. Vogel  (the Company's  former Vice  President, Operations)
 improperly obtained proprietary information of Swiss-American Products, Inc.
 ("Plaintiff") from  a  former  employer  that  manufactured  products  under
 contract for Plaintiff, and used that information  on behalf of the Company,
 in breach  of  certain common  law  duties and  a  confidentiality agreement
 between his former  employer and Plaintiff.   The suit  further alleges that
 Mr. Vogel and the  Company ("Defendants") conspired  to unlawfully disclose,
 convert and misappropriate Plaintiff's trade secrets.

 The  suit  sought   permanent  injunctive  relief,   including  a  permanent
 injunction prohibiting Defendants  from disclosing  or using  to Plaintiff's
 disadvantage any confidential proprietary information belonging to Plaintiff
 which Mr.  Vogel  allegedly  obtained  from  his former  employer,  or  from
 developing or  marketing products  based  on Plaintiff's  formulas  or other
 information allegedly taken from Mr. Vogel's former employer.  The suit also
 sought to recover damages in an unspecified amount from Defendants.

 Following a  hearing  on  July 30, 2001, the  trial court  entered  an order
 setting  the  case  for  trial on  July 30, 2002  and  granted  a  temporary
 injunction that prohibits  Defendants from  (i) disclosing  or using  any of
 Plaintiff's confidential,  proprietary  or  trade  secret information;  (ii)
 developing or  marketing  a  wound cleanser  product  that  is  the same  or
 substantially the same  as reflected in  a formula that  is at issue  in the
 lawsuit (although  this prohibition  expressly  does not  apply  to products
 actively manufactured and sold by  the Company before January  1, 2001 using
 the exact same  formula then in  effect); and (iii)  destroying, concealing,
 altering, removing or  disposing of any  documents, files, computer  data or
 other things  relating  to  Plaintiff or  Mr.  Vogel's  former employer,  or
 containing or  referring to  trade  secrets or  confidential  or proprietary
 information of Plaintiff or Mr. Vogel's former employer.

 A trial was  held  on  October 7, 2003.   Three days  into the  proceeding a
 mistrial was declared due to juror misconduct.  The trial judge subsequently
 ordered the two parties to mediate  the suit and such mediation  was held on
 May 17, 2004.  Despite the efforts of the  mediator, the parties were unable
 to reach a settlement.  Although a trial date had been set for June 1, 2004,
 the court later moved the trial start date to September 21, 2004.

 Due to the  Court's striking of  the economic  damage model provided  by the
 Plaintiff's expert witness, a motion for  continuance was filed and accepted
 by the Court, with the trial start date subsequently moved to June 21, 2005.

 On June  20,  2005,  the  court  postponed  the  trial,  ordered  additional
 discovery and set a new trial date for January 31, 2006.

 A hearing was held on October 10, 2005 on the matter of the Plaintiff damage
 model.  The court did not  rule on the motion before it  but instead ordered
 additional discovery.

 On December 20, 2005, the Company entered into  a settlement agreement  with
 Swiss-American Products, Inc., to resolve all claims related to the lawsuit.
 The settlement  agreement  provides for,  among  other things:  (i)  a  cash
 payment to Swiss-American  of $400,000, (ii)  the issuance  of a  promissory
 note in  favor  of Swiss-American  with  an original  principal  balance  of
 $400,000; and (iii)  the issuance  to Swiss-American  of a  Series C  Common
 Stock Purchase  Warrant (the  "Series C  Warrant") to  purchase a  total  of
 200,000 shares of  the Company's common  stock, 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.  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 in full.   The
 note is  subordinate to  the Company's  indebtedness  to Comerica  Bank  and
 certain other indebtedness.

 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 have alleged they were damaged by the mouthwash product.
 The amounts of damages have not been  specified. The Company has $10,000,000
 of  product  liability  insurance.  The  Company  and  its insurance carrier
 intend to vigorously defend against these claims.


 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 National  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 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

            Fiscal 2004                 High           Low
            -----------                 ----           ----
            First Quarter              $5.48          $3.72
            Second Quarter              5.41           3.52
            Third Quarter               4.55           3.02
            Fourth Quarter              6.90           3.73

 At  March 20, 2006, there were  872 holders of  record (including  brokerage
 firms) of Common Stock and the  closing price of the Company's Common  Stock
 was $7.18.

 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      1,814,081           $3.39              403,627

 Equity compensation
 plans not approved
 by security holders           0               0                    0
                       ---------            ----              -------
 Total                 1,814,081           $3.39              403,627
                       =========            ====              =======


 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, 2005, is derived from the consolidated
 financial statements of the Company, of  which the Statements for the  years
 ended December 31, 2001 and  2002, have been audited  by Ernst & Young  LLP,
 and for the years ended December 31,  2003, 2004 and 2005 have been  audited
 by Grant Thornton LLP.


                                                  Years ended December 31,
 (Dollars and numbers of shares in    -----------------------------------------
 thousands except per share amounts)  2005     2004     2003     2002     2001
 ------------------------------------------------------------------------------

 OPERATIONS STATEMENT INFORMATION:

 Revenues:
   Net product sales                $24,038  $27,584  $26,636  $15,571  $15,115
   Royalty income                     2,299    2,470    2,467    2,470    2,479
   Grant income                       1,624      767        -        -        -
                                     ------   ------   ------   ------   ------
 Total revenues                      27,961   30,821   29,103   18,041   17,594

 Costs and expenses:
   Cost of product sales             18,581   18,250   18,806   11,739    9,803
   Selling, general and
    administrative                    8,731    7,560    8,017    6,040    5,016
   Research and development             822      911      899    1,701    2,442
   Research and development,
     DelSite                          4,974    3,826    2,761    1,879        -
   Other expense (income), net         (131)     (92)    (123)      19      (13)
   Interest expense (income), net       301      205      249       41      (32)
                                     ------   ------   ------   ------   ------
  Income (loss) before income taxes  (5,317)     161   (1,506)  (3,378)     378
     Provision for income taxes          19      125        -        -        -
                                     ------   ------   ------   ------   ------
 Net income (loss)                  $(5,336) $    36  $(1,506) $(3,378) $   378
                                     ======   ======   ======   ======   ======
 Net income (loss) per common share
   - basic and diluted(1)           $ (0.50) $  0.00  $ (0.15) $ (0.34) $  0.04
                                     ======   ======   ======   ======   ======

 BALANCE SHEET INFORMATION (as of December 31):

  Working capital                   $ 6,975  $ 2,244  $ 3,019  $ 3,989  $ 6,315
  Total assets                       21,989   23,017   22,784   22,159   21,217
  Total long-term debt and capital
   lease obligations, net of debt
   discount                           3,418    1,324    1,953    1,517        -
  Total shareholders' equity         11,508   13,371   12,619   13,689   16,929

 (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 nutritional 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 2005 approximately 38% of the  Company's revenues were generated  through
 product sales, services and royalties in its Medical Services Division,  56%
 through sales of products and services in its Consumer Services Division and
 6% through U.S. Federal grant income in its DelSite research and development
 subsidiary.

 Sales to Natural  Alternatives, Mannatech and  Medline accounted for  26.6%,
 6.6%  and  26.6%, respectively,  of the  Company's  total  revenue in  2005.
 Further, in  2005  combined  sales to  Natural  Alternatives  and  Mannatech
 decreased approximately $5.1 million  or  35.5% from their 2004 levels.  The
 Company's supply agreement with  Natural Alternatives and Mannatech  expired
 in November 2005 and was not renewed.   Since that time, the consistency  in
 size and timing of orders from these customers has decreased materially.  As
 a result  of  the purchase  order  nature of  these  sales,  the  Company is
 presently uncertain as to the future levels  of sales, if any, to these  two
 customers.

 Revenues
 --------                                         Year-over-   Year-over-
                                                     Year         Year
                                 2005     2004      Growth       Growth
                                                     ($)           (%)
 -----------------------------------------------------------------------
 Net product sales             $24,038  $27,584    $(3,546)      (12.9%)
 Royalty income                  2,299    2,470       (171)       (6.9%)
 Grant income                    1,624      767        857       111.7%
                                ------   ------     ------        ----
 Total revenues                $27,961  $30,821    $(2,860)       (9.3%)
                                ======   ======     ======        ====

 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  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-over-   Year-over-
                                                     Year         Year
                                 2005     2004      Growth       Growth
                                                     ($)           (%)
 -----------------------------------------------------------------------
 Cost of product sales         $18,581  $18,250    $  330          1.8%
 Selling, general and
   administrative                8,731    7,560     1,171         15.5%
 Research and development          822      911       (89)        (9.8%)
 Research and development,
   DelSite                       4,974    3,826     1,148         30.0%
 Other expenses (income)          (131)     (92)      (39)       (42.4%)
 Interest expense (income),
   net                             301      205        96         46.8%

 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, 2005,  there was  $5,000,000 outstanding  on the notes with  an
 associated  debt  discount  of $2,691,000 for  a net balance  of $2,309,000.
 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-over-   Year-over-
                                                     Year         Year
                                 2005     2004      Growth       Growth
                                                     ($)           (%)
 -----------------------------------------------------------------------
 Net cash provided by (used
   in) operating activities    $(3,430) $ 2,412   $(5,842)      (242.2%)
 Net cash provided by (used
   in) investing activities      4,006   (2,172)    6,178        284.4%
 Net cash provided by
   financing activities          3,256      270     2,986      1,105.9%

 The decrease  in net  cash provided  by operating  activities was  primarily
 related to the $5.3 million net loss for the year as compared to net  income
 of $36,000 in 2004  and a decrease  in deferred revenue  of $1.1 million  as
 compared to an increase of $553,000 in 2004.  The deferred revenue  increase
 in 2004  was  due to  the receipt  of  $1.2  million of  additional  royalty
 payments  from  Medline.   The  increase   in  cash  provided  by  investing
 activities resulted from the  disposal of the  assets in the  sale/leaseback
 transaction with a book value of $4.6 million, which was partially offset by
 investment in facilities and equipment during 2005 of $610,000.  In 2004 the
 Company invested $2.2 million in capital  improvements.  The increase in net
 cash provided by financing activities reflects the sale of the  $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.

 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
                                                   ------------------
                                                    2005        2004
                                                   ------      ------
                                                 (Dollars in thousands)
 Days Sales Outstanding:
   Accounts receivable                            $ 2,679     $ 3,325
   Fourth quarter sales                             5,809       7,761
   Divided by 90 days equals
     average daily sales                             64.5        86.2
                                                   ------      ------
   Accounts receivable divided by
     average daily sales equals
       days sales outstanding                        41.5        38.6
                                                   ======      ======
 Months Inventory on Hand:
   Inventory                                      $ 4,705     $ 4,614
   Fourth quarter cost of product sales             4,935       4,473
   Divided by 3 equals
     average monthly cost of product sales          1,645       1,491
                                                   ------      ------
   Inventory divided by average
     monthly cost of product sales equals
       Months inventory on hand                       2.9         3.1
                                                   ======      ======
 Current Ratio:
   Current assets                                 $14,038     $10,566
   Divided by
     current liabilities                            7,063       8,322
                                                   ------      ------
   Equals current ratio                              1.99        1.27
                                                   ======      ======
 Quick Ratio:
   Quick assets                                   $ 8,941     $ 5,755
   Divided by
     current liabilities                            7,063       8,322
                                                   ------      ------
   Equals quick ratio                                1.27        0.69
                                                   ======      ======
 Debt to Equity:
   Current liabilities                            $ 7,063     $ 8,322
   Long-term debt                                   3,418       1,324
                                                   ------      ------
   Total debt                                     $10,481     $ 9,646
   Divided by equity                               11,508      13,371
                                                   ------      ------
   Equals debt to equity                             0.91        0.72
                                                   ======      ======
 Long-Term Debt to Equity:
   Long-term debt                                 $ 3,418     $ 1,324
   Divided by equity                               11,508      13,371
                                                   ------      ------
   Equals long-term debt to
     equity                                          0.30        0.10
                                                   ======      ======
 Working Capital:
   Current assets                                 $14,038     $10,566
   Less current liabilities                         7,063       8,322
                                                   ------      ------
   Equals working capital                         $ 6,975     $ 2,244
                                                   ======      ======

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

 The following table summarizes the Company's contractual obligations at
 December 31, 2005 (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 (7.75% at
   December 31, 2005)        $ 1,812   $ 1,812   $     -   $     -   $     -
  Private Placement note
   payable (6.0% at
   December 31, 2005)          5,000         -         -     5,000         -
  Swiss American Products
   note payable (6.0% at
   December 31, 2005)            400         -         -       400         -
  Bancredito note payable
   (U.S. prime plus 2.25%,
   9.5% at December 31, 2005)    671        96       212       242       121
  Other                           10         2         8         -         -
  Capital leases                 207        90        82        35         -
  Operating leases            11,906     1,419     2,528     2,227     5,732
                              ------    ------    ------    ------    ------
  Total contractual
   obligations               $20,006   $ 3,419   $ 2,830   $ 7,904   $ 5,853
                              ======    ======    ======    ======    ======

 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  is seeking  additional
 grant awards and  other potential collaborative  or sponsorship funding  for
 DelSite projects  and  potential licensing  revenues  for product  lines  or
 DelSite projects.

 Sales to Natural  Alternatives, Mannatech and  Medline accounted for  26.6%,
 6.6%  and  26.6%, respectively,  of the  Company's  total  revenue in  2005.
 Further, in  2005  combined  sales to  Natural  Alternatives  and  Mannatech
 decreased approximately $5.1 million  or  35.5% from their 2004 levels.  The
 Company's supply agreement with  Natural Alternatives and Mannatech  expired
 in November 2005 and was not renewed.   Since that time, the consistency  in
 size and timing of orders from these customers has decreased materially.  As
 a result  of  the purchase  order  nature of  these  sales,  the  Company is
 presently uncertain as to the future levels  of sales, if any, to these  two
 customers.   A  further  significant  decrease  in  orders  from  these  two
 customers would have a material adverse impact on our liquidity.

 At December 31, 2005 and 2004, the Company held cash and cash equivalents of
 $6,262,000 and $2,430,000,  respectively, an  increase of  $3,832,000.   The
 increase was primarily  due to the  sale of the $5.0 million 6% subordinated
 notes, the receipt of $4.1 million  in net proceeds from the  sale/leaseback
 transaction and  $240,000  in  proceeds  from  stock  option  exercises  and
 employee purchases of shares.  These cash receipts were partially offset  by
 $3.4 million of cash used in operating activities, the Company's  investment
 in property plant and equipment of $610,000, debt issuance costs of $426,000
 and debt  and  capital lease  obligation  payments, excluding  $517,000  for
 retirement of the mortgage  associated with the sale/leaseback  transaction,
 of $966,000. Customers with significant accounts receivable balances at  the
 end of 2005  include Mannatech  ($625,000), Medline  ($972,000) and  Natural
 Alternatives ($291,500), and  of these amounts  $1,802,000 (95.4%) has  been
 collected as of February 28, 2006.

 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 (7.25%  at December 31, 2005)  plus 0.5%.
 As of December 31, 2005, there was $1,812,000 outstanding on the credit line
 with $650,000 of credit available for operations, net of outstanding letters
 of credit of  $538,000.  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, 2005 are as follows:

 Covenant                   Covenant Requirement   Company's Position
 ---------                  --------------------   ------------------
 Total net worth                $12,200,000            $11,116,140
 Current ratio                      1.60                   2.40
 Liquidity ratio                    1.75                   4.94

 Although the Company was not in  compliance with one of its  financial-ratio
 covenants under the Comerica  line of credit for  the period ended  December
 31, 2005, Comerica has waived the event of non-compliance through March  31,
 2006.  The Company  anticipates renegotiating its financial-ratio  covenants
 with Comerica and/or seeking  a waiver for  non-compliance in periods  after
 March 31, 2006.  However, there can be no assurance that the Company will be
 successful in renegotiating  its covenants or  obtaining a  waiver, and  the
 Company's ability to  do so  may be  adversely impacted  by the  uncertainty
 surrounding the Company's  operating cash  flow resulting  from the  present
 sales levels  to Natural  Alternatives and  Mannatech.   If the  Company  is
 unable to renegotiate  its covenants  or obtain  a waiver  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.   In that  event, the  Company would  be
 forced  to  refinance all of the  Comerica indebtedness with another lender.
 Any such refinancing would 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.

 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%  (9.75%).   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, 2005, there was $310,000 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%  (9.25%).  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, 2005, there  was
 $361,000 outstanding on the loan.

 The Company had no additional material  capital commitments as of that  date
 other than its leases and agreements with suppliers.

 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 2005, the  Company
 received payments totaling $132,675 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 $262,000 and $271,000  in 2005 and 2004,  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  2006  of  approximately
 $800,000.  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.

 Presently, the  Company's debt/equity  ratio is  0.91 to  1.   Based on  its
 current estimates, management believes that the Company has the capacity  to
 incur additional debt, and, in the  future, the Company may seek  additional
 financing to be  used as  working capital  to fund  additional research  and
 development projects.  The Company  anticipates  that any  such  borrowings,
 together  with  the  expected  cash  flows  from  operations  and  licensing
 agreements and  expected  revenues  from  government  grant  programs,  will
 provide the funds necessary to finance its operations, including  additional
 levels of research and  development.  However, the  Company does not  expect
 that its current cash resources will  be sufficient to finance future  major
 clinical studies and  costs of  filing new  drug applications  which may  be
 necessary  to  develop  its  products to  their  full commercial  potential.
 Additional funds, therefore, may need to be raised through equity offerings,
 borrowings, licensing arrangements or other means.  Management believes that
 each of  the enumerated  financing avenues  is  presently available  to  the
 Company.  However, there is  no assurance that the  Company will be able  to
 obtain such funds on satisfactory terms when they are needed.

 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  2006,  the
 Company had  repurchased 2,400  of its  outstanding Common  Stock under  the
 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.

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

 As of December 31, 2005, the Company  has outstanding a letter of credit  in
 the amount of  $338,000, 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  a
 capital lease for equipment.  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.

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

 The information  presented  in  this financial  review  should  be  read  in
 conjunction with other financial  information provided throughout this  2005
 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 2005 were $28.0 million, a 9.1% decrease from $30.8  million
 in 2004. The  sales decrease of  $2.8 million is  primarily attributable  to
 reduced sales of bulk raw materials  to Mannatech and Natural  Alternatives,
 with a year-over-year sales  decrease of $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.

 Net revenues in 2004 were $30.8 million, a 5.9% increase from $29.1  million
 in 2003. The 2004 revenue increase was the third consecutive year of revenue
 growth for the Company. Included in  the revenue growth of $1.7 million  for
 2004 was approximately $767,000 related to  grant awards that were  received
 during 2004. Approximately $3.1 million in additional revenue resulted  from
 sales of the Company's bulk Manapol[R] powder in 2004.  These were partially
 offset by a  decrease of $391,000  in medical services  related revenue  and
 $1.69 million in specialty manufacturing sales.

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

                                                          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%)
                                ======     =====        ======     =====

                                                          2004 vs. 2003
                                                             Change
                                           % of         ----------------
 Net Revenue                     2004      Total          $          %
 -----------                    ------     -----        ------     -----
 Medical Services Division     $10,391      33.7%      $  (391)     (3.6%)
 Consumer Services Division     19,663      63.8%        1,342       7.3%
 DelSite                           767       2.5%          767     100.0%
                                ------     -----        ------     -----
   Total                       $30,821     100.0%      $ 1,718       5.9%
                                ======     =====        ======     =====

 Medical Services Division revenues in 2005 increased $152,000,  or 1.5% from
 2004, primarily  due to  increased demand  of Medline's  own branded  dermal
 management products, which are sold to Medline under a non-exclusive  supply
 agreement entered into in December 2000.  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.

 In 2004, the Medical Services Division revenues decreased $391,000, or 3.6%,
 versus 2003, primarily due to  decreased demand of Carrington-branded  wound
 care  products  from Medline, the  Company's exclusive domestic distributor.
 Total sales  of the  Division's domestic  wound care  products decreased  by
 $1.44 million  to $4.10  million in  2004  from $5.54  million in  2003,  as
 Medline decreased its inventory stock levels during the year.  Additionally,
 the Division's products faced increasing competitive pressure from  low-end,
 commodity-type  products  which  eroded  their  market  share.   Educational
 efforts were  initiated  to  support  Medline's  sales  efforts  in  product
 differentiation, performance and net cost of  therapy to the customer.   The
 Company also initiated selective advertisements to support its brand.  Total
 sales of the Division's international wound care products increased $396,000
 to $844,000 in 2004  from $448,000 in 2003,  with the increase primarily  in
 European sales.  Additionally, revenues of  $2.97 million in 2004,  compared
 to $2.33 million in 2003,  were generated from sales  to Medline of its  own
 branded dermal  management products.   The  Division also  recorded  royalty
 revenue of $2.47 million in each of 2004 and 2003 relating to the  exclusive
 Licensing and Distribution Agreement with Medline.

 The Company's Consumer Services Division recorded revenues of $15.79 million
 in 2005, a decrease of $3.87 million, or 19.7%, when compared to revenues of
 $19.66 million in  2004.  Sales  of bulk Manapol[R]  powder decreased  $5.20
 million in 2005  to $9.36 million,  down from $14.56  million in  2004.   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 is still  supplying
 Manapol[R] to both companies  on a non-contract,  purchase order basis,  but
 the consistency  in size  and  timing of  orders  from these  customers  has
 decreased materially  since  the  expiration of  the  supply  agreement  and
 continues to be unpredictable.  As a result of the purchase order nature  of
 these sales, the Company is presently  uncertain as to the future levels  of
 sales, if any, to these two customers.   Total sales to these two  customers
 were $9.29 million, $14.41  million and $11.35 million  for the years  2005,
 2004 and 2003, 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  $1.23 million from $4.66 million in 2004
 to  $5.89  million  in 2005 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, up from $442,000 in 2004.

 In 2004 the Consumer Services Division  recorded an increase in revenues  of
 $1.34 million, or 7.3%,  to $19.66 million in  2004 over revenues of  $18.32
 million in 2003.   Sales  of bulk Manapol[R]  powder grew  $3.11 million  to
 $14.56  million  in  2004  from  $11.46  million  in  2003.   Sales  for the
 Division's   specialty   manufacturing  services  business  decreased  $1.69
 million to $4.66 million in 2004 from $6.35 million in 2003, due in part  to
 intensifying competition in  the specialty  manufacturing market.   Of  this
 decrease, $529,000 was attributable to the cancellation of a single  product
 manufactured for a  major customer, and  $171,000 was due  to a decrease  in
 international sales  of  drinks manufactured  for  Japan, Taiwan  and  Korea
 markets.  Additionally,  sales of  the Division's  Aloeceuticals[R] line  of
 immune-enhancing dietary  supplements decreased  by $77,000  to $442,000  in
 2004 from $519,000 in 2003.

 The Company's  DelSite  subsidiary  recorded  an  increase  in  revenues  of
 $857,000, or 112%,  to $1.6  million in 2005  over 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.  Revenue in 2004 under this grant was $320,000.

 Revenues in 2004 from  the Company's DelSite  subsidiary were $767,000,  the
 first year  that DelSite  recorded revenues.  These revenues  represent  two
 grant awards received from NIAID as discussed above.

 Product-Related Gross Margin
 ----------------------------
 The product-related  gross  margin of  $7.76  million  in 2005  is  a  $4.04
 million, or 34.3%, decrease  from 2004 levels.   This decrease reflects  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.  The  product-related  gross
 margins of  $11.80  million in  2004  reflect  a $1.51  million,  or  14.6%,
 increase over 2003  levels.  This  increase reflects  the increased  revenue
 levels for the Consumer Services Division plus cost reduction programs  that
 led to improvements in capacity utilization and production efficiencies.

                                                           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)%
                                 ======     =====        ======     =====

                                                           2004 vs. 2003
                                                              Change
                                                         ----------------
 Product-Related Gross Margin     2004      Total           $         %
 ----------------------------    ------     -----        ------     -----
 Medical Services Division      $ 2,550     21.6%       $  (465)    (15.4%)
 Consumer Services Division       9,254     78.4%         1,971      27.1%
                                 ------     -----        ------     -----
   Total                        $11,804    100.0%       $ 1,506      14.6%
                                 ======     =====        ======     =====

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

 In 2004  product-related gross  margin for  the Medical  Services  Division,
 which includes $2.47 million of royalty revenue for 2004 and 2003, decreased
 15.4% to  $2.55 million  from  $3.01 million  in  2003. This  reduction  was
 primarily the result of increased sales of Medline-branded dermal management
 products which have  dramatically lower product-related  gross margins  than
 the  Carrington-branded  wound  care  products  the  Company  produces.  The
 increased production of these products improved the capacity utilization and
 thereby helped to reduce manufacturing variances in the Irving manufacturing
 facility.

 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 attributable  to
 reduced Manapol[R] production in the second half of the year.

 In 2004  the  Consumer  Services Division  reported  an  increase  of  $1.97
 million, or 27.1%,  in product-related gross  margin compared  to 2003.  The
 increase was  primarily  due  to  the  increase  in  sales  noted above.  In
 addition,  the  Division  experienced  reductions  in  the  direct  cost  of
 packaging components and a shift in product mix toward higher margin product
 sales.

 DelSite's  2005  and   2004  revenues  were   $1.6  million  and   $767,000,
 respectively.  DelSite has no direct  cost of goods sold, only research  and
 development cost.

 Selling, General and Administrative Expenses
 --------------------------------------------

 The Company  experienced  an  increase of  15.5%  in  selling,  general  and
 administrative expenses during 2005.   These expenses totaled $8.73  million
 in 2005, an  increase of  $1.17 million  from $7.56  million in  2004.   The
 increase is primarily related  to $1.05 million in  expense recorded as  the
 result of the settlement  of the Swiss  American Products lawsuit  discussed
 more fully in "Item 3, Legal Proceedings."

 During 2004 the Company experienced a  decrease of 5.7% in selling,  general
 and administrative expenses.  These expenses totaled $7.56 million in  2004,
 a decrease of $457,000 from $8.02 million  in 2003.  The Company recorded  a
 decrease in distribution-related  expenses of $254,000  to $2.03 million  in
 2004 from $2.29  million in 2003.   The reduction  was primarily related  to
 consolidated shipping programs  and reduced freight  rates achieved  through
 improved negotiations  with freight  carriers.   Additionally,  the  Company
 experienced a $74,000  decline in selling  expenses in  2004, decreasing  to
 $2.06 million  from  $2.13 million  in  2003. This  decrease  was  primarily
 attributable to headcount reductions  in Aloeceuticals[R]  sales  personnel.
 The Company also recorded a decrease of $128,000 in administrative  expenses
 to $3.47 million  in 2004 from  $3.60 million in  2003 as  the Company  more
 efficiently managed these expenses.

 Research and Development
 ------------------------
 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.  The decrease  in 2005 was a  result of lower new  product
 development  research  activities by the Company in 2005 as opposed to 2004.

 Specialized research  and  development expenses in support of the  Company's
 ongoing operations  rose  by  1.3%, increasing  to  $911,000  in  2004  from
 $899,000 in 2003.

 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  $4.97 million  in 2005,  a 29.8%  increase over  the  2004
 expenditures of $3.83 million.  This increase was primarily due to  expenses
 from the first full year of work on the preclinical avian influenza  vaccine
 grant program.  The  2004 expenditures were a  38.6% increase over the  2003
 expenditures of $2.76  million primarily  due to  initial expenses  recorded
 under both NAIAD grant programs.

 Combined research  and development  expenses  totaled $5.80  million,  $4.74
 million and $3.66 million for the years 2005, 2004 and 2003, 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  $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.  Net interest expense of $205,000 was recorded
 in 2004 versus net interest expense  of $249,000 in 2003, with the  decrease
 of $44,000 due to lower outstanding debt balances throughout 2004.

 Income Taxes
 ------------

 The Company incurred $19,000  of foreign income tax  expense related to  the
 Company's operations in Costa Rica in  2005 and $125,000 in 2004, which  was
 the first year  that these  activities were subject  to income  taxes.   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 2005, 2004 or  2003
 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 2005 was $5.34 million, or basic and diluted loss
 per share of $0.50.  Net earnings was $36,000 in 2004, or basic and  diluted
 earnings per share of $0.00, compared to  a loss of $1.50 million, or  basic
 and diluted loss per  share of $0.15,  in 2003.   Basic and diluted  average
 shares outstanding for 2005 were 10,762,342,  compared to basic and  diluted
 average  shares  outstanding   for  2004  of   10,590,062  and   11,171,305,
 respectively, and basic and diluted average  shares outstanding for 2003  of
 10,120,147.  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.  The  new  standard  is effective in the first annual reporting
 period  beginning  after  June 15,  2005.  As  of  December  31,  2005,  all
 outstanding  options  are  vested.  Therefore,  the  Company  will recognize
 expense in future periods if new grants are made.

                         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  $5,000, $2,000 and  $105,000
 for the  years ending  December 31,  2005,  2004,  and  2003,  respectively.
 Accordingly, the Company has a $35,000 reserve recorded for customer returns
 at December 31, 2005.  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 27.9%
 of cost  of  sales  for  the  year  ended December 31, 2005.  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 2005,  the exchange  rate from  U.S.
 Dollar  to Costa Rica Colon  increased by 8.5%  to 497 at December 31, 2005.
 The effect  of an  additional 10%  strengthening in  the value  of the  U.S.
 Dollar relative to the Costa  Rica Colon in 2005  would have resulted in  an
 increase of $464,489 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 5.6%  of sales  for 2005.
 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, 2005,
 a hypothetical one  percent increase in  interest rates would  result in  an
 increase in interest expense of $41,000 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.
           --------------------

 None.


 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.
           -----------------

 On December 18, 2005, the Compensation Committee of the Company approved the
 acceleration  of  the vesting  of  all then-unvested  stock  options.  As  a
 result, options to purchase approximately 145,900 shares became  exercisable
 immediately.  The accelerated options had exercise prices ranging from $4.00
 to $5.30  per share, with  a weighted average  exercise price  of $4.75  per
 share, and included 53,000 shares held by executive officers of the Company.
 All options issued  to outside directors are vested immediately.  Therefore,
 no options held by outside directors of the Company were accelerated.

 The accelerated options were granted under the Company's 1995 and 2004 Stock
 Option Plans.  The terms of the accelerated options previously provided that
 50% of the options would  vest on the first  anniversary of the grant  date.
 The acceleration of vesting resulted in no additional expense in the  fourth
 quarter of 2005.

 Beginning January 1, 2006, the Company was required to adopt the  provisions
 of Statement  of  Financial Accounting  Standards  No. 123(R)  "Share  Based
 Payment" ("FAS  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 FAS 123(R).   As  a result  of
 accelerating these options  in advance of  the adoption of  FAS 123(R),  the
 Company expects  to  reduce  the  pre-tax  stock  option  expense  it  would
 otherwise be required to record.


                                   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 2006 annual meeting
 of shareholders, which will be filed  pursuant to Regulation 14A within  120
 days after the Company's fiscal year ended December 31, 2005.


 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
 2006 annual  meeting  of  shareholders, which  will  be  filed  pursuant  to
 Regulation 14A  within  120  days after  the  Company's  fiscal  year  ended
 December 31, 2005.


 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  2006  annual  meeting   of
 shareholders, which will be filed pursuant to Regulation 14A within 120 days
 after the Company's fiscal year ended December 31, 2005.


 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  2006 annual meeting  of shareholders, which  will be  filed
 pursuant to Regulation 14A within 120  days after the Company's fiscal  year
 ended December 31, 2005.


 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  2006 annual meeting  of shareholders, which  will be  filed
 pursuant to Regulation 14A within 120  days after the Company's fiscal  year
 ended December 31, 2005.


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

    (3)    Exhibits.

           Reference is made to the Index to Exhibits on pages E-1 through
           E-7 or 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, 2005 and 2004                             F-2

      Consolidated Statements of Operations -- years ended
           December 31, 2005, 2004 and 2003                       F-3

      Consolidated Statements of Shareholders' Equity --
           years ended December 31, 2005, 2004 and 2003           F-4

      Consolidated Statements of Cash Flows -- years ended
           December 31, 2005, 2004 and 2003                       F-5

      Notes to Consolidated Financial Statements                  F-6

      Financial Statement Schedule
           Valuation and Qualifying Accounts                      F-21

      Report of Independent Registered Public Accounting Firm     F-22


<PAGE>

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


                                                           December 31,
                                                      ----------------------
                                                        2005          2004
                                                      --------      --------
 ASSETS:
 Current Assets:
   Cash and cash equivalents                         $   6,262     $   2,430
   Accounts receivable, net of allowance for
    doubtful accounts of $329 and $162 at
    December 31, 2005 and 2004, respectively             2,679         3,325
   Inventories, net                                      4,705         4,614
   Prepaid expenses                                        392           197
                                                      --------      --------
 Total current assets                                   14,038        10,566

 Property, plant and equipment, net                      6,755        11,674
 Customer relationships, net                               392           585
 Other assets, net                                         804           192
                                                      --------      --------
 Total assets                                        $  21,989     $  23,017
                                                      ========      ========
 LIABILITIES AND SHAREHOLDERS' EQUITY:
 Current Liabilities:
   Line of credit                                    $   1,812     $   1,887
   Accounts payable                                      2,092         1,674
   Accrued liabilities                                   1,585         1,328
   Current portion of long-term debt and
    capital lease obligations                              188         1,000
   Deferred revenue                                      1,386         2,433
                                                      --------      --------
 Total current liabilities                               7,063         8,322

 Long-term debt and capital lease obligations,
   net of debt discount                                  3,418         1,324

 Commitments and contingencies

 SHAREHOLDERS' EQUITY:
   Common stock, $.01 par value, 30,000,000 shares
    authorized, 10,805,725 and 10,722,364 shares
    issued at December 31, 2005 and 2004,
    respectively                                           108           107
   Capital in excess of par value                       57,185        53,713
   Accumulated deficit                                 (45,782)      (40,446)
   Treasury stock at cost, 2,400 shares
    at December 31, 2005 and 2004                           (3)           (3)
                                                      --------      --------
 Total shareholders' equity                             11,508        13,371
                                                      --------      --------
 Total liabilities and shareholders' equity          $  21,989     $  23,017
                                                      ========      ========

     The accompanying notes are an integral part of these balance sheets.

<PAGE>

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


                                                 Years Ended December 31,
                                               ----------------------------
                                                2005       2004       2003
                                               ------     ------     ------
 Revenues:
  Net product sales                           $24,038    $27,584    $26,636
  Royalty income                                2,299      2,470      2,467
  Grant income                                  1,624        767          -
                                               ------     ------     ------
 Total net revenues                            27,961     30,821     29,103

 Cost and expenses:
   Cost of product sales                       18,581     18,250     18,806
   Selling, general and administrative          8,731      7,560      8,017
   Research and development                       822        911        899
   Research and development, DelSite            4,974      3,826      2,761
   Other income                                  (131)       (92)      (123)
   Interest expense, net                          301        205        249
                                               ------     ------     ------
 Net income (loss) before income taxes         (5,317)       161     (1,506)
 Provision for income taxes                        19        125          -
                                               ------     ------     ------
 Net income (loss)                            $(5,336)   $    36    $(1,506)
                                               ======     ======     ======

 Basic and diluted earnings (loss) per
   share                                      $ (0.50)   $  0.00    $ (0.15)
                                               ======     ======     ======

 Basic shares outstanding                      10,762     10,590     10,120

 Diluted shares outstanding                    10,762     11,171     10,120


        The accompanying notes are an integral part of these statements.

<PAGE>
<TABLE>

 Consolidated Statements of Shareholders' Equity
 For the Years Ended December 31, 2005, 2004 and 2003
 (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, 2003       9,968  $  100    $52,568     $(38,976)         2  $   (3) $13,689
 Issuance of common
  stock for employee
  stock purchase plan    246       2        197            -          -       -      199
 Issuance of common
  stock for stock
  option plan            171       2        235            -          -       -      237
 Net loss                  -       -          -       (1,506)         -       -   (1,506)
                      ------   -----     ------      -------     ------   -----   ------
 December 31, 2003    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



           The accompanying notes are an integral part of these statements.

</TABLE>
<PAGE>

 Consolidated Statements of Cash Flows
 (Amounts in thousands)
                                                     Years Ended December 31,
                                                    --------------------------
                                                     2005      2004      2003
                                                    ------    ------    ------
 Operating activities:
  Net income (loss)                                $(5,336)  $    36   $(1,506)
    Adjustments to reconcile net income (loss)
     to net cash provided by (used in)
     operating activities:
    Provision for bad debts                            243        48       150
    Provision for inventory obsolescence               318       205       200
    Depreciation and amortization                    1,238     1,241     1,309
    Loss on disposal of assets                           -         -         8
    Legal settlement                                   647         -         -
  Changes in operating assets and liabilities:
    Accounts receivable                                403      (275)     (878)
    Inventories                                       (409)    1,141    (1,827)
    Prepaid expenses                                  (195)       56       350
    Other assets                                        62        46        21
    Accounts payable and accrued liabilities           675     (639)       927
    Deferred revenue                                (1,076)      553       (42)
                                                    ------    ------    ------
 Net cash provided by (used in) operating
  activities                                        (3,430)    2,412    (1,288)

 Investing activities:
  Cash paid in purchase of business, net of
   cash acquired                                         -         -       (79)
  Disposal of property, plant, and equipment
   in sale/leaseback transaction                     4,616         -         -
  Purchases of property, plant and equipment          (610)   (2,172)   (1,393)
                                                    ------    ------    ------
 Net cash provided by (used in) investing
  activities                                         4,006    (2,172)   (1,472)

 Financing activities:
  Borrowings on line of credit                           -       300         -
  Payments on line of credit                           (75)        -         -
  Proceeds from debt issuances                       2,263       350     1,500
  Proceeds from warrant issuances                    2,737         -         -
  Principal payments on debt and capital
   lease obligations                                (1,483)   (1,096)     (892)
  Issuances of common stock                            240       716       436
  Debt issuance costs                                 (426)        -         -
                                                    ------    ------    ------
 Net cash provided by financing activities           3,256       270     1,044
                                                    ------    ------    ------
 Net increase (decrease) in cash and cash
  equivalents                                        3,832       510    (1,716)
                                                    ------    ------    ------
 Cash and cash equivalents at beginning of year      2,430     1,920     3,636
                                                    ------    ------    ------
 Cash and cash equivalents at end of year          $ 6,262   $ 2,430   $ 1,920
                                                    ======    ======    ======
 Supplemental disclosure of cash flow information
  Cash paid during the year for interest           $   260   $   225   $   259
  Cash paid during the year for income taxes       $   140         -         -
  Non-cash warrant issue to broker                 $   248         -         -
  Property plant and equipment
    acquired under capital leases                  $   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.


 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 $262,000, $271,000  and $383,000
 in 2005, 2004 and 2003, respectively, for royalties due under the agreement.
 The  Company recorded expense  for amortization of  the intangible asset  of
 $193,000 in  each of  the years  2005 and  2004 and  $195,000  in 2003,  and
 accumulated amortization of $588,000, $395,000 and $202,000 at  December 31,
 2005, 2004 and 2003, respectively.   Amortization expenses over each  of the
 next two years are expected to be approximately $200,000 per year.

 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 $1,032,000,  $914,000 and $1,230,000  for the years  ended
 December 31, 2005, 2004 and 2003, respectively.

 ADVERTISING COSTS.   Advertising  costs, included  in  selling, general  and
 administrative, are expensed  as incurred  and were  $136,000, $240,000  and
 $190,000 for the years ended 2005, 2004 and 2003, respectively.

 STOCK-BASED COMPENSATION.  The  Company accounts for employee  stock options
 in accordance  with Accounting  Principles Board  Opinion No.  25 (APB  25),
 Accounting for Stock Issued to Employees  and Financial Accounting Standards
 Board Interpretation No. 44,  Accounting for Certain Transactions  involving
 Stock Compensation, an interpretation of APB Opinion No. 25.  Under  APB 25,
 the Company  recognizes  no  compensation expense  related  to  employee  or
 director stock options when options are granted with exercise prices  at the
 quoted market price of the stock on the date of grant.

 The Company  has  adopted the  disclosure-only  provisions of  Statement  of
 Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based
 Compensation  and Statement of  Financial Accounting Standards No.  148 (FAS
 148), Accounting for Stock-Based Compensation - Transition and  Disclosure -
 An Amendment of FASB  Statement No. 123.   Under the provisions of  FAS 123,
 pro forma compensation  expense related  to options issued  to employees  is
 disclosed based on the fair value of options on the grant date.

 The following  table illustrates  the effect  on net  income  (loss) if  the
 Company had applied the fair value recognition provision of FAS 123 to stock
 based compensation:

 ---------------------------------------------------------------------------
                                              2005        2004        2003
 ---------------------------------------------------------------------------
 Net income (loss) (in thousands):
      As reported                            $(5,336)    $    36     $(1,506)
      Less:  Stock-based compensation
       expense determined under fair
       value-based method                     (1,055)     (1,496)       (583)
                                              ------      ------      ------
      Pro forma net loss                     $(6,391)    $(1,460)    $(2,089)
                                              ======      ======      ======

      Basic and diluted shares outstanding    10,762      10,590      10,120

 Net income (loss) per share:
      Basic and diluted as reported          $ (0.50)    $  0.00     $ (0.15)
      Basic and diluted pro forma              (0.59)      (0.14)      (0.21)
 ---------------------------------------------------------------------------

 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.  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.  The new  standard is effective in  the first annual  reporting
 period  beginning  after  June 15, 2005.   As  of  December  31,  2005,  all
 outstanding options  are  vested.   Therefore,  the Company  will  recognize
 expense in future periods if new grants are made.


 NOTE THREE.  INVENTORIES

 The following summarizes the  components of inventory  at December 31,  2005
 and 2004, in thousands:

                                                 2005          2004
 ---------------------------------------------------------------------------
 Raw materials and supplies                    $2,652        $2,306
 Work-in-process                                  322           514
 Finished goods                                 2,522         2,613
 Less obsolescence reserve                       (791)         (819)
 ---------------------------------------------------------------------------
 Total                                         $4,705        $4,614
 ---------------------------------------------------------------------------


 NOTE FOUR.  PROPERTY, PLANT AND EQUIPMENT

 Property, plant and  equipment consisted  of the following  at December  31,
 2005 and 2004, in thousands:
                                                         Estimated
                                  2005        2004      Useful Lives
 ---------------------------------------------------------------------------
 Land                           $   151     $ 1,391
 Buildings and improvements       2,702      10,297     7 to 25 years
 Furniture and fixtures             773         638     4 to  8 years
 Machinery and equipment         10,754       9,488     3 to 10 years
 Leasehold improvements           1,327       1,332     3 to 10 years
 Equipment under capital leases     490         392           5 years
 ---------------------------------------------------------------------------
 Total                           16,197      23,538
 Less accumulated depreciation
   and amortization               9,442      11,864
 ---------------------------------------------------------------------------
 Property, plant and
   equipment, net               $ 6,755     $11,674
 ---------------------------------------------------------------------------

 The net book  value for equipment  under capital leases  as of December  31,
 2005 and 2004, was $355,000 and $251,000, respectively.

 The net  book  value of  property,  plant and  equipment  in Costa  Rica  at
 December 31, 2005 and 2004 was $4,209,000 and $4,241,000, respectively.


 NOTE FIVE.  ACCRUED LIABILITIES

 The following summarizes  significant components  of accrued liabilities  at
 December 31, 2005 and 2004, in thousands:
                                             2005           2004
 ---------------------------------------------------------------------------
 Accrued payroll                           $  215         $  267
 Accrued insurance                            166            194
 Accrued taxes                                117            290
 Accrued professional fees                    260            145
 Accrued rent                                 165            151
 Accrued interest                              37              -
 Accrued product recall costs                 251              -
 Other                                        374            281
 ---------------------------------------------------------------------------
 Total                                     $1,585         $1,328
 ---------------------------------------------------------------------------


 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  (7.25% at December 31, 2005) plus  0.5%.

 As of December 31, 2005, there was $1,812,000 outstanding on the credit line
 with $650,000 of credit available for operations, net of outstanding letters
 of credit of  $538,000. 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, 2005 are as follows:

 Covenant                   Covenant Requirement   Company's Position
 ---------                  --------------------   ------------------
 Total net worth                $12,200,000            $11,116,140
 Current ratio                      1.60                   2.40
 Liquidity ratio                    1.75                   4.94

 Although the Company was not in  compliance with one of  its financial-ratio
 covenants under the Comerica  line of credit for  the period ended  December
 31, 2005, Comerica has waived the event of non-compliance through  March 31,
 2006.

 The Company is in the process of renegotiating its financial-ratio covenants
 with Comerica.  However, there can be no assurance that the Company  will be
 successful and,  if the  covenants are  not renegotiated,  the Company  will
 likely be in violation  of the total  net worth covenant  in the future  and
 will seek  additional  waivers  from  Comerica, however,  there  can  be  no
 assurance that Comerica will issue future waivers.

 The total net worth, current ratio and liquidity ratio covenant  amounts and
 the Company's  position are  calculated as  defined  in the  amendment.  The
 covenant amounts for these  ratios will remain at  these same fixed  amounts
 until maturity.


 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 (7.25%) plus 2.0%.  As of December 31, 2005,  there  was $361,000
 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 (7.25%) plus 2.5%.   As of December 31, 2005, there  was $310,000
 outstanding on the loan.

 Both the loans through Bancredito are secured by land and equipment in Costa
 Rica (with a carrying value of approximately $680,000).

 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, 2005, there  was
 $5,000,000 outstanding  on the  note with  an  associated debt  discount  of
 $2,691,000 for a net balance of  $2,309,000.  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, 2005, there  was $400,000 outstanding  on
 the note.

 The following summarizes annual maturities at December 31, 2005, in
 thousands:

                 2006                        $   108
                 2007                            107
                 2008                            112
                 2009                          5,517
                 2010                            125
                 Thereafter                      121
                                              ------
                 Subtotal                      6,090
                 Debt Discount                (2,691)
                                              ------
                 Total                       $ 3,399
                                              ======


 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,
 2005, a total of  968,573 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 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, 2005, options  to purchase 122,200 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  will  be required  to  adopt  the
 provisions of Statement of Financial Accounting Standards No. 123(R)  "Share
 Based Payment" ("FAS 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 FAS 123(R).   As  a result  of
 accelerating these options  in advance of  the adoption of  FAS 123(R),  the
 Company expects  to  reduce  the  pre-tax  stock  option  expense  it  would
 otherwise be required to record by an estimated $162,500 in 2006 and  $4,400
 in 2007.

 The following summarizes stock option activity  for each of the three  years
 in the period ended December 31, 2005 (shares in thousands):

                                                             Weighted
                                                             Average
                                                             Exercise
                                 Shares   Price Per Share     Price
 ---------------------------------------------------------------------------
 Balance, January 1, 2003       1,511     $ 1.05 to $28.75     $2.58

    Granted                       358     $ 1.58 to $ 4.26     $2.94
    Forfeited                     (73)    $ 1.05 to $10.25     $1.68
    Exercised                    (171)    $ 1.05 to $ 4.81     $1.41
 ---------------------------------------------------------------------------
 Balance, December 31, 2003     1,625     $ 1.05 to $28.75     $2.82

    Granted                       632     $ 3.90 to $ 5.30     $4.66
    Forfeited                    (204)    $ 1.05 to $28.75     $4.95
    Exercised                    (231)    $ 1.05 to $ 4.26     $1.62
 ---------------------------------------------------------------------------
 Balance December 31, 2004      1,822     $ 1.05 to $27.00     $3.38
    Granted                       226     $ 3.86 to $ 5.18     $3.95
    Forfeited                    (192)    $ 1.05 to $27.00     $4.31
    Exercised                     (42)    $ 1.05 to $ 4.81     $1.98
 ---------------------------------------------------------------------------
 Balance December 31, 2005      1,814     $ 1.05 to $ 7.50     $3.39
                               ======
 Options exercisable at
    December 31, 2003           1,326     $ 1.05 to $28.75     $2.81
 ---------------------------------------------------------------------------
 Options exercisable at
    December 31, 2004           1,440     $ 1.05 to $27.00     $3.13
 ---------------------------------------------------------------------------
 Options exercisable at
    December 31, 2005           1,814     $ 1.05 to $ 7.50     $3.39
 ---------------------------------------------------------------------------

 The following table summarizes information about stock options outstanding
 at December 31, 2005:

                          Options Outstanding       Options Exercisable
                    ------------------------------  -------------------
                             Weighted
                             Average     Weighted            Weighted
                   Shares   Remaining    Average    Shares   Average
    Range of        (In     Contractual  Exercise    (In     Exercise
 Exercise Prices thousands)    Life       Price   thousands)  Price
 ---------------------------------------------------------------------
 $ 7.50 to $ 7.50     28    1.01 years   $ 7.50       28     $ 7.50
 $ 3.86 to $ 5.30  1,023    7.19 years   $ 4.56    1,023     $ 4.56
 $ 1.75 to $ 2.50    375    4.04 years   $ 2.09      375     $ 2.09
 $ 1.05 to $ 1.50    388    4.30 years   $ 1.28      388     $ 1.28
                   -----                           -----
                   1,814    6.02 years   $ 3.39    1,814     $ 3.39
                   =====                           =====

 The fair value of each option granted was estimated on the date of the grant
 using the Black-Scholes  option pricing model  with the following  weighted-
 average assumptions used for  grants to employees in  2005, 2004, and  2003,
 respectively: risk-free interest rates of  4.35%, 3.51% and 4.27%;  expected
 dividend yields of  0%; expected volatility  of 61.9%, 79.2%  and 89.7%  and
 expected term of 5  years for all periods  presented.  The weighted  average
 fair values of options granted were $2.22, $3.11 and $2.20 in 2005, 2004 and
 2003, respectively.

 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.

 At December 31, 2004 there were no warrants outstanding.

 COMMON STOCK RESERVED.   At December  31, 2005, the  Company had reserved  a
 total of  7,617,708  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, 2005,
 $251,000 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 have alleged  they were damaged  by the mouthwash  product.   The
 amounts of damages have not been  specified.  The Company has $10,000,000 of
 product liability insurance.  The Company and its  insurance  carrier intend
 to vigorously defend against these claims.

 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, 2005 were as follows, in thousands:

                                                Capital    Operating
                                                 Leases      Leases
 ---------------------------------------------------------------------
 2006                                             $  104     $ 1,419
 2007                                                 56       1,343
 2008                                                 38       1,185
 2009                                                 31       1,102
 2010                                                  5       1,125
 Thereafter                                            0       5,732
 ---------------------------------------------------------------------
 Total minimum lease payments                     $  234     $11,906
                                                              ======
 Amounts representing interest                       (27)
                                                   -----
 Present value of capital lease obligations          207
 Less current portion of capital lease obligations   (90)
                                                   -----
 Obligations under capital lease agreements,
   excluding the current portion                  $  117
                                                   =====

 Total rental expense  under operating leases  was $1,035,000, $881,000,  and
 $774,000 for the years ended December 31, 2005, 2004 and 2003, 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  $338,000
 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 a  capital  lease  for
 equipment. 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, 2005 and 2004 were as follows, in thousands:


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

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

 The Company  incurred $19,000  and $125,000  of foreign  income tax  expense
 related to  the  Company's  operations  in Costa  Rica  in  2005  and  2004,
 respectively.  There was no foreign income tax expense incurred in 2003.

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

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

 The tax  provision for  2003  varies from  the  federal statutory  rate  due
 primarily to changes in the valuation allowance.

 At December 31, 2005,  the Company had net  operating loss carryforwards  of
 approximately $33.8 million for federal income tax purposes,  which begin to
 expire in 2009,  and research and  development tax  credit carryforwards  of
 approximately $185,313, which  began to  expire in  2005, 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
 2024.


 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 three customers.  Sales to Natural Alternatives International, Inc.,
 ("Natural Alternatives"),  a customer  in  the Consumer  Services  Division,
 accounted  for  27%,  45%, and 36%  of the Company's net sales in 2005, 2004
 and  2003,  respectively.  Accounts  receivable  from  Natural  Alternatives
 represented 10% and 64%  of gross accounts receivable  at December 31,  2005
 and 2004, respectively.  Sales to Mannatech, Inc., ("Mannatech"), a customer
 in the  Consumer Services Division, accounted  for  7%, 2%  and  3%  of  the
 Company's  net  sales  in  2005,  2004  and  2003,  respectively.   Accounts
 receivable  from  Mannatech  represented  21%  and  0%  of  gross   accounts
 receivable at December 31,  2005 and 2004, respectively.   Sales to  Medline
 Industries, Inc., ("Medline") a customer  in the Medical Services  Division,
 accounted for 27%, 23% and 26% of the Company's sales during 2005, 2004  and
 2003, respectively.   Accounts receivable from  Medline represented 32%  and
 20%  of  the  Company's  gross  accounts  receivable  at  December 31,  2005
 and 2004, 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, 2005 and 2004, in thousands.

            Balance at Beginning    Charges to                Balance at End
                of Period           Expenses      Deductions    of Period
 ---------------------------------------------------------------------------
 A/R Reserve-2005    $162             $243           $76           $329
 A/R Reserve-2004    $181             $ 48           $67           $162


 NOTE TWELVE.  NET INCOME (LOSS) PER SHARE

 The Company calculates basic earnings per share by dividing net earnings  by
 the weighted  average number  of shares  outstanding. Diluted  earnings  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 per share with the amounts rounded to the nearest
 thousands, except per share amounts:

                                              2005        2004        2003
                                             ------      ------      ------
 Net income (loss)                          $(5,336)    $    36     $(1,506)
 Basic earnings (loss) per share:
   Weighted average number of common shares
     outstanding                             10,762      10,590      10,120
     Basic per share amount                 $ (0.50)    $  0.00     $ (0.15)
                                             ======      ======      ======
 Diluted earnings (loss) per share:
   Weighted average number of common shares
     outstanding                             10,762      10,590      10,120
   Dilutive effect of stock options and
      warrants                                    0         581           0
                                             ------      ------      ------
   Diluted weighted average number of
     common shares outstanding               10,762      11,171      10,120
   Diluted per share amount                 $ (0.50)    $  0.00     $ (0.15)
                                             ======      ======      ======

 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.

 At December 31, 2003,  all of the Company's  1,625,185 common stock  options
 and 50,000  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.


 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,  2005,
 2004, and 2003.

 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, 2005, 2004, and 2003.

 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, 2005, 2004 and 2003  were
 as follows:

                                              2005        2004        2003
                                             ------      ------      ------
 Net revenues:
  Medical Services Division                 $10,543     $10,391     $10,782
  Consumer Services Division                 15,794      19,663      18,321
  DelSite                                     1,624         767           0
                                             ------      ------      ------
                                            $27,961     $30,821     $29,103
                                             ======      ======      ======
 Income (loss) before income taxes:
  Medical Services Division                 $(2,673)    $(1,861)    $(1,335)
  Consumer Services Division                    687       5,081       2,590
  DelSite                                    (3,350)     (3,059)     (2,761)
                                             ------      ------      ------
                                            $(5,336)    $   161     $(1,506)
                                             ======      ======      ======
 Identifiable assets:
  Medical Services Division                 $ 4,487     $ 6,094     $ 7,248
  Consumer Services Division                  8,636      12,129      12,813
  DelSite                                     1,428       1,978         324
  Corporate                                   7,438       2,816       2,399
                                             ------      ------      ------
                                            $21,989     $23,017     $22,784
                                             ======      ======      ======
 Capital expenditures:
  Medical Services Division                 $     0     $     0     $   291
  Consumer Services Division                    419         278         920
  DelSite                                       191       1,894         182
                                             ------      ------      ------
                                            $   610     $ 2,172     $ 1,393
                                             ======      ======      ======
 Depreciation and amortization:
  Medical Services Division                 $   197     $   244     $   357
  Consumer Services Division                    595         711         888
  DelSite                                       446         286          64
                                             ------      ------      ------
                                            $ 1,238     $ 1,241     $ 1,309
                                             ======      ======      ======


 NOTE FOURTEEN.  RELATED PARTY TRANSACTIONS

 At December 31, 2005, 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, $132,675 and $92,250  was collected in 2005  and
 2004, 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  $888,000, $1,447,000  and $1,229,000  in 2005,  2004  and
 2003, 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, to be 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, 2005, the  Company had received  $1.2
 million more  in  royalties than  it  had  recognized in  income,  which  is
 recorded as deferred revenue on the balance sheet.


 NOTE SIXTEEN.  UNAUDITED SELECTED QUARTERLY FINANCIAL DATA

 The unaudited selected  quarterly financial  data below  reflect the  fiscal
 years ended December 31, 2005 and 2004, respectively.

 (Amounts in thousands, except per share amounts)
 ---------------------------------------------------------------------------
 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)
 ---------------------------------------------------------------------------
 2004                    1st Quarter  2nd Quarter  3rd Quarter  4th Quarter
 ---------------------------------------------------------------------------
 Net revenue               $7,340       $7,991       $7,729       $7,761
 Cost of product sales      4,573        4,813        4,391        4,473
 Net income (loss)           (245)         (36)         104          213
 Basic and diluted income
   (loss) per share        $(0.03)      $(0.00)      $ 0.01       $ 0.02
 ---------------------------------------------------------------------------


 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, 2005,  2004
 and 2003 was approximately $138,000, $129,000 and $134,000, respectively.

<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
 ---------------------------------------------------------------------------
 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
 ---------------------------------------------------------------------------
 2003
 ---------------------------------------------------------------------------
 Bad debt reserve         $  110    $  150   $   -     $   79      $   181
 Inventory reserve           632       200       -         97          735
 Reserve for Aloe & Herbs
   non-current notes and
   investments included
   in other assets           377         -       -        150          227
 Reserve for returns         136         -       -        101           35

<PAGE>

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 Shareholders and Board of Directors
   Carrington Laboratories, Inc.


 We have audited the  accompanying consolidated balance sheets  of Carrington
 Laboratories, Inc. and subsidiaries as of December 31, 2005 and 2004 and the
 related consolidated statements of operations, shareholders' equity and cash
 flows for each  of  the  three years in the  period ended December 31, 2005.
 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  financial   statement
 presentation.  We believe that our audits provide a reasonable basis for our
 opinion.

 In our  opinion, the  consolidated financial  statements  referred to  above
 present  fairly,  in  all  material  respects,  the  consolidated  financial
 position of Carrington  Laboratories, Inc. and  subsidiaries as of  December
 31, 2005 and  2004, and  the consolidated  results of  their operations  and
 their consolidated cash  flows for  each of the  three years  in the  period
 ended December 31, 2005, 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 dully authorized.

                                    Carrington Laboratories, Inc.



 Date:  March 30, 2006              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      March 30, 2006
 -------------------------         Officer and Director
 Carlton E. Turner, Ph.D.     (principal executive officer)
 D.Sc.


 /s/ Robert W. Schnitzius      Vice President and Chief        March 30, 2006
 -------------------------        Financial Officer
 Robert W. Schnitzius          (principal financial and
                                 accounting officer)


 /s/ Ronald R. Blanck                 Director                 March 30, 2006
 -------------------------
 Ronald R. Blanck, D.O.


 /s/ R. Dale Bowerman                 Director                 March 30, 2006
 -------------------------
 R. Dale Bowerman


 /s/ George DeMott                    Director                 March 30, 2006
 -------------------------
 George DeMott


 /s/ Thomas J. Marquez                Director                 March 30, 2006
 -------------------------
 Thomas J. Marquez


 /s/ Edwin Meese, III                 Director                 March 30, 2006
 -------------------------
 Edwin Meese, III


 /s/ Selvi Vescovi                    Director                 March 30, 2006
 -------------------------
 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. (incorporated
             herein by reference to Exhibit 4.5 to
             Carrington's Registration Statement on Form S-3
             (No. 33-57360) filed with the Securities and
             Exchange Commission on January 25, 1993).

  4.2        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        Amendment No. 1 to Rights Agreement dated
             October 21, 1998 (incorporated herein by
             reference to Exhibit 4 to the Company's
             Form 8-A/A Post-Effective Amendment No. 1).

  4.4        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).

  4.5        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 4.1 to the Company's Form 8-A/A Post-
             Effective Amendment No. 3).

  4.6        Form of 6% Subordinated Promissory Note due 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).

  4.7        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).

  4.8        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).

  4.9        6% Subordinated Promissory Note due 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).

  4.10       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 +      1995 Management Compensation Plan (incorporated
             herein by reference to Exhibit 4.1 to Form S-8
             Registration Statement No. 33-64403 filed with
             the Commission on November 17, 1995).

 10.3        Trademark License and Product Supply Agreement
             dated July 22, 1997 between Caraloe, Inc., and
             Nu Skin International, Inc. (incorporated herein
             by reference to Exhibit 10.1 to Carrington's
             quarterly report on Form 10-Q for the quarter
             ended September 30, 1997).

 10.4        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).

 10.5        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).

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

 10.7        Promissory Note of Aloe Commodities
             International, Inc.,dated June 17, 1998, payable
             to the order of the Registrant in the principal
             amount of $200,000 (incorporated herein by
             reference to Exhibit 10.4 to Carrington's
             Quarterly Report on Form 10-Q for the quarter
             ended June 30, 1998).

 10.8        Letter agreements dated September 30, 1998
             and November 4, 1998 between Aloe Commodities
             International, Inc. and the Registrant amending
             due date of Promissory Note dated June 17, 1998
             from Aloe Commodities International, Inc. to the
             Registrant (incorporated herein by reference to
             Exhibit 10.2 to Carrington's Quarterly Report on
             Form 10-Q for the quarter ended September 30,
             1998).

 10.9        Letter Agreement dated February 4, 1999 between
             Aloe Commodities International, Inc. and the
             Registrant amending due date of Promissory Note
             dated June 17, 1998 from Aloe Commodities
             International, Inc. to the Registrant
             (incorporated herein by reference to Exhibit
             10.98 to Carrington's 1998 Annual Report on Form
             10-K).

 10.10       Promissory Note dated July 1, 1998 of Rancho
             Aloe, (C.R.) S.A. payable to the order of the
             Registrant in the principal amount of
             $186,655.00 (incorporated herein by reference to
             Exhibit 10.1 to Carrington's Quarterly Report on
             Form 10-Q for the quarter ended September 30,
             1998).

 10.11       Promissory Note of Aloe & Herbs International,
             Inc. dated November 23, 1998 payable to the
             order of the Registrant in the principal amount
             of $300,000 (incorporated herein by reference to
             Exhibit 10.92 to Carrington's 1998 Annual Report
             on Form 10-K).

 10.12       Letter Agreement dated September 29, 1999
             between Aloe Commodities International, Inc.
             and Carrington Laboratories, Inc. (incorporated
             herein by reference to Exhibit 10.1 to
             Carrington's Quarterly Report on Form 10-Q for
             the quarter ended September 30, 1999).

 10.13 #     Distributor and License Agreement dated November
             3, 2000 between Carrington Laboratories, Inc.
             and Medline Industries, Inc.(incorporated by
             reference to Exhibit 10.82 to Carrington's 1999
             Annual Report on Form 10-K).

 10.14 #     Supply Agreement dated November 3, 2000 between
             Carrington Laboratories, Inc. and Medline
             Industries, Inc. (incorporated by reference to
             Exhibit 10.83 to Carrington's 1999 Annual Report
             on Form 10-K).

 10.15       Lease Agreement dated January 22, 2001 between
             Plazamerica, Inc and Carrington Laboratories, Inc.

 10.16 +     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).

 10.17 +     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).

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

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

 10.20       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).

 10.21       2004 Stock Option Plan of Carrington
             Laboratories, Inc., (incorporated by reference
             to Exhibit 4.1 to Carrington's Form S-8
             Registration Statement filed with the SEC
             on August 17, 2004).

 10.22       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
             filed with the SEC on August 17, 2005).

 10.23       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 Cartage 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).

 10.24       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).

 10.25 #     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).

 10.26       One-year extension of the Strategic
             Collaboration Agreement between Carrington
             Laboratories, Inc., and Southern Research
             Institute, dated February 4, 2005 (incorporated
             by reference to Exhibit 10.1 to Carrington's
             Form 8-K as filed with the SEC on February 22,
             2005).

 10.27 #     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).

 10.28       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).

 10.29       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).

 10.30       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).

 10.31       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).

 10.32       Settlement Agreement and Mutual Release of All
             Claims dated as of December 20, 2005, by and
             among Swiss American Products, Inc., and 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).

 10.33       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).

 10.34       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).

 10.35 * +   Employee Stock Purchase Plan of Carrington
             Laboratories, Inc., Amendment No. 2 dated
             December 29, 2005 and effective as of January 1,
             2006.

 21.1 *      Subsidiaries of Carrington.

 23.1 *      Consent of Grant Thornton.

 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.