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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended September 30, 2005



OR



| ̈ | 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: 000-50417



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Royal BodyCare, Inc.

(Exact name of registrant as specified in its charter)



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|                                         |  |                      
|---------------------------------------- |  | ---------------------
|Nevada                                   |  | 91-2015186           
|(State of Incorporation)                 |  | (IRS Employer ID No.)
|                                         | 
|2301 Crown Court, Irving, Texas          |  | 75038                
|(Address of principal executive offices) |  | (Zip code)           



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



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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
Act of 1934 during the past 12 months and (2) has been subject to such filing requirements for the past 90 days.    x  YES ̈NO



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct). ̈YES    x  NO



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ̈YES    x  NO



Number of shares of common stock, par value $0.001, outstanding at October 28, 2005: 20,056,294



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TABLE OF CONTENTS



|                               |  |                                                                                                       |  |   
|------------------------------ |  | ----------------------------------------------------------------------------------------------------- |  | --
|                               |  | Page Number                                                                                          
|PART I  FINANCIAL INFORMATION |  |                                                                                                      
|                               |  |                                                                                                      
|Item 1.                        |  | Financial Statements (unaudited)                                                                      |  |   
|                               |  | Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004                  |  | 3 
|                               |  | Condensed Consolidated Statements of Operations for the quarters ended September 30, 2005 and 2004    |  | 4 
|                               |  | Condensed Consolidated Statements of Operations for the nine months ended September 30, 2005 and 2004 |  | 5 
|                               |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 |  | 6 
|                               |  | Notes to Condensed Consolidated Financial Statements                                                  |  | 7 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 16
|Item 3.                        |  | Quantitative and Qualitative Disclosure about Market Risk                                             |  | 26
|Item 4.                        |  | Controls and Procedures                                                                               |  | 26
|                               | 
|PART II 
OTHER INFORMATION    |  |                                                                                                      
|                               |  |                                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                                     |  | 27
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                           |  | 27
|Item 3.                        |  | Defaults Upon Senior Securities                                                                       |  | 27
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                   |  | 27
|Item 5.                        |  | Other Information                                                                                     |  | 27
|Item 6.                        |  | Exhibits                                                                                              |  | 27
|                               | 
|Signatures                     |  | 28                                                                                                   
|                               | 
|Exhibit Index                  |  | 29                                                                                                   



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Item 1. FINANCIAL STATEMENTS



ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                   |  |                    |            |   |                  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                   |  | September 30, 2005 |            |   | December 31,2004 |  
|ASSETS                                                                                                                                             |  |                    |            |   |                  |   |            |  
|Current assets:                                                                                                                                    |  |                    |            |   |                  |   |            |  
|Cash and cash equivalents                                                                                                                          |  | $                  | 1,980,402  |   |                  | $ | 1,051,511  |  
|Accounts receivable                                                                                                                                |  |                    | 300,587    |   |                  |   | 435,109    |  
|Inventories                                                                                                                                        |  |                    | 3,242,428  |   |                  |   | 2,237,165  |  
|Deferred income tax assets                                                                                                                         |  |                    | 23,298     |   |                  |   | 22,473     |  
|Prepaid expenses and other                                                                                                                         |  |                    | 389,755    |   |                  |   | 451,569    |  
|                                                                                                                                                   |  |                    |            |   |                  |   |            |  
|Total current assets                                                                                                                               |  |                    | 5,936,470  |   |                  |   | 4,197,827  |  
|                                                                                                                                                   |  |                   
|Property & equipment, net                                                                                                                          |  |                    | 4,096,035  |   |                  |   | 4,423,883  |  
|                                                                                                                                                   |  |                   
|Goodwill, net                                                                                                                                      |  |                    | 2,095,054  |   |                  |   | 2,095,054  |  
|                                                                                                                                                   |  |                   
|Intangible assets, net                                                                                                                             |  |                    | 247,181    |   |                  |   | 278,986    |  
|                                                                                                                                                   |  |                   
|Other assets                                                                                                                                       |  |                    | 172,103    |   |                  |   | 158,313    |  
|                                                                                                                                                   |  |                    |            |   |                  |   |            |  
|                                                                                                                                                   |  | $                  | 12,546,843 |   |                  | $ | 11,154,063 |  
|                                                                                                                                                   |  |                    |            |   |                  |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                               |  |                    |            |   |                  |   |            |  
|Current liabilities:                                                                                                                               |  |                    |            |   |                  |   |            |  
|Accounts payable, trade                                                                                                                            |  | $                  | 1,090,076  |   |                  | $ | 815,100    |  
|Accrued liabilities                                                                                                                                |  |                    | 3,535,140  |   |                  |   | 2,742,828  |  
|Current maturities of long-term debt                                                                                                               |  |                    | 390,881    |   |                  |   | 391,449    |  
|Lines of credit                                                                                                                                    |  |                    | 122,995    |   |                  |   | 125,644    |  
|                                                                                                                                                   |  |                    |            |   |                  |   |            |  
|Total current liabilities                                                                                                                          |  |                    | 5,139,092  |   |                  |   | 4,075,021  |  
|                                                                                                                                                   |  |                   
|Long term debt, less current maturities                                                                                                            |  |                    | 2,584,585  |   |                  |   | 2,760,997  |  
|                                                                                                                                                   |  |                   
|Shareholders equity:                                                                                                                              |  |                    |            |   |                  |   |            |  
|Common stock, $0.001 par value; 50,000,000 shares authorized; 20,056,294 shares issued and outstanding at September 30, 2005 and
December 31, 2004 |  |                    | 20,056     |   |                  |   | 20,056     |  
|Additional paid-in capital                                                                                                                         |  |                    | 12,789,978 |   |                  |   | 12,789,978 |  
|Accumulated deficit                                                                                                                                |  |                    | (7,919,507 | ) |                  |   | (8,440,500 | )
|Accumulated other comprehensive loss                                                                                                               |  |                    | (67,361    | ) |                  |   | (51,489    | )
|                                                                                                                                                   |  |                    |            |   |                  |   |            |  
|                                                                                                                                                   |  |                    | 4,823,166  |   |                  |   | 4,318,045  |  
|                                                                                                                                                   |  |                    |            |   |                  |   |            |  
|                                                                                                                                                   |  | $                  | 12,546,843 |   |                  | $ | 11,154,063 |  
|                                                                                                                                                   |  |                    |            |   |                  |   |            |  



See notes to condensed consolidated
financial statements.



- 3 -



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ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                   |  |                                      |            |      |   |            |  
|-------------------------------------------------- |  | ------------------------------------ | ---------- | ---- | - | ---------- | -
|                                                   |  | For the Quarters Ended September 30, |           
|                                                   |  | 2005                                 |            | 2004 |  
|Net sales                                          |  | $                                    | 4,914,551  |      | $ | 4,066,225  |  
|                                                   |  |                                     
|Cost of sales                                      |  |                                      | 1,979,578  |      |   | 1,388,812  |  
|                                                   |  |                                      |            |      |   |            |  
|Gross profit                                       |  |                                      | 2,934,973  |      |   | 2,677,413  |  
|                                                   |  |                                     
|Operating expenses                                 |  |                                      |            |      |   |            |  
|Distributor commissions                            |  |                                      | 801,707    |      |   | 839,225    |  
|General and administrative                         |  |                                      | 1,776,673  |      |   | 1,657,251  |  
|Depreciation and amortization                      |  |                                      | 144,868    |      |   | 144,911    |  
|                                                   |  |                                      |            |      |   |            |  
|Total operating expenses                           |  |                                      | 2,723,248  |      |   | 2,641,387  |  
|                                                   |  |                                      |            |      |   |            |  
|Operating profit                                   |  |                                      | 211,725    |      |   | 36,026     |  
|                                                   |  |                                     
|Interest expense                                   |  |                                      | 62,279     |      |   | 64,501     |  
|Other income                                       |  |                                      |           |      |   | (46,675    | )
|                                                   |  |                                      |            |      |   |            |  
|                                                   |  |                                      | 62,279     |      |   | 17,826     |  
|                                                   |  |                                      |            |      |   |            |  
|Earnings before income taxes                       |  |                                      | 149,446    |      |   | 18,200     |  
|                                                   |  |                                     
|Provision for income taxes                         |  |                                      |           |      |   |           |  
|                                                   |  |                                      |            |      |   |            |  
|Net earnings                                       |  | $                                    | 149,446    |      | $ | 18,200     |  
|                                                   |  |                                      |            |      |   |            |  
|Basic earnings per share:                          |  |                                      |            |      |   |            |  
|                                                   |  |                                     
|Basic earnings per share                           |  | $                                    | 0.01       |      | $ | 0.00       |  
|                                                   |  |                                      |            |      |   |            |  
|Basic weighted average common shares outstanding   |  |                                      | 20,056,294 |      |   | 20,056,294 |  
|                                                   |  |                                      |            |      |   |            |  
|Diluted earnings per share:                        |  |                                      |            |      |   |            |  
|                                                   |  |                                     
|Diluted earnings per share                         |  | $                                    | 0.01       |      | $ | 0.00       |  
|                                                   |  |                                      |            |      |   |            |  
|Diluted weighted average common shares outstanding |  |                                      | 22,202,158 |      |   | 20,478,345 |  
|                                                   |  |                                      |            |      |   |            |  



See notes to condensed consolidated
financial statements.



- 4 -



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ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                   |  |                                         |            |      |   |            |  
|-------------------------------------------------- |  | --------------------------------------- | ---------- | ---- | - | ---------- | -
|                                                   |  | For the Nine Months Ended September 30, |           
|                                                   |  | 2005                                    |            | 2004 |  
|Net sales                                          |  | $                                       | 14,412,650 |      | $ | 13,023,574 |  
|                                                   |  |                                        
|Cost of sales                                      |  |                                         | 5,554,008  |      |   | 4,478,903  |  
|                                                   |  |                                         |            |      |   |            |  
|Gross profit                                       |  |                                         | 8,858,642  |      |   | 8,544,671  |  
|                                                   |  |                                        
|Operating expenses                                 |  |                                         |            |      |   |            |  
|Distributor commissions                            |  |                                         | 2,454,248  |      |   | 2,728,446  |  
|General and administrative                         |  |                                         | 5,261,672  |      |   | 5,067,323  |  
|Depreciation and amortization                      |  |                                         | 432,725    |      |   | 435,216    |  
|                                                   |  |                                         |            |      |   |            |  
|Total operating expenses                           |  |                                         | 8,148,645  |      |   | 8,230,985  |  
|                                                   |  |                                         |            |      |   |            |  
|Operating profit                                   |  |                                         | 709,997    |      |   | 313,686    |  
|                                                   |  |                                        
|Interest expense                                   |  |                                         | 189,004    |      |   | 198,168    |  
|Other income                                       |  |                                         |           |      |   | (125,079   | )
|                                                   |  |                                         |            |      |   |            |  
|                                                   |  |                                         | 189,004    |      |   | 73,089     |  
|                                                   |  |                                         |            |      |   |            |  
|Earnings before income taxes                       |  |                                         | 520,993    |      |   | 240,597    |  
|                                                   |  |                                        
|Provision for income taxes                         |  |                                         |           |      |   |           |  
|                                                   |  |                                         |            |      |   |            |  
|Net earnings                                       |  | $                                       | 520,993    |      | $ | 240,597    |  
|                                                   |  |                                         |            |      |   |            |  
|Basic earnings per share:                          |  |                                         |            |      |   |            |  
|                                                   |  |                                        
|Basic earnings per share                           |  | $                                       | 0.03       |      | $ | 0.01       |  
|                                                   |  |                                         |            |      |   |            |  
|Basic weighted average common shares outstanding   |  |                                         | 20,056,294 |      |   | 20,000,738 |  
|                                                   |  |                                         |            |      |   |            |  
|Diluted earnings per share:                        |  |                                         |            |      |   |            |  
|                                                   |  |                                        
|Diluted earnings per share                         |  | $                                       | 0.02       |      | $ | 0.01       |  
|                                                   |  |                                         |            |      |   |            |  
|Diluted weighted average common shares outstanding |  |                                         | 21,147,160 |      |   | 21,109,088 |  
|                                                   |  |                                         |            |      |   |            |  



See notes to condensed consolidated
financial statements.



- 5 -



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ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                    |  |                                         |            |   |      |   |          |  
|--------------------------------------------------- |  | --------------------------------------- | ---------- | - | ---- | - | -------- | -
|                                                    |  | For the Nine Months Ended September 30, |           
|                                                    |  | 2005                                    |            |   | 2004 |  
|Cash flows from operating activities:               |  |                                         |            |   |      |   |          |  
|Net earnings                                        |  | $                                       | 520,993    |   |      | $ | 240,597  |  
|Adjustment for non-cash items:                      |  |                                         |            |   |      |   |          |  
|Depreciation and amortization                       |  |                                         | 443,417    |   |      |   | 442,472  |  
|Loss on disposition of equipment                    |  |                                         | 427        |   |      |   |         |  
|Change in operating assets and liabilities          |  |                                         |            |   |      |   |          |  
|Accounts receivable                                 |  |                                         | 133,253    |   |      |   | (21,227  | )
|Inventories                                         |  |                                         | (1,001,480 | ) |      |   | (334,762 | )
|Prepaid expenses and other                          |  |                                         | 62,316     |   |      |   | (187,837 | )
|Other assets                                        |  |                                         | (13,513    | ) |      |   | (8,769   | )
|Accounts payable and accrued liabilities            |  |                                         | 1,063,920  |   |      |   | 340,588  |  
|                                                    |  |                                         |            |   |      |   |          |  
|Net cash provided by operating activities           |  |                                         | 1,209,333  |   |      |   | 471,062  |  
|                                                    |  |                                         |            |   |      |   |          |  
|Net Cash flows from investing activities:           |  |                                         |            |   |      |   |          |  
|Purchase of property and equipment                  |  |                                         | (91,874    | ) |      |   | (89,147  | )
|Proceeds from disposition of property and equipment |  |                                         | 27,631     |   |      |   |         |  
|                                                    |  |                                         |            |   |      |   |          |  
|Net cash used by investing activities               |  |                                         | (64,243    | ) |      |   | (89,147  | )
|                                                    |  |                                         |            |   |      |   |          |  
|Cash flows from financing activities:               |  |                                         |            |   |      |   |          |  
|Net payments of lines of credit                     |  |                                         | (2,649     | ) |      |   | (3,329   | )
|Payments of long term debt                          |  |                                         | (195,474   | ) |      |   | (480,840 | )
|Proceeds from borrowing                             |  |                                         |           |   |      |   | 224,263  |  
|Proceeds from the exercise of stock options         |  |                                         |           |   |      |   | 14,500   |  
|                                                    |  |                                         |            |   |      |   |          |  
|Net cash used by financing activities               |  |                                         | (198,123   | ) |      |   | (245,406 | )
|                                                    |  |                                         |            |   |      |   |          |  
|Effect of exchange rate changes on cash flows       |  |                                         | (18,076    | ) |      |   | 2,850    |  
|                                                    |  |                                         |            |   |      |   |          |  
|Net increase in cash and cash equivalents           |  |                                         | 928,891    |   |      |   | 139,359  |  
|                                                    |  |                                        
|Cash and cash equivalents, beginning of period      |  |                                         | 1,051,511  |   |      |   | 501,757  |  
|                                                    |  |                                         |            |   |      |   |          |  
|Cash and cash equivalents, end of period            |  | $                                       | 1,980,402  |   |      | $ | 641,116  |  
|                                                    |  |                                         |            |   |      |   |          |  



See notes to condensed consolidated
financial statements.



- 6 -



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ROYAL BODYCARE, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note A
 Unaudited Condensed Consolidated Financial Statements:



The
accompanying unaudited condensed consolidated financial statements of Royal BodyCare, Inc. (RBC or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and
disclosures are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the summary of significant
accounting policies and notes to the consolidated financial statements included in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.



In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation
of the Companys results for the interim periods have been included. The Condensed Consolidated Balance Sheet as of December 31, 2004 was derived from the Companys audited financial statements included in the Companys Form 10-K
for the year ended December 31, 2004. The preparation of consolidated 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 consolidated financial statements and reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The results of operations
for the interim periods presented are not necessarily indicative of the results to be expected for the full year.



The Company accounts for payments made to its Associates (as hereinafter defined) in accordance with Emerging Issues Task Force Issue (EITF) No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products). As provided by EITF 01-9, sales incentives paid to Associates that represent rebates are recorded as a reduction of sales
rather than a distributor commission expense. Accordingly, the Company made the following reclassifications with respect to the quarter and nine months ended September 30, 2004, which reclassifications had no effect on operating profit, net
earnings or earnings per share.



|                        |  |              |  |                                  |           |   |                                     |   |            |  
|----------------------- |  | ------------ |  | -------------------------------- | --------- | - | ----------------------------------- | - | ---------- | -
|                        |  |              |  | Quarter Ended September 30, 2004 |           |   | Nine Months EndedSeptember 30, 2004 |  
|Net sales               |  | As reported  |  | $                                | 4,257,738 |   |                                     | $ | 13,647,287 |  
|                        |  | Rebates      |  |                                  | (191,513  | ) |                                     |   | (623,713   | )
|                        |  |              |  |                                  |           |   |                                     |   |            |  
|                        |  | Reclassified |  | $                                | 4,066,225 |   |                                     | $ | 13,023,574 |  
|                        |  |              |  |                                  |           |   |                                     |   |            |  
|Distributor commissions |  | As reported  |  | $                                | 1,030,738 |   |                                     | $ | 3,352,159  |  
|                        |  | Rebates      |  |                                  | (191,513  | ) |                                     |   | (623,713   | )
|                        |  |              |  |                                  |           |   |                                     |   |            |  
|                        |  | Reclassified |  | $                                | 839,225   |   |                                     | $ | 2,728,446  |  
|                        |  |              |  |                                  |           |   |                                     |   |            |  



- 7 -



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Note B  Nature of Operations and Organization:



The Company is principally engaged in the marketing of nutritional supplements and personal
care products (collectively Nutritional Products). In the United States, Canada and Japan, the Companys products are marketed through a network of distributors that are referred to as Associates. The Associates are
independent contractors who purchase products for personal use, purchase products for resale to retail customers and sponsor other individuals as Associates. Associates can derive compensation both from the direct sales of products and from sales
generated by sponsored Associates.



RBC also markets its Nutritional Products
in countries outside the United States, Canada and Japan through license arrangements. The licensees are third parties who are granted exclusive rights to distribute RBC products in their respective territories and, for the most part, distribute our
products through an independent Associate network in the licensed territory. Under these arrangements, the independent distributor network in a licensed territory is compensated by the licensee according to the same or a similar compensation plan as
the one used by RBC for its Associates in the United States, Canada and Japan.



In addition to its Nutritional Products, RBC also markets a line of wound care and oncology products throughout the United States under the MPM Medical trade name. These products are distributed to hospitals, nursing homes, clinics and
pharmacies through traditional medical/surgical supply dealers and pharmaceutical distributors.



The Company recently decided to expand sales of Nutritional Products through expansion of its Associate network into South Korea. This decision is contingent upon closing a $1.3 million credit facility from a bank to
help fund this expansion plan. This credit facility, which has been tentatively approved by the bank, is more fully described in Note H below.



Note C  Inventories:



Inventories at September 30, 2005 and December 31, 2004 consist of the following:



|                                |  |                    |           |                   |   |          
|------------------------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                                |  | September 30, 2005 |           | December 31, 2004
|Raw materials and bulk products |  | $                  | 597,792   |                   | $ | 377,075  
|Packaging Materials             |  |                    | 393,925   |                   |   | 369,139  
|Finished goods                  |  |                    | 2,250,711 |                   |   | 1,490,951
|                                |  |                    |           |                   |   |          
|                                |  | $                  | 3,242,428 |                   | $ | 2,237,165
|                                |  |                    |           |                   |   |          



- 8 -



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Note D  Property and Equipment:



Property and equipment at September 30, 2005 and December 31, 2004 consists of the following:



|                                       |  |                    |           |                   |   |          
|-------------------------------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                                       |  | September 30, 2005 |           | December 31, 2004
|Building and improvements              |  | $                  | 2,758,983 |                   | $ | 2,758,983
|Computer software and office equipment |  |                    | 2,973,628 |                   |   | 2,941,387
|Warehouse equipment                    |  |                    | 257,826   |                   |   | 273,125  
|Automotive equipment                   |  |                    | 55,392    |                   |   | 55,392   
|Leasehold improvements                 |  |                    | 18,830    |                   |   | 18,164   
|                                       |  |                    |           |                   |   |          
|                                       |  |                    | 6,064,659 |                   |   | 6,047,051
|Less  accumulated depreciation        |  |                    | 3,109,797 |                   |   | 2,764,341
|                                       |  |                    |           |                   |   |          
|                                       |  |                    | 2,954,862 |                   |   | 3,282,710
|Land                                   |  |                    | 1,141,173 |                   |   | 1,141,173
|                                       |  |                    |           |                   |   |          
|                                       |  | $                  | 4,096,035 |                   | $ | 4,423,883
|                                       |  |                    |           |                   |   |          



Note E  Goodwill and Other
Intangible Assets:



The Company measures its goodwill for impairment at
the end of each year or in the event of an impairment indicator. No impairment losses have been recognized as a result of this testing. Goodwill consists of the following:



|         |  |                      |           |                          |                   |            |                    |  |                          |           |  |   |            |  
|-------- |  | -------------------- | --------- | ------------------------ | ----------------- | ---------- | ------------------ |  | ------------------------ | --------- |  | - | ---------- | -
|         |  | September 30, 2005   |           |                          | December 31, 2004 |           
|         |  | Gross carrying value |           | Accumulated amortization |                   |            | Grosscarryingvalue |  | Accumulated Amortization |          
|Goodwill |  | $                    | 3,222,349 |                          | $                 | (1,127,295 | )                  |  | $                        | 3,222,349 |  | $ | (1,127,295 | )



Other intangible assets consist of the
following:



|                                               |  |                      |  |                      |         |                          |                   |          |                    |  |                          |         |  |   |          |  
|---------------------------------------------- |  | -------------------- |  | -------------------- | ------- | ------------------------ | ----------------- | -------- | ------------------ |  | ------------------------ | ------- |  | - | -------- | -
|                                               |  |                      |  | September 30, 2005   |         |                          | December 31, 2004 |         
|                                               |  | Average life (years) |  | Gross carrying value |         | Accumulated amortization |                   |          | Grosscarryingvalue |  | Accumulated Amortization |        
|Distribution contracts                         |  | 8                    |  | $                    | 277,369 |                          | $                 | (137,439 | )                  |  | $                        | 277,369 |  | $ | (112,727 | )
|Copyrights, trademarks and other registrations |  | 19                   |  |                      | 99,100  |                          |                   | (21,802  | )                  |  |                          | 99,100  |  |   | (17,838  | )
|Other                                          |  | 11                   |  |                      | 47,600  |                          |                   | (17,647  | )                  |  |                          | 47,600  |  |   | (14,518  | )
|                                               |  |                      |  |                      |         |                          |                   |          |                    |  |                          |         |  |   |          |  
|                                               |  |                      |  | $                    | 424,069 |                          | $                 | (176,888 | )                  |  | $                        | 424,069 |  | $ | (145,083 | )
|                                               |  |                      |  |                      |         |                          |                   |          |                    |  |                          |         |  |   |          |  



Amortization expense related to other
intangible assets totaled approximately $10,600 for the quarters ended September 30, 2005 and 2004 and $31,800 for the nine months ended September 30, 2005 and 2004. The aggregate estimated amortization expense for intangible assets
remaining as of September 30, 2005 is as follows:



- 9 -



---

|                  |  |   |        
|----------------- |  | - | -------
|Remainder of 2005 |  | $ | 10,602 
|2006              |  |   | 42,407 
|2007              |  |   | 42,407 
|2008              |  |   | 42,407 
|2009              |  |   | 42,301 
|Thereafter        |  |   | 67,057 
|                  |  |   |        
|Total             |  | $ | 247,181
|                  |  |   |        



Note F  Accrued Liabilities:



Accrued liabilities at September 30, 2005 and December 31, 2004
consist of the following:



|                                                         |  |                    |           |                   |   |          
|-------------------------------------------------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                                                         |  | September 30, 2005 |           | December 31, 2004
|Deferred revenue for unshipped orders and order deposits |  | $                  | 2,512,591 |                   | $ | 1,556,775
|Distributor commissions                                  |  |                    | 479,903   |                   |   | 542,839  
|Salaries and wages                                       |  |                    | 392,401   |                   |   | 502,670  
|Sales and other taxes                                    |  |                    | 73,084    |                   |   | 56,298   
|Interest                                                 |  |                    | 21,091    |                   |   | 21,849   
|Other                                                    |  |                    | 56,070    |                   |   | 62,397   
|                                                         |  |                    |           |                   |   |          
|                                                         |  | $                  | 3,535,140 |                   | $ | 2,742,828
|                                                         |  |                    |           |                   |   |          



Note G  Stock-Based
Compensation:



On July 1, 1998, the Companys shareholders
adopted the 1998 Stock Option Plan (the Plan) and reserved 500,000 shares of common stock for issuance under the Plan. Effective September 4, 2003, the Companys shareholders adopted an amendment and restatement of the Plan in
the form of the 2003 Stock Incentive Plan. The purpose of this amendment and restatement was, among other things, to increase the number of shares issuable under the Plan to 3,500,000 shares of common stock and to add restricted stock as available
for awards under the Plan. The Plan, in both the original form and the amended and restated form, provides for the issuance of both nonqualified and incentive stock options, and permits grants to employees, non-employee directors and consultants of
the Company.



The Company accounts for the Plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net earnings, as all options granted under this plan had an
exercise price equal to or greater than the quoted market price of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                                |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                |  | Quarters Ended September 30, |        
|                                                                                                                |  | 2005                         |         |   | 2004 |  
|Net earnings, as reported                                                                                       |  | $                            | 149,446 |   |      | $ | 18,200  |  
|Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards |  |                              | (19,527 | ) |      |   | (19,894 | )
|                                                                                                                |  |                              |         |   |      |   |         |  
|Pro forma net earnings (loss)                                                                                   |  | $                            | 129,919 |   |      | $ | (1,694  | )
|                                                                                                                |  |                              |         |   |      |   |         |  
|Earnings (loss) per share  basic and diluted                                                                   |  |                              |         |   |      |   |         |  
|As reported                                                                                                     |  | $                            | 0.01    |   |      | $ | 0.00    |  
|Pro forma                                                                                                       |  | $                            | 0.01    |   |      | $ | (0.00   | )



- 10 -



---

|                                                                                                                |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                |  | Nine Months Ended September 30, |        
|                                                                                                                |  | 2005                            |         |   | 2004 |  
|Net earnings, as reported                                                                                       |  | $                               | 520,993 |   |      | $ | 240,597 |  
|Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards |  |                                 | (58,581 | ) |      |   | (59,877 | )
|                                                                                                                |  |                                 |         |   |      |   |         |  
|Pro forma net earnings                                                                                          |  | $                               | 462,412 |   |      | $ | 180,720 |  
|                                                                                                                |  |                                 |         |   |      |   |         |  
|Basic earnings per share                                                                                        |  |                                 |         |   |      |   |         |  
|As reported                                                                                                     |  | $                               | 0.03    |   |      | $ | 0.01    |  
|Pro forma                                                                                                       |  | $                               | 0.02    |   |      | $ | 0.01    |  
|Diluted earnings per share                                                                                      |  |                                 |         |   |      |   |         |  
|As reported                                                                                                     |  | $                               | 0.02    |   |      | $ | 0.01    |  
|Pro forma                                                                                                       |  | $                               | 0.02    |   |      | $ | 0.01    |  



The fair value of these options was
estimated at the date of grant using the Black-Scholes option pricing model. Option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Also, the Companys employee stock options have
characteristics significantly different from those of traded options including long-vesting schedules, and changes in the subjective input assumptions can materially affect the fair value estimate. The Company believes that the best assumptions
available were used to value the options.



New Accounting
Pronouncement



In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123revised 2004 (SFAS 123R), Share-Based Payment,which replaces SFAS 123, and supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees.SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the
recording of such expense in the consolidated statement of operations.



The
accounting provisions of SFAS 123R are effective for fiscal years beginning after June 15, 2005. Accordingly, the Company is required to adopt SFAS 123R in the first quarter of 2006. Although the Company has not completed its evaluation of the
impact of adopting this statement, it expects adoption to affect its statement of operations, but have no effect on its financial condition or cash flows.



Note H  Long Term Obligations:



At September 30, 2005 and December 31, 2004 long-term debt consists of the following:



|                                                                                                                                                    |  |                    |           |                   |   |          
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                                                                                                                                                    |  | September 30, 2005 |           | December 31, 2004
|Mortgage note payable bearing interest at 7.75%, payable in monthly installments of $25,797 through April 2019, collateralized by land and
building |  | $                  | 2,595,658 |                   | $ | 2,674,395
|Note payable to bank bearing interest at prime plus 1.50% (8.0% at September 30, 2005) due in monthly installments of $9,500 through July
2006      |  |                    | 95,102    |                   |   | 173,150  



- 11 -



---

|                                                                                                                                                                                                                                                                                                 |  |                    |           |                   |   |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | --------- | ----------------- | - | ---------
|                                                                                                                                                                                                                                                                                                 |  | September 30, 2005 |           | December 31, 2004
|U. S. Small Business Administration note bearing interest at prime plus 2.75% (9.5% at September 30, 2005) due in monthly installments of
approximately $4,400 through July 2008                                                                                                                 |  |                    | 135,916   |                   |   | 166,901  
|Convertible notes (original amount $730,000) bearing interest at 10% payable quarterly, originally due two years from the date of issuance
(1997), notes are convertible into common stock any time prior to maturity at the option of the holder based on a per share conversion price of $1.32 |  |                    | 123,000   |                   |   | 128,000  
|Capital lease obligation                                                                                                                                                                                                                                                                         |  |                    | 15,790    |                   |   |         
|Other                                                                                                                                                                                                                                                                                            |  |                    | 10,000    |                   |   | 10,000   
|                                                                                                                                                                                                                                                                                                 |  |                    |           |                   |   |          
|                                                                                                                                                                                                                                                                                                 |  |                    | 2,975,466 |                   |   | 3,152,446
|Less  current maturities                                                                                                                                                                                                                                                                        |  |                    | 390,881   |                   |   | 391,449  
|                                                                                                                                                                                                                                                                                                 |  |                    |           |                   |   |          
|                                                                                                                                                                                                                                                                                                 |  | $                  | 2,584,585 |                   | $ | 2,760,997
|                                                                                                                                                                                                                                                                                                 |  |                    |           |                   |   |          



In May 2005, the Company financed the
purchase of certain equipment in the amount of approximately $18,000 through a capital lease. This capital lease has a term ending in 2008 and an interest rate approximating 10%.



The Company recently decided to expand sales of Nutritional Products through expansion of its Associate network into South Korea. This
decision is contingent upon closing a $1.3 million credit facility from a bank to help fund this expansion plan. This credit facility, which has been tentatively approved by the bank, would bear interest at prime plus 1% and be comprised of a
$900,000 line of credit secured by inventory and accounts receivable and a five-year note in the amount of $400,000 secured by equipment.



Note I  Segments and Geographic Area:



The Companys segments are based on the organization structure that is used by management for making operating and investment decisions and for assessing
performance. Based on this management approach, the Company has two operating segments: Nutritional Products and Medical Products. The Nutritional Products segment manufactures and distributes a line of over 75 nutritional supplements and personal
care products, including herbs, vitamins and minerals, as well as natural skin, hair and body care products. These products are marketed under the Royal BodyCare® trade name and are distributed by a network of independent distributors operating primarily in North America and by
licensees operating in certain other countries outside of North America. The Medical Products segment markets a line of approximately 25 wound care and oncology products in the United States under the MPM Medical trade name. The wound care products
are distributed directly to hospitals, nursing homes and home health care agencies through medical/surgical supply dealers. The oncology products are distributed to hospitals, cancer treatment clinics and pharmacies through pharmaceutical
distributors.



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



- 12 -



---

Segment information is as follows (in thousands):



|                                     |  |                      |        |                  |   |              |  |   |       
|------------------------------------ |  | -------------------- | ------ | ---------------- | - | ------------ |  | - | ------
|                                     |  | Nutritional Products |        | Medical Products |   | Consolidated
|Quarter ended September 30, 2005     |  |                      |        |                  |   |              |  |   |       
|Net sales                            |  | $                    | 4,179  |                  | $ | 736          |  | $ | 4,915 
|Depreciation and amortization        |  |                      | 138    |                  |   | 10           |  |   | 148   
|Operating profit                     |  |                      | 124    |                  |   | 88           |  |   | 212   
|Capital expenditures                 |  |                      | 33     |                  |   |             |  |   | 33    
|Total assets                         |  |                      | 11,337 |                  |   | 1,210        |  |   | 12,547
|                                     |  |                      |       
|Quarter ended September 30, 2004     |  |                      |        |                  |   |              |  |   |       
|Net sales                            |  | $                    | 3,538  |                  | $ | 528          |  | $ | 4,066 
|Depreciation and amortization        |  |                      | 138    |                  |   | 10           |  |   | 148   
|Operating profit                     |  |                      | 16     |                  |   | 20           |  |   | 36    
|Capital expenditures                 |  |                      | 32     |                  |   |             |  |   | 32    
|Total assets                         |  |                      | 10,059 |                  |   | 931          |  |   | 10,990
|                                     |  |                      |       
|Nine Months ended September 30, 2005 |  |                      |        |                  |   |              |  |   |       
|Net sales                            |  | $                    | 12,311 |                  | $ | 2,102        |  | $ | 14,413
|Depreciation and amortization        |  |                      | 413    |                  |   | 30           |  |   | 443   
|Operating profit                     |  |                      | 481    |                  |   | 229          |  |   | 710   
|Capital expenditures                 |  |                      | 92     |                  |   |             |  |   | 92    
|Total assets                         |  |                      | 11,337 |                  |   | 1,210        |  |   | 12,547
|                                     |  |                      |       
|Nine Months ended September 30, 2004 |  |                      |        |                  |   |              |  |   |       
|Net sales                            |  | $                    | 11,555 |                  | $ | 1,469        |  | $ | 13,024
|Depreciation and amortization        |  |                      | 412    |                  |   | 30           |  |   | 442   
|Operating profit                     |  |                      | 272    |                  |   | 42           |  |   | 314   
|Capital expenditures                 |  |                      | 89     |                  |   |             |  |   | 89    
|Total assets                         |  |                      | 10,059 |                  |   | 931          |  |   | 10,990



Financial information summarized
geographically for the quarters and nine months ended September 30, 2005 and 2004 is listed below (in thousands):



|                                 |  |           |       |                   |   |      
|-------------------------------- |  | --------- | ----- | ----------------- | - | -----
|                                 |  | Net sales |       | Long-Lived assets
|Quarter ended September 30, 2005 |  |           |       |                   |   |      
|Domestic                         |  | $         | 2,602 |                   | $ | 6,217
|Canada                           |  |           | 496   |                   |   | 393  
|Former Soviet Union              |  |           | 1,735 |                   |   |     
|All others                       |  |           | 82    |                   |   |     
|                                 |  |           |       |                   |   |      
|Totals                           |  | $         | 4,915 |                   | $ | 6,610
|                                 |  |           |       |                   |   |      
|Quarter ended September 30, 2004 |  |           |       |                   |   |      
|Domestic                         |  | $         | 2,415 |                   | $ | 6,686
|Canada                           |  |           | 481   |                   |   | 408  
|Former Soviet Union              |  |           | 1,107 |                   |   |     
|All others                       |  |           | 63    |                   |   |     
|                                 |  |           |       |                   |   |      
|Totals                           |  | $         | 4,066 |                   | $ | 7,094
|                                 |  |           |       |                   |   |      



- 13 -



---

|                                     |  |           |        |                   |   |      
|------------------------------------ |  | --------- | ------ | ----------------- | - | -----
|                                     |  | Net sales |        | Long-Lived assets
|Nine Months ended September 30, 2005 |  |           |        |                   |   |      
|Domestic                             |  | $         | 7,834  |                   | $ | 6,217
|Canada                               |  |           | 1,510  |                   |   | 393  
|Former Soviet Union                  |  |           | 4,873  |                   |   |     
|All others                           |  |           | 196    |                   |   |     
|                                     |  |           |        |                   |   |      
|Totals                               |  | $         | 14,413 |                   | $ | 6,610
|                                     |  |           |        |                   |   |      
|Nine Months ended September 30, 2004 |  |           |        |                   |   |      
|Domestic                             |  | $         | 7,564  |                   | $ | 6,686
|Canada                               |  |           | 1,579  |                   |   | 408  
|Former Soviet Union                  |  |           | 3,643  |                   |   |     
|All others                           |  |           | 238    |                   |   |     
|                                     |  |           |        |                   |   |      
|Totals                               |  | $         | 13,024 |                   | $ | 7,094
|                                     |  |           |        |                   |   |      



Significant Customers



The Company recorded sales to Coral Club International, Inc., a
licensee of the Company, in the amount of $1,735,000 and $1,107,000 during the quarters ended September 30, 2005 and 2004, respectively, and $4,873,000 and $3,643,000 in the nine months ended September 30, 2005 and 2004, respectively.
These sales accounted for more than 10% of net sales in these quarters. In no other case did a customer of the Company account for more than 10% of net sales during the quarters or nine months ended September 30, 2005 or 2004.



Note J  Earnings Per Share:



Summarized basic and diluted earnings per common share were calculated as follows:



|                                     |  |              |         |        |            |           |   |     
|------------------------------------ |  | ------------ | ------- | ------ | ---------- | --------- | - | ----
|                                     |  | Net Earnings |         | Shares |            | Per Share
|Quarter ended September 30, 2005     |  |              |         |        |            |           |   |     
|Basic earnings per common share      |  | $            | 149,446 |        | 20,056,294 |           | $ | 0.01
|Effect of dilutive stock options     |  |              |        |        | 2,145,864  |           |   |     
|                                     |  |              |         |        |            |           |   |     
|Diluted earnings per common share    |  | $            | 149,446 |        | 22,202,158 |           | $ | 0.01
|                                     |  |              |         |        |            |           |   |     
|Quarter ended September 30, 2004     |  |              |         |        |            |           |   |     
|Basic earnings per common share      |  | $            | 18,200  |        | 20,056,294 |           | $ | 0.00
|Effect of dilutive stock options     |  |              |        |        | 422,051    |           |   |     
|                                     |  |              |         |        |            |           |   |     
|Diluted earnings per common share    |  | $            | 18,200  |        | 20,478,345 |           | $ | 0.00
|                                     |  |              |         |        |            |           |   |     
|Nine months ended September 30, 2005 |  |              |         |        |            |           |   |     
|Basic earnings per common share      |  | $            | 520,993 |        | 20,056,294 |           | $ | 0.03
|Effect of dilutive stock options     |  |              |        |        | 1,090,866  |           |   |     
|                                     |  |              |         |        |            |           |   |     
|Diluted earnings per common share    |  | $            | 520,993 |        | 21,147,160 |           | $ | 0.02
|                                     |  |              |         |        |            |           |   |     
|Nine Months ended September 30, 2004 |  |              |         |        |            |           |   |     
|Basic earnings per common share      |  | $            | 240,597 |        | 20,000,738 |           | $ | 0.01
|Effect of dilutive stock options     |  |              |        |        | 1,108,350  |           |   |     
|                                     |  |              |         |        |            |           |   |     
|Diluted earnings per common share    |  | $            | 240,597 |        | 21,109,088 |           | $ | 0.01
|                                     |  |              |         |        |            |           |   |     



- 14 -



---

The number of stock options that were outstanding but not included in the computation of diluted earnings per common
share because their exercise price was greater than the average market price of the common stock, or were otherwise anti-dilutive, was 402,000 and 442,000 for the quarters ended September 30, 2005 and 2004, respectively, and 402,000 and 444,000
for the nine months ended September 30, 2005 and 2004, respectively.



The
assumed conversion of the convertible notes would have an anti-dilutive effect on diluted earnings per common share for the quarters and nine months ended September 30, 2005 and 2004, and accordingly have been excluded from the computation.



Note K  Comprehensive Income:



Comprehensive income is net earnings adjusted for other comprehensive income (loss), which,
for the periods presented, consists of the change in the foreign currency translation adjustment. The following table provides information regarding comprehensive income:



|                                        |  |                                 |         |   |      |   |        
|--------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------
|                                        |  | Quarters Ended September 30,   
|                                        |  | 2005                            |         |   | 2004
|Net earnings                            |  | $                               | 149,446 |   |      | $ | 18,200 
|Other comprehensive income (loss):      |  |                                 |         |   |      |   |        
|Foreign currency translation adjustment |  |                                 | (9,218  | ) |      |   | 16,235 
|                                        |  |                                 |         |   |      |   |        
|Comprehensive income                    |  | $                               | 140,228 |   |      | $ | 34,435 
|                                        |  |                                 |         |   |      |   |        
|                                        | 
|                                        |  | Nine Months Ended September 30,
|                                        |  | 2005                            |         |   | 2004
|Net earnings                            |  | $                               | 520,993 |   |      | $ | 240,597
|Other comprehensive income (loss):      |  |                                 |         |   |      |   |        
|Foreign currency translation adjustment |  |                                 | (15,872 | ) |      |   | 6,078  
|                                        |  |                                 |         |   |      |   |        
|Comprehensive income                    |  | $                               | 505,121 |   |      | $ | 246,675
|                                        |  |                                 |         |   |      |   |        



Note L  Legal Proceedings:



On May 29, 2002, the Company filed suit against a former supplier
and member of its Board of Directors, and certain others (collectively Defendants) for various causes of action, initially arising from Defendants refusal to sell certain raw materials to the Company. On August 16, 2002, Defendants
filed a counter claim against the Company.



On February 18, 2003, the
parties entered into an agreement to settle all claims and causes of actions that existed between them. Under the terms of this settlement, Defendants agreed to pay to the Company an aggregate of $250,000, payable in monthly installments beginning
in February 2003, calculated as a percentage of gross revenues, as defined. The Company received the final payment due under this settlement in December 2004, which payments are classified as Other income in the accompanying consolidated
financial statements.



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



- 15 -



---

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



FORWARD-LOOKING STATEMENTS



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



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



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



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



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



| |  | the continued market acceptance of our proprietary versions of silica-mineral hydride powder and other raw materials formerly supplied by a third-party supplier as unique and
beneficial product ingredients
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to modify existing product formulations or develop new formulations consistent with new scientific research in the nutrition industry
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the introduction of competitive business opportunities that may attract potential Associates to other businesses
|- |  | ----------------------------------------------------------------------------------------------------------------



| |  | the continued reduction in demand for our Nutritional Products in North America
|- |  | -------------------------------------------------------------------------------



| |  | the continued reduction in the number of active Associates in North America, which is related to our ability to increase the rate at which new Associates are recruited to join us or
to decrease the rate of attrition of our active Associates, or a combination of both
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | legislative and regulatory actions affecting the manufacturing or marketing of our products and/or distribution methods
|- |  | -----------------------------------------------------------------------------------------------------------------------



- 16 -



---

| |  | a change in market conditions in the territory of Coral Club International, Inc., a licensee which provided 34% of our net sales in the first nine months of 2005 and 30% of our net
sales in the year of 2004
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a change in market conditions related to, or buying patterns of, the largest distributor of our Medical Products, which accounted for 44% of Medical Products net sales in the first
nine months of 2005 and 37% of Medical Products net sales in the year of 2004
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to meet future cash flow estimates to support our goodwill impairment testing
|- |  | -----------------------------------------------------------------------------------------



| |  | our ability to obtain future financing to fund internal growth and our future capital requirements
|- |  | --------------------------------------------------------------------------------------------------



| |  | the loss of key management personnel
|- |  | ------------------------------------



OVERVIEW



We operate in two industry segments, Nutritional Products and Medical Products.



| |  | Through the Nutritional Products segment, we distribute products in three broad categories: (i) wellness products, (ii) weight loss products, and (iii) fitness
products. Products include herbal formulas, vitamins, minerals, antioxidants and personal care products. In the United States, Canada and Japan, we distribute Nutritional Products directly through a network of independent Associates. In markets
other than the United States, Canada and Japan, we distribute Nutritional Products through exclusive license arrangements with third parties, who, for the most part, distribute our products through an independent Associate network in the licensed
territory.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Through the Medical Products segment, we distribute wound care and oncology products. These products are distributed in the United States to hospitals, nursing homes, clinics and
pharmacies through traditional medical/surgical supply dealers and pharmaceutical distributors.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net Sales. Consolidated net sales in dollars and as a percentage of consolidated net sales are as follows:



|                      |  |                              |       |  |      |   |  |   |       |  |     |  
|--------------------- |  | ---------------------------- | ----- |  | ---- | - |  | - | ----- |  | --- | -
|                      |  | Quarters Ended September 30, |      
|                      |  | 2005                         |       |  | 2004 |  
|                      |  | (U.S. dollars in 000s)      |      
|Nutritional Products: |  |                              |       |  |      |   |  |   |       |  |     |  
|Associate network     |  | $                            | 2,364 |  | 48   | % |  | $ | 2,395 |  | 59  | %
|Licensees             |  |                              | 1,815 |  | 37   | % |  |   | 1,143 |  | 28  | %
|                      |  |                              |       |  |      |   |  |   |       |  |     |  
|                      |  |                              | 4,179 |  | 85   | % |  |   | 3,538 |  | 87  | %
|Medical Products      |  |                              | 736   |  | 15   | % |  |   | 528   |  | 13  | %
|                      |  |                              |       |  |      |   |  |   |       |  |     |  
|                      |  | $                            | 4,915 |  | 100  | % |  | $ | 4,066 |  | 100 | %
|                      |  |                              |       |  |      |   |  |   |       |  |     |  



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|                      |  |                                 |        |  |      |   |  |   |        |  |     |  
|--------------------- |  | ------------------------------- | ------ |  | ---- | - |  | - | ------ |  | --- | -
|                      |  | Nine Months Ended September 30, |       
|                      |  | 2005                            |        |  | 2004 |  
|                      |  | (U.S. dollars in 000s)         |       
|Nutritional Products: |  |                                 |        |  |      |   |  |   |        |  |     |  
|Associate network     |  | $                               | 7,248  |  | 50   | % |  | $ | 7,767  |  | 60  | %
|Licensees             |  |                                 | 5,063  |  | 35   | % |  |   | 3,788  |  | 29  | %
|                      |  |                                 |        |  |      |   |  |   |        |  |     |  
|                      |  |                                 | 12,311 |  | 85   | % |  |   | 11,555 |  | 89  | %
|Medical Products      |  |                                 | 2,102  |  | 15   | % |  |   | 1,469  |  | 11  | %
|                      |  |                                 |        |  |      |   |  |   |        |  |     |  
|                      |  | $                               | 14,413 |  | 100  | % |  | $ | 13,024 |  | 100 | %
|                      |  |                                 |        |  |      |   |  |   |        |  |     |  



Associate Network. The
following table sets forth the Associate network net sales by geographic region as a percentage of total net sales for the periods indicated:



|              |  |                             |   |  |                                |   |  |      |   |  |      |  
|------------- |  | --------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|              |  | Quarters EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|              |  | 2005                        |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|United States |  | 79                          | % |  | 79                             | % |  | 79   | % |  | 79   | %
|Canada        |  | 21                          |   |  | 20                             |   |  | 21   |   |  | 20   |  
|Japan         |  |                            |   |  | 1                              |   |  |     |   |  | 1    |  
|              |  |                             |   |  |                                |   |  |      |   |  |      |  
|              |  | 100                         | % |  | 100                            | % |  | 100  | % |  | 100  | %
|              |  |                             |   |  |                                |   |  |      |   |  |      |  



Net sales through the Associate
network have declined, in our view, primarily because of the low rate of sponsorship of new Associates by the current Associate network. This is discussed further below under the caption Results of Operations  Quarter ended
September 30, 2005 Compared with Quarter ended September 30, 2004  Net sales. To increase sales through this distribution channel, we recently decided to expand our Associate network into South Korea. This decision is
contingent upon closing a $1.3 million credit facility from a bank to help fund this expansion plan, which credit facility is described in further detail below under the caption Liquidity and Capital Resources  General liquidity and cash
flows. Although there is no assurance that expansion into South Korea will improve our operating results, based on information we have developed to date through our planning process, we believe that expansion into this market will make a
positive contribution to the Companys consolidated net sales and future earnings.



Licensees. We sell Nutritional Products to third parties who purchase products from us in accordance with a license arrangement that gives the licensee exclusive rights to distribute our products in the licensed territory. For the
most part, licensees are required to distribute our products in the licensed territory through network marketing. We do not maintain inventory to fulfill licensee orders prior to receipt of a licensee product order; licensees are required to pay us
a 50% deposit with their orders and then pay the balance when products are ready to ship. We recognize sales when we ship products to the licensees. Licensees also pay us a royalty, generally on a monthly basis, based on sales in their territories.
We record these royalties as sales. Net sales in this distribution channel are mainly dependent upon the licensees success in building a distribution network in the licensed territory. Gross profit on sales to licensees is significantly less
than on sales to our Associate network because we do not pay Associate commissions or incur other expenses related to product distribution in the licensed territory.



Our principal licensee is Coral Club International (CCI). CCI, which accounted for 96% of licensee net sales in the first nine
months of 2005 and 2004, distributes products in a territory comprised mainly of the former Soviet Union and Eastern Europe. The President of CCI is a former member of our Board of Directors and owns approximately 20% of our outstanding common
stock.



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Medical Products. We sell Medical Products primarily to wholesalers such as medical/surgical dealers and
pharmaceutical distributors. These wholesalers supply various health care providers such as hospitals, nursing homes, clinics and pharmacies. Our sales force, which is comprised of employed sales representatives and independent manufacturer
representatives, markets our products to both wholesalers and health care providers. In some cases, wholesalers maintain their own sales forces to market products that they supply, which include our products. We sell to wholesalers on terms that
generally require payment within 30 to 45 days. We recognize sales when products are shipped. Manufacturer representatives receive a percentage of sales as compensation, which percentage varies by product.



This segments largest customer, a medical/surgical dealer, accounted for 44% and 32% of
Medical Products net sales in the first nine months of 2005 and 2004, respectively.



Distributor Commissions. Distributor commissions consist primarily of commissions paid to our Associates in accordance with our Associate compensation plan. These commissions are calculated based on the total monthly sales by the
Associate and his or her downline organization. Associates can qualify to receive additional commissions as sales in their organizations expand. Most commissions are paid to Associates monthly. Total Associate commissions have historically averaged
approximately 35% of net sales in this distribution channel. In accordance with EITF 01-9, sales incentives paid to Associates that represent rebates are recorded as a reduction of sales rather than distributor commission expense. Associates earn
rebates based on their personal monthly sales and the level at which they qualify under the Associate compensation plan. We also classify commissions paid to manufacturer representatives who sell Medical Products as distributor commissions. Total
commissions to manufacturer representatives average less than 2% of Medical Products sales.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Those estimates and assumptions are based on
historical experiences and changes in the business environment. However, actual results may sometimes differ materially from estimates under different conditions. Critical accounting policies and estimates are defined as both those that are material
to the portrayal of our financial condition and results of operations and that require managements most subjective judgments. We believe our most critical accounting policies and estimates are as described in this section.



Revenue Recognition.In accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements (SAB 104), we recognize revenue at the point products are shipped, which is the point the risks and rewards of ownership pass to the customer. Under the terms of our license agreements,
our licensees are required to make a cash deposit equal to 50% of the purchase order amount at the time the purchase order is placed, and allow two to three months for delivery. In addition, under our agreement with CCI, we segregate and store
products for CCI in our warehouse and then ship them at a later date to locations designated by CCI in accordance with its business needs. As part of this agreement, CCI accepts ownership of and pays for the products as they are segregated in our
warehouse for CCIs account. However, in accordance with SAB 104, we do not recognize revenue until the products are shipped. Deposits and payments received for unshipped products are recorded as deferred revenue and are included in accrued
liabilities. As required by EITF 01-9, sales are recorded net of the rebate portion of sales incentives paid to Associates.



Intangible Assets.We review the carrying value of our goodwill and other intangible assets at the end of each year and at other times if events and circumstances
warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value



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of our goodwill or other intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the
goodwill or intangible assets exceeds its fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could affect the evaluation.



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



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



RESULTS OF OPERATIONS



The following table sets forth our operating results as a percentage of net sales for the periods indicated:



|                              |  |                             |   |  |                                |   |  |       |   |  |       |  
|----------------------------- |  | --------------------------- | - |  | ------------------------------ | - |  | ----- | - |  | ----- | -
|                              |  | Quarters EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                              |  | 2005                        |   |  | 2004                           |   |  | 2005  |   |  | 2004  |  
|Net sales                     |  | 100.0                       | % |  | 100.0                          | % |  | 100.0 | % |  | 100.0 | %
|Cost of sales                 |  | 40.3                        |   |  | 34.2                           |   |  | 38.6  |   |  | 34.4  |  
|                              |  |                             |   |  |                                |   |  |       |   |  |       |  
|Gross profit                  |  | 59.7                        |   |  | 65.8                           |   |  | 61.4  |   |  | 65.6  |  
|Operating expenses:           |  |                             |   |  |                                |   |  |       |   |  |       |  
|General and administrative    |  | 36.2                        |   |  | 40.8                           |   |  | 36.5  |   |  | 38.9  |  
|Distributor commissions       |  | 16.3                        |   |  | 20.6                           |   |  | 17.0  |   |  | 21.0  |  
|Depreciation and amortization |  | 2.9                         |   |  | 3.6                            |   |  | 3.0   |   |  | 3.3   |  
|                              |  |                             |   |  |                                |   |  |       |   |  |       |  
|Total operating expenses      |  | 55.4                        |   |  | 65.0                           |   |  | 56.5  |   |  | 63.2  |  
|                              |  |                             |   |  |                                |   |  |       |   |  |       |  
|Operating profit              |  | 4.3                         |   |  | .8                             |   |  | 4.9   |   |  | 2.4   |  
|Interest expense              |  | 1.3                         |   |  | 1.6                            |   |  | 1.3   |   |  | 1.5   |  
|Other income                  |  |                            |   |  | (1.2                           | ) |  |      |   |  | (1.0  | )
|                              |  |                             |   |  |                                |   |  |       |   |  |       |  
|                              |  | 1.3                         |   |  | .4                             |   |  | 1.3   |   |  | .5    |  
|                              |  |                             |   |  |                                |   |  |       |   |  |       |  
|Earnings before income taxes  |  | 3.0                         |   |  | .4                             |   |  | 3.6   |   |  | 1.9   |  
|Provision for income taxes    |  |                            |   |  |                               |   |  |      |   |  |      |  
|                              |  |                             |   |  |                                |   |  |       |   |  |       |  
|Net earnings                  |  | 3.0                         | % |  | .4                             | % |  | 3.6   | % |  | 1.9   | %
|                              |  |                             |   |  |                                |   |  |       |   |  |       |  



Quarter ended September 30,
2005 Compared with Quarter ended September 30, 2004



Net
sales.Net sales for the quarter ended September 30, 2005 were $4,915,000 compared with net sales for the prior year of $4,066,000, an increase of $849,000 or 21%. This increase was due to a $641,000 increase in net sales of Nutritional
Products and a $208,000 increase in net sales of Medical Products. While sales of Nutritional Products to our licensees increased $672,000, sales of Nutritional Products to our Associate network declined $31,000.



Associate Network. The decline in sales to our Associate network primarily relates, in
our view, to a decline in the number of active Associates. We consider an Associate active if he or she has purchased during the previous 12 months. The decline in the number of active Associates results, we



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believe, from low levels of sponsoring of new Associates by the current Associate network. Because attrition of active Associates is characteristic of this
marketing channel, to prevent a decline in the Associate network, the rate of new Associate sponsorship must be sufficient to offset normal attrition. The low level of sponsorship we have experienced is the continuation of a trend that largely began
with the breach of a supply agreement by a former supplier, who was also a former member of our Board of Directors. In contravention of the supply agreement in force at the time, in May 2002 this former supplier refused to continue to supply his
products to us and instead began to supply a competitor. Since this supplier supplied raw materials used in the production of our key products and was central to our brand, his departure dramatically reduced the confidence of our Associates as well
as their motivation to introduce our products and our business to prospective new Associates. This reduced confidence and motivation has resulted in levels of sponsorship that have been inadequate to offset normal attrition of active Associates.



In an attempt to increase confidence and motivate the Associate network to
increase its sponsorship activities, we have taken a number of actions since mid-2002:



| |  |  | Proprietary raw materials  We completed the development of proprietary raw materials to replace the ingredients previously purchased from our former supplier.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New marketing message  We developed a new marketing message, which emphasizes nanotechnology, product benefits and the desirable lifestyle available to a successful Associate.
In addition, we developed and introduced a new sponsoring system that is focused, simple and easy to explain to prospective Associates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Focused product strategy  We first categorized our diverse product line into three major product groups. We then developed and introduced new products in each product group,
allowing us, in some cases, to eliminate redundant products from the product line.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New marketing materials  We developed and introduced new marketing tools that support our marketing message for use by our Associates in sponsoring new Associates.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Updated Associate compensation plan  We introduced changes to our Associate compensation plan to simplify the compensation plan and to encourage sponsoring.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Corporate support  We have significantly increased the support, including financial support, we provide to Associates who are actively engaged in sponsoring activities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



While we believe these actions will ultimately increase the
sponsorship of new Associates, we can give no assurance that the decline of active Associates will not continue.



Licensees. The growth in net sales to our licensees relates to growth of CCI. Sales to CCI increased $628,000 in the third quarter of 2005. CCIs sales growth
is attributed to the continued expansion of the independent Associate network in CCIs territory. However, our sales to CCI may vary significantly from quarter to quarter irrespective of the sales demand of CCIs independent Associate
network. Under our arrangement with CCI, CCI orders products from us and pays for them when we segregate them in our warehouse for CCIs account. We then store these products until CCI provides shipping instructions. Because we do not recognize
revenue until we ship products to CCI, our sales to CCI will fluctuate from quarter to quarter depending on a number of logistical considerations, only one of which is the sales demand of CCIs independent Associate network. Sales to CCI in the
third quarter of 2005 decreased $405,000 from second quarter sales of $2,140,000. Backlog related to CCIs account was $3,491,000, $3,487,000 and $1,864,000 at September 30, 2005, June 30, 2005 and September 30, 2004,
respectively.



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Medical products. The growth in net sales of Medical Products is mainly related to increased sales to our
largest customer in this segment. Sales to this customer increased $158,000 during the third quarter of 2005 compared to the third quarter of 2004. We attribute this increase to the growth of this customers business.



Cost of sales. Cost of sales for the quarter ended September 30, 2005 was
$1,980,000 compared with cost of sales in the prior year of $1,389,000, an increase of $591,000 or 43%. As a percentage of net sales, cost of sales was 40% in 2005 and 34% in 2004. As a percentage of net sales, gross profit declined 6% mainly for
two reasons: (i) a change in the product mix of Nutritional Products sold, principally with regard to products sold to licensees; and (ii) a change in sales mix of Nutritional Products between sales to the Associate network and sales to
licensees. The gross profit for products sold to licensees is lower than the gross profit for products sold to the Associate network because we sell to licensees at lower prices. Sales prices to licensees are lower since we do not pay Associate
commissions or incur other expenses related to product distribution in the licensed territory.



Distributor commissions. Distributor commissions for the quarter ended September 30, 2005 were $802,000 compared with distributor commissions in 2004 of $839,000, a decrease of $37,000 or 4%. With regard
to our Associate network, distributor commissions as a percentage of commissionable sales were 34% in the third quarter of 2005 compared with 36% in the third quarter of 2004. The higher percentage in the third quarter of 2004 related mainly to the
payment of extra commission incentives to certain Associates who joined us in the first quarter of 2004. On a consolidated basis, distributor commissions as a percentage of net sales declined to 16% in the third quarter of 2005 compared with 21% in
2004. This percentage decline was related to the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees, and the percentage decline in distributor commissions paid to the Associate network.



General and administrative. General and administrative expenses for the
quarter ended September 30, 2005, were $1,777,000 compared with 2004 expenses of $1,657,000, an increase of $120,000 or 7%. This increase was the result of a $99,000 increase in expenses in the Nutritional Products segment and a $21,000
increase in expenses in the Medical Products segment. General and administrative expenses in the Nutritional Products segment included $36,000 related to the planned expansion of Associate network distribution into South Korea described above.
General and administrative expenses in the Medical Products segment increased to support increased sales and marketing activities. As a percentage of net sales, general and administrative expenses were 36% and 41% in 2005 and 2004, respectively.



Other income. Other income in the third quarter of 2004 represents
payments received pursuant to the settlement in February 2003 of a lawsuit with a former supplier. Under the terms of the settlement, this supplier was obligated to make monthly payments calculated as a percentage of his gross revenues, as defined,
up to an aggregate of $250,000. This settlement was fully paid in December 2004.



Net earnings. As a result of the factors described above, the net earnings for the quarter ended September 30, 2005 were $149,000, or $.01 per share, compared with net earnings in the prior year of $18,000 or $.00 per share.



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Nine months ended September 30, 2005 Compared with nine months ended September 30, 2004



Net sales.Net sales for the nine months ended
September 30, 2005 were $14,413,000 compared with net sales for the prior year of $13,024,000, an increase of $1,389,000 or 11%. This increase was due to a $756,000 increase in net sales of Nutritional Products and a $633,000 increase in net
sales of Medical Products. While sales of Nutritional Products to our licensees increased $1,275,000, sales of Nutritional Products to our Associate network declined $519,000.



Associate Network. The decline in sales to our Associate network primarily relates, in our view, to a decline in the number of active
Associates, as fully discussed above under Results of Operations  Quarter ended September 30, 2005 Compared with Quarter ended September 30, 2004  Net sales.



Licensees. The growth in net sales to our licensees relates to growth of CCI. Sales to CCI increased $1,230,000 in the first nine
months of 2005. CCIs sales growth is attributed to the continued expansion of the independent distributor network in CCIs territory.



Medical products. The growth in net sales of Medical Products is mainly related to increased sales to our largest customer in this segment. Sales to this
customer increased $439,000 during the first nine months of 2005 compared to the first nine months of 2004. We attribute this increase to the growth of this customers business.



Cost of sales. Cost of sales for the nine months ended September 30, 2005 was $5,554,000 compared with cost of sales in the
prior year of $4,479,000, an increase of $1,075,000 or 24%. As a percentage of net sales, cost of sales was 39% in 2005 and 34% in 2004. As a percentage of net sales, gross profit declined 5% mainly for two reasons: (i) a change in the product
mix of Nutritional Products sold, principally with regard to products sold to licensees; and (ii) a change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees. The gross profit for products sold to
licensees is lower than the gross profit for products sold to the Associate network because we sell to licensees at lower prices. Sales prices to licensees are lower since we do not pay Associate commissions or incur other expenses related to
product distribution in the licensed territory.



Distributor
commissions. Distributor commissions for the nine months ended September 30, 2005 were $2,454,000 compared with distributor commissions in 2004 of $2,728,000, a decrease of $274,000 or 10%. With regard to our Associate network, distributor
commissions as a percentage of commissionable sales were 34% in the first nine months of 2005 compared with 36% in the first nine months of 2004. The higher percentage in the first nine months of 2004 related mainly to the payment of extra
commission incentives to certain Associates who joined us in the first quarter of 2004. On a consolidated basis, distributor commissions as a percentage of net sales declined to 17% in the first nine months of 2005 compared with 21% in 2004. This
percentage decline was related to the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees, and the percentage decline in distributor commissions paid to the Associate network.



General and administrative. General and administrative expenses for the nine months
ended September 30, 2005, were $5,262,000 compared with 2004 expenses of $5,067,000, an increase of $195,000 or 4%. This increase was the result of a $103,000 increase in expenses in the Nutritional Products segment and a $92,000 increase in
expenses in the Medical Products segment. General and administrative expenses in the Nutritional Products segment included $95,000 related to the planned expansion of Associate network distribution into South Korea described above. General and
administrative expenses in the Medical Products segment increased to support increased sales and marketing activities. As a percentage of net sales, general and administrative expenses were 37% and 39% in 2005 and 2004, respectively.



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Other income. Other income in the first nine months of 2004 represents payments received pursuant to the
settlement in February 2003 of a lawsuit with a former supplier. Under the terms of the settlement, this supplier was obligated to make monthly payments calculated as a percentage of his gross revenues, as defined, up to an aggregate of $250,000.
This settlement was fully paid in December 2004.



Net earnings. As a
result of the factors described above, net earnings for the nine months ended September 30, 2005 were $521,000, or $.02 per share, compared with a net earnings in the prior year of $241,000 or $.01 per share.



LIQUIDITY AND CAPITAL RESOURCES



Cash and working capital. During the nine months ended September 30, 2005, we
had a net increase in cash of $929,000 compared with a net increase in cash of $139,000 in 2004. These cash increases were attributable to cash flows from operating activities.



At September 30, 2005, we had working capital of $797,000, a $674,000 improvement from working capital at December 31, 2004 of
$123,000. This increase in working capital was related to an increase in current assets of $1,738,000 that was partially offset by an increase in current liabilities of $1,064,000.



Operating activities. In the first nine months of 2005, our operating activities provided cash flows of $1,209,000 compared with
$471,000 in 2004. In the first nine months of 2005, net earnings adjusted for non-cash activities including depreciation and amortization and loss on disposition of equipment, provided cash flows of $965,000 compared with $683,000 in 2004. Cash
flows from operating activities improved in the first nine months of 2005 because of the increase in net earnings and decreases in accounts receivable and prepaid expenses.



Operating activities include the management of working capital accounts such as accounts receivable, inventories, prepaid expenses, accounts
payable, deferred revenues and accrued operating expenses. One of the most significant factors affecting our working capital accounts is the arrangement we maintain with our licensees, principally CCI. In accordance with our licensee agreements,
product orders from licensees are accompanied by a cash deposit equal to 50% of the value of the order. These deposits are used in part to make deposits with our suppliers against orders we place to fulfill licensee product orders. In addition, in
accordance with our license agreement with CCI, we segregate and store finished products for CCI in our warehouse and then ship them at a later date based on CCIs business needs. CCI pays the remaining 50% due on its product orders when goods
are segregated in our warehouse for CCIs account. Cash received as deposits for product orders and as payment for stored products are recorded as deferred revenue, which we include as a component of accrued liabilities. Raw materials and bulk
products purchased to fulfill licensee orders, as well as finished goods stored for CCI, are included in our inventory until they are shipped. Deposits we make with our suppliers are recorded as prepaid expenses. During the first nine months of
2005, cash used to increase inventory of $1,001,000 and cash generated by the increase in accounts payable and accrued liabilities of $1,064,000 were mainly related to transactions associated with our licensee agreements.



Investing activities.During the first nine months of 2005, we used cash of $64,000
related to investing activities. Cash was used to purchase property and equipment in the amount of $92,000, which was partially offset by proceeds from sales of property and equipment of $28,000.



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Financing activities. During the first nine months of 2005, we used cash of $195,000 to repay long-term debt
compared with $481,000 in the first nine months of 2004. Payments in 2004 included the payoff of a bank loan that was refinanced through another bank.



General liquidity and cash flows. We believe that the working capital requirements of our existing operations can be met through available cash and cash generated
from operating activities for the foreseeable future; however, an overall decrease in demand for our products could adversely affect our liquidity. In the event of a significant decrease in cash provided by our operating activities, we may seek
outside sources of capital including bank borrowings, other types of debt or equity financings. We can give no assurance, however, that we would be able to obtain any additional outside financing or obtain financing on terms we would find
acceptable.



We recently decided to expand our Associate network operations
into South Korea. This decision is contingent upon closing a $1.3 million credit facility with a bank. This credit facility, which has been tentatively approved by the bank, would bear interest at prime plus 1% and be comprised of a $900,000 line of
credit secured by inventory and accounts receivable and a five-year note in the amount of $400,000 secured by equipment. Funds obtained through this credit facility will be used for capital expenditures and operating expenses associated with the
start up of Korean operations. We can give no assurance that we will be able to obtain this credit facility, whether on terms we would find acceptable or at all. In addition to this credit facility, we plan to seek additional outside sources of
capital including bank borrowings, other types of debt or equity financings to provide further funding for this project. We can give no assurance, however, that we would be able to obtain additional outside financing on terms we would find
acceptable.



We have no plans or requirements for any significant capital
expenditures during the next twelve months other than those described above.



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



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



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



Foreign exchange



We have foreign-based operations in Canada that accounted for 10% of net sales during the first nine months of 2005 and 12% of net sales during fiscal 2004. We make advances to our foreign subsidiary denominated in
U.S. dollars, exposing the foreign subsidiary to the effect of changes in spot exchange rates of the Canadian dollar relative to the U.S. dollar. We do not regularly use forward-exchange contracts to hedge these exposures. Based on our foreign
currency exchange rate exposure for intercompany advances of approximately $13,000 at September 30, 2005, a 10% adverse change in the currency rate would reduce earnings before tax by approximately $1,300.



Interest rates



Our credit arrangements expose us to fluctuations in interest rates. At September 30, 2005, we had $354,000 outstanding in
indebtedness, which provided for interest to be paid monthly based on a variable rate. Thus, interest rate changes would result in a change in the amount of interest to be paid each month. Based upon the interest rates and borrowings at
September 30, 2005, a 10% increase in interest rates would adversely affect our financial position, annual results of operations, or cash flows by approximately $3,200.



ITEM 4. CONTROLS AND PROCEDURES



As required
by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934 (the Exchange Act), our management, including our Chief Executive Officer and Chief Financial Officer, evaluated as of September 30, 2005, the
effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures, as of September 30, 2005, were effective for the purpose of ensuring that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules
and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures.



We believe, however, that a controls system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.



There has been no change in internal controls over financial reporting that
occurred during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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---

PART II. OTHER INFORMATION



|        |  |                                                                       |  | 
|------- |  | --------------------------------------------------------------------- |  | 
|Item 1. |  | Legal Proceedings.                                                   
|        |  |                                                                      
|        |  | None                                                                  |  | 
|        | 
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds.         
|        |  |                                                                      
|        |  | None                                                                  |  | 
|        | 
|Item 3. |  | Defaults Upon Senior Securities.                                     
|        |  |                                                                      
|        |  | None                                                                  |  | 
|        | 
|Item 4. |  | Submission of Matters to a Vote of Security Holders.                 
|        |  |                                                                      
|        |  | None                                                                  |  | 
|        | 
|Item 5. |  | Other Information.                                                   
|        |  |                                                                      
|        |  | None                                                                  |  | 
|        | 
|Item 6. |  | Exhibits.                                                            
|        | 
|        |  | The Exhibit Index filed herewith is incorporated herein by reference.





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---

SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Royal BodyCare, Inc.RegistrantBy:

/s/ Clinton H. HowardIts:

Chief Executive OfficerBy:

/s/ Steven E. BrownIts:

Vice President-Finance andChief Financial Officer(Principal Financial and Accounting Officer)




|      |  |                  
|----- |  | -----------------
|DATE: |  | November 11, 2005
|      |  | Irving, Texas    
|      |  |                  



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ROYAL BODYCARE, INC.



Exhibit
Index



|              |  |                                         
|------------- |  | ----------------------------------------
|ExhibitNumber |  | Description                             
|31.1          |  | Rule 13a-14(a)/15d-14(a) Certifications.
|              | 
|31.2          |  | Rule 13a-14(a)/15d-14(a) Certifications.
|              | 
|32.1          |  | Section 1350 Certifications.            
|              | 
|32.2          |  | Section 1350 Certifications.            



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