RBC Life Sciences (RBCL) 10-K 2007 FY Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2007

OR

o 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

RBC LIFE SCIENCES, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Securities Registered Pursuant to Section 12(g) of the Act:Common Stock, $0.001 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yeso Noþ.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yeso Noþ.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesþ Noo.

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ.

Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2007: $4,218,829

Number of shares of common stock outstanding as of March 1, 2008: 21,236,924

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2008 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

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 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. Although we believe that the expectations and assumptions reflected in the forward-looking statements are reasonable, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond our control. Our forward-looking statements speak only as of the date on which this report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our shareholders. Many important factors that could cause such a difference are described in this Form 10-K in Part I, Item 1A. Risk Factors and Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk, which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this report.

RBC LIFE SCIENCES, INC.

FORM 10-K
YEAR ENDED DECEMBER 31, 2007

TABLE OF CONTENTS

	PAGE
PART I	2
Item 1.Business	2
Item 1A.Risk Factors	14
Item 1B.Unresolved Staff Comments	21
Item 2.Properties	21
Item 3.Legal Proceedings	21
Item 4.Submission of Matters to a Vote of Security Holders	21
PART II	22
Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.Selected Financial Data	23
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operation	23
Item 7A.Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.Financial Statements and Supplementary Data	33
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	33
Item 9A(T).Controls and Procedures	33
Item 9B.Other Information	34
PART III	35
Item 10.Directors, Executive Officers and Corporate Governance	35
Item 11.Executive Compensation	35
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	35
Item 13.Certain Relationships and Related Transactions, and Director Independence	35
Item 14.Principal Accounting Fees and Services	35
PART IV	36
Item 15.Exhibits, Financial Statement Schedules	36
SIGNATURES	38
Exhibit 10.12
Exhibit 10.13
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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PART I

Item 1. Business

Overview

RBC Life Sciences, Inc., a Nevada corporation, (along with its subsidiaries, sometimes hereinafter referred to collectively as “we”, “our”, the “Company” or “RBC”) is principally engaged in the marketing and distribution of nutritional supplements and personal care products (collectively “Nutritional Products”). This product line is marketed under the RBC Life Sciences brand name and can be divided into three broad categories: (i) wellness products, (ii) fitness products and (iii) skin care products. The product line includes herbal formulas, vitamins, minerals, antioxidants and skin, hair and body care products.

In certain markets, primarily the United States and Canada, we market Nutritional Products through a network of independent distributors that we refer to as “Associates.” We also market Nutritional Products in certain international markets through license arrangements. The licensees are third parties who are granted exclusive rights to distribute Nutritional Products in their respective territories and, for the most part, distribute these products through an independent distributor network in a licensed territory.

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. The marketing effort of our Associates involves person-to-person communication of information related to our products and the system by which they are marketed. We believe this feature makes network marketing a more effective means of marketing our products than in-store retail sales where there is little or no direct explanation of product benefits. Network marketing provides financial opportunity to a broad cross-section of people, including those seeking to simply supplement other income, as well as those who desire a full-time home-based business.

In addition to Nutritional Products, we also market a line of wound care products (“Medical Products”) throughout the United States under the MPM Medical brand name. Medical Products are distributed to hospitals, nursing homes, clinics and pharmacies through traditional medical/surgical supply dealers and pharmaceutical distributors. These products are used to prevent and treat wounds, and manage pain associated with wounds, in the acute care, long-term care, oncology and podiatry markets.

Our principal offices are located at 2301 Crown Court, Irving, Texas 75038. We can be reached by phone at 972-893-4000, by fax at 972-893-4111 and by email at webmaster@rbclifesciences.com. Our corporate information can be accessed at www.rbclifesciences.com or www.mpmmedicalinc.com. In June 2006, we changed the name of the Company from Royal BodyCare, Inc. to RBC Life Sciences, Inc.

Industry Overview

Nutritional Products.In this segment of our business, we compete within two industries: nutrition and direct selling. The nutrition industry is highly fragmented and very competitive. Companies in this industry manufacture and distribute products generally intended to maintain and/or enhance the body’s health and general well being. Products manufactured and distributed include (i) nutritional supplements, (ii) natural and organic foods, (iii) functional foods and (iv) natural and organic personal care and household products. The majority of our net sales in this segment are sales of nutritional supplements.

According to the most recently published data from theNutrition Business Journal(“NBJ”), global nutrition industry sales reached over $228 billion for the year 2006, a 7% growth from 2005. According to NBJ, of that $228 billion, nutritional supplements contributed $68 billion, natural and organic foods $54 billion, functional foods $85 billion, and natural and organic personal care and household products $21 billion. NBJ also reported that nutrition industry sales in the United States reached $85 billion in 2006, up 10% from 2005. According to NBJ, Eastern Europe/Russia was the fastest growing region with sales of $4 billion, an increase of 21% over 2005.

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We believe that there are several demographic, healthcare and lifestyle trends that drive the continued growth of the nutrition industry:

• The general public’s interest in healthier lifestyles, healthier aging and disease prevention;

• The aging population, particularly the baby-boomer generation, which we believe is more likely to use more nutritional supplementation as it ages;

• Rising health care costs and reduced confidence in prescription drugs causing many consumers to take preventative measures, including alternative medicines and nutritional supplements; and

• The publication of research findings supporting the positive health effects of certain nutritional supplements.

Nutritional products are distributed through various market participants, which include the following:

• Mass market retailers, including mass merchandisers, drug stores, supermarkets, and discount stores;

• Natural health food retailers;

• Network marketing;

• Mail order;

• Health care professionals and practitioners; and

• The Internet.

Our primary distribution model is a network marketing system, which is a common form of direct selling. According to the World Federation of Direct Selling Associations, the direct selling industry generated approximately $109 billion annually in worldwide retail sales in 2006, with approximately 58 million independent distributors. According to the Direct Selling Association (“DSA”), the United States generated approximately $32 billion in annual retail sales in 2006 with approximately 15 million independent distributors. Also according to the DSA, wellness products, which include nutritional supplements, accounted for 20%, and personal care products accounted for 34%, of U.S. direct retail sales.

Medical Products.In this segment of our business, we compete in the wound care industry. Industry participants are companies of all sizes that manufacture and distribute a wide range of products related to the treatment and prevention of wounds. Products manufactured and distributed include:

• Wound management products such as adhesive bandages and gauze;

• Wound closure products such as staples, various clips and sutures;

• Advanced wound care products, which are represented by a variety of moist wound healing dressings such as alginate dressings, film dressings, foam dressings, hydrocolloid dressings and hydrogel dressings;

• Active wound healing products such as skin replacements, collagen dressings and growth factors;

• Debriding products including various cleansers; and

• Pressure relief devices such as beds, mattress overlays and other support devices.

Wounds requiring treatment can be either acute or chronic. Industry data indicates that acute wounds comprise over 93% of all wounds. These are wounds that follow the normal process of healing and generally include burns, traumatic wounds and surgical incisions. Chronic wounds are wounds that do not heal within a normally expected time frame under standard care and generally include venous, arterial, pressure and diabetic ulcers. The increasing prevalence of chronic wounds is driven by the large and growing elderly, diabetic and obese populations as these groups are more likely to suffer from conditions that compromise circulation, which is a primary cause of chronic wounds.

The majority of our net sales in this segment are sales of advanced wound care products used in the treatment of chronic wounds.

Competitive Strengths

Product Portfolio.We have developed a line of high-quality health products based on the demands of the industries within which we operate. Our product lines feature proprietary products, newly developed products and products that have been available for many years. We continually review and if necessary improve our product formulations based on new scientific data and market demands to ensure our product portfolio remains current and attractive to our customers.

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In-house Manufacturing.We manufacture certain proprietary raw materials for our exclusive use, including the key raw material used in our top-selling products, Microhydrin^® and Microhydrin^® Plus. Together, these products accounted for 16% of consolidated net sales in 2007. We believe that our ability to manufacture these proprietary raw materials is a competitive advantage for us because it allows to us better protect our proprietary technology and know-how, and better manage the quality of and costs associated with the production of our key raw materials.

Science-based Product Development.We emphasize science-based product development in the fields of nutrition and wound care. We have developed substantially all of our products utilizing scientific data as the basis of product formulation. Scientific data used includes published research, in-house and third-party research and sponsored research. We maintain an on-going research and development effort that includes in-house personnel as well as third-party advisors including medical professionals.

Operating Flexibility.Other than the production of certain proprietary raw materials, we contract the production of all our products to third-party contract manufacturers. This arrangement allows us to minimize capital expenditures, benefit from their expertise, and help maintain operating overhead in line with sales. We have found the marketplace for quality contract manufacturers to be competitive and attractive. We utilize our own in-house quality control laboratories to monitor the performance of our third-party manufacturers to ensure they maintain a high quality of service.

Experienced Management Team.Our management team includes individuals with expertise in various managerial disciplines including nutrition, wound care, international development, marketing, operations, finance and information technology. The management team is led by our founder and Chief Executive Officer, Clinton H. Howard.

Business Strategy

We seek to grow our business by pursuing the following strategies:

Leverage and Expand our Relationship with CCI.Our largest licensee is Coral Club International, Inc. (“CCI”), which distributes our Nutritional Products in a territory comprised mainly of the former Soviet Union and Eastern Europe. Net sales to CCI accounted for approximately 55% of our consolidated net sales in 2007 and grew by 73% over 2006 net sales. We believe that net sales to CCI will continue to grow based on our commitment to supply CCI with new products and operational and regulatory support. We will continue to implement initiatives to accomplish these objectives while seeking additional ways to facilitate continued growth in this territory.

Expand our Existing Network Marketing Associate Base.Nutritional Product sales through our North American Associates have declined over the past several years, mainly as a result of a declining Associate base. However, we continue to believe that the network marketing model is the most effective way to sell our Nutritional Products. Our objective is to increase sales in this channel by increasing the attraction recruitment, retention and productivity of our Associates. We will seek to accomplish these objectives through the implementation of new marketing initiatives, the introduction of new products and a continued commitment to Associate support. While we believe that we will be able to accomplish these objectives, there is no assurance that our Associate base will expand.

Expand Medical Products in Existing and New Markets.We believe there is significant opportunity to increase net sales of our Medical Products in the United States and international markets. We have developed and continue to develop new market opportunities in the United States based on our expertise in the wound care market. To this end, we have begun to make infrastructure investments to support our field sales force and better leverage Medical Products marketing and sales activities. In addition, we have begun to develop relationships with third parties to facilitate the distribution of certain Medical Products in international markets.

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Develop Improved and New Products.As a distributor of health products, it is vital to improve existing products and to develop new and innovative products. We will use our existing resources and, to the extent we deem prudent, invest additional resources, to identify opportunities for new and improved products. Our product development activities will continue to center around the development and introduction of science-based products.

Products

The Nutritional Products segment, which accounted for 83%, 83% and 85% of consolidated net sales in 2007, 2006 and 2005, respectively, markets nutritional supplements and personal care products under the RBC Life Sciences brand name. The Medical Products segment markets wound care products under the MPM Medical brand name. For additional information related to these industry segments, please see Note O to our consolidated financial statements included under Part IV of this report.

Nutritional Products. We currently market 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 in three broad categories: (i) wellness products, (ii) fitness products and (iii) skin care products. Featured products include:

• Microhydrin and Microhydrin Plus – powerful, broad-spectrum antioxidants;

• Organic spirulina – sold in powder, tablet and capsule forms, a nutritious algae that provides a complete range of vital nutrients and a higher percentage of easily digested protein than meat;

• ColoVada – an effective fourteen-day colon cleansing program that has been widely used for more than 20 years;

• HydraCel^TM – a product that improves the quality of drinking water by reducing surface tension and making water more alkaline;

• 24 Seven Life Essentials^® – a daily multivitamin/mineral supplement;

• Immune 360^TM – a product to nourish and support the function of the immune system;

• Digestion Formula – a combination of digestive enzymes to supplement the decline of enzymes that naturally occurs with aging; and

• Cellution 7^TM – a science-based skin care product collection that incorporates ingredients with unique benefits.

Our primary products are the antioxidant products marketed under the trade names Microhydrin and Microhydrin Plus, which collectively accounted for approximately 16% and 22% of consolidated sales in 2007 and 2006, respectively. No other product accounted for more than 10% of our sales. Our finished products are produced according to our specifications and/or formulas by manufacturers and suppliers that we do not control. We maintain quality control of our products through our in-house laboratories as well as through the manufacturing and laboratory facilities of our third-party suppliers.

Substantially all of our product line has been developed utilizing scientific data as the basis of product formulation. Scientific data includes published research, in-house and third-party research and sponsored research. Our product line features:

• Silica mineral hydride, a nutritional antioxidant manufactured by us using our proprietary formula and process and used as an ingredient in the formulation of nutritional supplement and personal care products;

• Organic spirulina sourced from the highest quality producers, sold as a stand-alone product and combined as an ingredient in many other nutritional supplement formulations; and

• Organic aloe vera specially processed to retain the benefits found in a fresh aloe vera leaf and sold as a beverage and as a topical gel and used as an ingredient in many of our skin care products.

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We established a manufacturing facility in June 2002 to produce certain key raw materials that were formerly sourced from a third-party supplier. Through the establishment of this facility, we developed our own proprietary manufacturing processes, improved the quality of key raw materials used in our product line and expanded the range of raw materials available to us. Our proprietary raw materials represent the key ingredient in our top-selling products, Microhydrin and Microhydrin Plus, the key ingredient in HydraCel and the key flavoring ingredients in our SlimShake protein drinks, and are used in many of our product formulations.

Medical Products. As is the case with our Nutritional Products, substantially all of our Medical Products were developed utilizing scientific data as the basis of product formulation. Our Medical Products are produced according to our specifications and/or formulas by manufacturers and suppliers that we do not control. We maintain quality control of our products through our in-house laboratories as well as through the manufacturing and laboratory facilities of our third-party suppliers.

We currently market a line of approximately 28 wound care products. Certain wound care products, which account for approximately 85% of Medical Products sales, are for the treatment and healing of wounds such as pressure ulcers, leg ulcers, cuts, burns and abrasions. These products include wound and skin cleansers, wound dressings, a moisture barrier cream and a unique hydrogel wound dressing with Lidocaine. Our other wound care products, which represent approximately 15% of Medical Products sales, are designed to reduce destruction to skin and tissue caused by radiation, and to reduce pain and itching in the skin and the internal mucosa caused by radiation reactions or reactions to certain cancer medications.

Manufacturing and Product Sourcing

We manufacture certain proprietary raw materials used in the production of many of our Nutritional Products. Included in the raw materials we produce is the key ingredient, silica mineral hydride, used in production of our top-selling products Microhydrin and Microhydrin Plus. These raw materials are manufactured according to proprietary formulations and processes developed by us for our exclusive use. Our manufacturing operations are conducted at our headquarters located in Irving, Texas.

We contract with third-party manufacturers and suppliers, such as Progressive Laboratories, Inc., Merical Vita-Pak, Inc. and Summa Rx Laboratories, Inc., to produce all of our finished products according to our specifications and/or formulas. This strategy provides operating flexibility with minimum investment and helps us to control operating costs. We believe that our manufacturers and suppliers are high-quality and are capable of meeting our current and projected demand over the next several years. We do not have long-term contracts with any of our manufacturers or suppliers. Most of our products can be manufactured by a number of contract manufacturers at competitive prices.

Sales by Geographic Area

For information related to sales by geographic region for the years ended December 31, 2007, 2006 and 2005, please see Note O to our consolidated financial statements included under Part IV of this report.

Independent Distributor Network

Overview.We distribute Nutritional Products in certain markets, primarily the United States and Canada, through a network of independent distributors that we refer to as “Associates.” In using this distribution model, we sell substantially all of our Nutritional Products in these markets through individuals who are not our employees. Our Associates generally purchase products from us for resale to consumers or for personal consumption. The concept of network marketing is based on the strength of personal recommendations that frequently come from friends, neighbors, relatives and close associates. We believe that network marketing is an effective method of distribution because it allows person-to-person interaction about our products and business, which is not readily available through other distribution channels.

Our sales in these markets are dependent upon the number and productivity of our Associates. Growth in sales is dependent upon the sponsorship of new Associates and retention of existing Associates. We had approximately 10,200 active Associates in North America at December 31, 2007. This compares to approximately 11,700 active Associates at December 31, 2006. We consider an Associate active if he/she has placed an order within the previous 12 months. The decline in active Associates is the result of low levels of sponsorship of new Associates by our present Associate base. In an effort to reverse this trend, we have developed and introduced new products, modified our marketing message, focused our product strategy, developed new marketing materials and methods for use by our Associates and introduced changes to our Associate compensation plan designed to encourage 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.

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We do not have any significant accounts receivable from our Associates because they are required to pay for purchases prior to shipment. Associates pay for products primarily by credit card, although orders can also be paid with cash, direct account withdrawal, money orders or checks. We are not dependent upon the sales of any individual Associate, the loss of whom would have a material adverse effect on our business.

Associates.A person who wishes to become an Associate must complete an application under the sponsorship of an existing Associate. The new Associate then becomes part of the sponsoring Associate’s organization. New Associates sign a written contract and agree to adhere to policies and procedures that govern the activities of Associates. Associates are independent contractors and not our employees. An Associate has the right to purchase products at wholesale, sponsor new Associates and earn compensation in accordance with the Associate compensation plan. While some Associates sell products and recruit new Associates on a full-time basis, most engage in these activities on a part-time basis or only purchase our products for personal consumption.

Sponsoring.We develop and sell sales materials and tools for use by our Associates, who have the primary responsibility for recruiting and educating new Associates with respect to our products, the Associate compensation plan and how to build a successful distributorship. Because new Associates are linked to their sponsor, sponsorship of new Associates creates multiple levels in the network marketing structure. Persons that an Associate sponsors are referred to as “downline” or sponsored Associates.

Sponsoring activities are not required of Associates and we do not pay any commissions for sponsoring new Associates. However, because of the financial incentives provided to those who succeed in building an Associate network that consumes and resells products, we believe that many of our Associates attempt, with varying degrees of effort and success, to sponsor new Associates.

Compensation.Our Associate compensation plan provides several opportunities for Associates to earn compensation. We believe our compensation plan provides financial rewards comparable to those offered by other compensation plans in the industry. There are generally two ways in which our Associates earn compensation:

• Through retail markups on sales of products purchased at wholesale; and

• Through a series of commissions on product sales generated by the Associate and his or her downline Associates.

Commissions are based on the total monthly sales by the Associate and his or her downline organization. As an Associate’s business expands from successfully sponsoring new Associates into the business which in turn expand their own businesses, an Associate can earn higher commissions. Most commissions are paid to Associates monthly.

Support.Associates are encouraged to assume responsibility for training and motivating other Associates within their respective downline organizations and to conduct meetings for potential new Associates. Associates can purchase sales and training materials from us, and they generally assume the costs of advertising and marketing our products to their customers, as well as the direct cost of sponsoring and training new Associates.

In addition to the development of sales and training materials for use by our Associates, we also periodically sponsor and conduct regional, national and international Associate events and training seminars. Attendance at these sessions is voluntary, although experience indicates that the most effective and successful Associates are those that participate in training activities. These live events are supplemented regular e-mail communications and corporate conference calls.

We also use the Internet to support our Associates and enhance communication with them. Through our multi media website, Associates can obtain information about us and our products. They can also obtain other current information such as new product announcements, descriptions of product specials and sales promotions and other marketing and training materials. In addition, Associates have the ability to sponsor new Associates and to place orders through our website. To help our Associates effectively manage their businesses, we allow them to obtain a wide-range of information related to their downline organization directly from our database, which can be accessed through our website.

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Compliance.On occasion, Associates fail to adhere to our Associate policies and procedures.  We systematically review reports of alleged Associate misbehavior.  Infractions of the policies and procedures are reviewed by a compliance committee that determines what disciplinary action may be warranted in each case.  If we determine that an Associate has violated any of our Associate policies and procedures, we may take a number of disciplinary actions.  For example, we may terminate the Associate’s purchase and distribution rights completely or impose sanctions, such as warnings or probation.  We may also withdraw or deny awards, suspend privileges, withhold commissions until specific conditions are satisfied or take other appropriate actions at our discretion.

Returns.Our product return policy allows retail customers to return the unused portion of any product to the Associate who sold them the product for a full cash refund.  We reimburse the Associate with a replacement product or a credit on account upon receipt of proper documentation and the return of the remaining product.

Product returned by Associates that is unused and resalable is refunded up to one year from the date of purchase at 100% of the sales price less a 10% restocking fee and commissions paid.  Returned product that was damaged during shipment to the customer is 100% refundable.  Return of product that was not damaged at the time of receipt by the Associate may result in cancellation of the Associate’s distributorship according to the terms of the Associate agreement.  For the years 2007, 2006 and 2005, returns were less than 1% of sales.

Licensees

We have entered into exclusive license arrangements for distribution of our Nutritional Products in certain international markets. Most of our sales under these arrangements are to CCI, which has exclusive distribution rights in the former Soviet Union and certain other countries, principally in Eastern Europe. Sales to CCI were 55%, 40% and 34% of consolidated net sales in 2007, 2006 and 2005, respectively. Under arrangements with other licensees, our products are also distributed in Western Europe, United Arab Emirates and Indonesia.

Pursuant to these arrangements, the licensees, who are unaffiliated third parties, are granted exclusive rights to sell our products in their respective territories through, for the most part, network marketing. The independent distributor networks of licensees using the network marketing distribution model have similar characteristics to the Associate network in the United States and Canada, and the distributors are compensated through the same or a similar compensation plan as that used by us for our Associates.

Medical Products Distribution

Sales force.At December 31, 2007, the MPM Medical sales force consisted of six full-time sales representatives and approximately 19 manufacturer representatives assigned to specific geographic territories within the United States. This compares to a sales force at December 31, 2006 that consisted of five full-time sales representatives, one part-time sales representative and approximately 14 manufacturer representatives.

Distribution.Our sales force calls on the customers that use our wound care products, as well as the dealers and distributors through whom our customers purchase these products. We distribute our wound care products to hospitals, nursing homes, clinics, pharmacies and home health care agencies throughout the United States primarily through a traditional, nationwide network of medical/surgical supply dealers and pharmaceutical distributors.

Many potential customers for wound products have become members of group purchasing organizations (“GPOs”) in an effort to reduce costs. GPOs negotiate pricing arrangements with health care product manufacturers and distributors and offer the negotiated prices to affiliated hospitals and other members. We generally do not solicit GPOs because, in most cases, we do not offer a product range that is broad enough to effectively compete in the wound care product category, and we do not offer the education and training services generally expected by GPO members. However, because our product line includes certain specialty products that are not generally offered through GPOs, our sales force calls on GPO members to solicit sales of our products that they cannot purchase through the GPO. In addition, our sales force calls on other potential customers including specialty distributors, e.g. those that supply products reimbursed under Part B of Medicare, and health care providers in specialty markets such as the oncology and podiatry markets. We do not have long-term supply contracts with any of our customers, dealers or distributors.

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Since 2004, a medical/surgical dealer has significantly expanded its business and, as a result, increased its purchases of wound care products from MPM. This dealer distributes our Medical Products mainly to nursing homes, which obtain reimbursement for the price of products from Medicare. This dealer accounted for 57%, 55% and 47% of Medical Products net sales in 2007, 2006 and 2005, respectively.

Third-Party Reimbursement.Most of our Medical Products are purchased by health care providers for use on patients in their care. In most cases, these health care providers obtain reimbursement for the cost of our products from various third-party payers, including Medicare, Medicaid, private insurance plans and managed care organizations. In an effort to control rising health care costs, there have been, and may continue to be, proposals by legislators, regulators and third-party payers to curb these costs. We believe that presently available third-party reimbursement is adequate to support the market for our products; however, continued demand for our Medical Products is partially dependent upon the extent of available reimbursement for these products.

Trademarks, Patents or Other Intellectual Property

We have trademark registrations in the United States and certain foreign jurisdictions of the name Royal BodyCare, our logo and the name Microhydrin, and we have trademark registrations in the United States of certain other key product and product ingredient names. In addition, we have trademark applications pending in the United States and certain foreign jurisdictions for the name RBC Life Sciences and other key trade dress used by us. As long as we continue to renew our trademarks when necessary, the trademark protection provided by them is perpetual. We also rely on common law trademark rights to protect our unregistered trademarks. Common law trademark rights do not provide the same level of protection as afforded by a United States federal registration of a trademark. Also, common law trademark rights are limited to the geographic area in which the trademark is actually used. These trademarks are useful in achieving brand recognition within our industries.

During 2002, we developed proprietary formulations and manufacturing processes to produce certain raw materials, which are principal ingredients in our leading products. We have not filed for patent protection related to our proprietary formulations or manufacturing processes. Therefore, there can be no assurance that another company will not replicate one or more of our products.

Seasonality

Our business is not subject to significant seasonal fluctuations. However, as a practical matter, CCI, whose principal office is located in Moscow, generally limits its shipping orders during the winter months due to unfavorable weather conditions.

Inventory Requirements, Backlogs

Distributors of our Nutritional Products, except for licensees, and distributors of our Medical Products generally do not maintain large inventories of our products. They depend on us to maintain our inventory at a level that will allow us to fill their orders or the orders of their customers, as the case may be, as they are placed. We generally ship orders within 24 to 72 hours after we receive them so there is no significant backlog of orders related to these distribution channels.

We do not maintain inventory in anticipation of product orders from our licensees. Under the terms of our license agreements, the licensee is required to make a cash deposit equal to 50% of the purchase order amount at the time the purchase order is placed, and must allow two to three months for delivery. In addition, under our agreement with CCI, we 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, we do not recognize sales until the products are shipped. Therefore, we define backlog as purchase orders received by us that are accompanied by the requisite deposit, plus the purchase price of CCI products that are stored in our warehouse pending shipment. Backlog fluctuates depending on licensee ordering patterns and the timing of CCI’s shipping requests. Backlog was approximately $5,778,000 and $3,374,000 at December 31, 2007 and 2006, respectively.

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Industry/Competitors

We market our Nutritional Products in a highly competitive industry both domestically and internationally. We compete against companies that sell heavily advertised products through retail stores as well as other network marketing companies. Many of our competitors are significantly larger than we are, have far greater financial resources and have broader name recognition.

In the distribution of Nutritional Products, we compete with retail outlets, such as health food stores, supermarkets and department stores, and other network marketing companies. We endeavor to compete successfully by offering a wide selection of products that incorporate proprietary technology, are science-based and have a reputation for high quality. We believe that our products possess features and provide benefits that are desired by consumers looking for natural health products. We place a high degree of emphasis on new product development to ensure our product line remains current with developing trends in our industry and new scientific evidence. We generally do not attempt to compete based on price, although price is a consideration. Prices are justified through product quality and benefits and, to the extent possible, the proprietary ingredients and unique formulations.

We also compete against other network marketing companies for the time, attention and commitment of new and current Associates. The pool of individuals interested in the business opportunities presented by network marketing tends to be limited in each market and is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Our ability to remain competitive depends, in significant part, on our success in sponsoring and retaining Associates. We endeavor to compete successfully by offering unique and effective products at prices competitive with other network marketing companies, a rewarding Associate compensation plan and attractive Associate support programs.

Our Medical Products also face heavy competition. In the wound care product market, we compete against a number of companies, most of which are significantly larger, have far greater financial resources and have a broader name recognition. As with our Nutritional Products, we place a high degree of emphasis on new product development to ensure our product line remains current with developing trends and new scientific evidence. We endeavor to compete by offering a range of high quality products, which are unique and effective, at competitive prices.

Research and Development

From time to time, we have contracted with scientists at universities, medical colleges and private research organizations to conduct small studies to evaluate the safety and functions of our products. Most of these studies have been conducted to evaluate the safety and functions of Microhydrin or Microhydrin-based formulations. Since 2006, we have initiated several studies to evaluate the efficacy of certain of our wound care products distributed to the oncology market. Amounts expended to fund these studies have not been significant.

We enhance our product line through the development of new products and the improvement of existing products. New product ideas are derived from a number of sources, including in-house personnel with significant experience in product formulation and development, medical and nutrition professionals, trade publications, scientific and health journals, product suppliers and other third parties. Prior to introducing new products, we investigate product formulations to ensure that they are backed by sound scientific research and are in compliance with applicable regulations.

Governmental Regulations

Products.One or more of the following agencies regulates the formulation, manufacture, packaging, labeling, advertising, distribution and sale of our products: the Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission, the U. S. Department of Agriculture, the Environmental Protection Agency and various agencies of the states and foreign countries into which our products are shipped or sold.

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In the United States, the FDA regulates products under the Food, Drug, and Cosmetic Act (“FDCA”) and regulations promulgated under that act.  The FDCA has been amended several times with respect to nutritional supplements, most recently by the Nutrition Labeling and Education Act of 1990 and the Dietary Supplement Health and Education Act of 1994 (“DSHEA”) and related regulations. We believe DSHEA provides a favorable regulatory climate to consumers and the dietary supplement industry. This legislation governs the formulation, manufacturing, marketing and sale of nutritional supplements, including the content and presentation of health-related information included on the labels or labeling of nutritional supplements. Under this legislation, the majority of our products are classified as dietary supplements, which are defined to include vitamins, minerals, herbs, amino acids and other dietary substances used to supplement diets. In accordance with these regulations, a dietary supplement that contains a new dietary ingredient, which is defined as an ingredient not on the market before October 15, 1994, must have a history of use or other evidence of safety establishing that it is reasonably expected to be safe. The manufacturer must notify the FDA at least 75 days before marketing products containing new dietary ingredients and provide the FDA with the information upon which the manufacturer based its conclusion that the product has a reasonable expectation of safety.

Under DSHEA, dietary supplement products may include truthful, non-misleading and substantiated statements of nutritional support.  Examples of such claims are statements describing general well-being resulting from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining a structure or function of the body.  These claims are also known as “structure/function” claims.  FDA requires companies that include structure/function claims on their labeling to notify the agency of the claim within 30 days of first marketing the dietary supplement with the identified claims.  FDA does not typically respond to these notifications, but could issue a “courtesy letter” should the agency question some aspect of the submission.  A dietary supplement that includes a structure/function claim on its labeling is also required to include a disclaimer stating that the FDA has not evaluated the claim.  FDA distinguishes between structure/function claims which do not require FDA pre-approval and disease-related health claims which require FDA prior approval or the issuance of an authorizing regulation. We believe that the labeling of our dietary supplements complies with these regulations.

As authorized by DSHEA, the FDA adopted good manufacturing practice regulations (“GMPs”) specifically for dietary supplements. These new GMPs, issued in June 2007, are more detailed than the GMPs that previously applied to dietary supplements and require, among other things, dietary supplements to be prepared, packaged and held in compliance with specific rules, and require quality control provisions similar to those in the GMPs for drugs. To limit disruption for dietary supplements produced by small businesses, these new regulations have a three-year phase-in period. Companies with more than 500 employees have to comply by June 2008, companies with less than 500 employees have until June 2009 to comply, and companies with fewer than 20 employees have until June 2010 to comply. We believe our manufacturing and distribution practices will timely comply with the new rules.

Most of our Medical Products are regulated under the FDCA as medical devices. Under the FDCA, Medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness.  Most of our medical devices are classified as Class I, and we do not now nor intend to market any Class III medical devices.

 Class I devices are those for which safety and effectiveness can be assured by adherence to a set of regulatory guidelines called General Controls, including compliance with the applicable portions of the FDA’s Quality System Regulation, which sets forth the current GMPs for medical devices, facility registration and product listing, reporting of adverse medical events and appropriate, truthful and non-misleading labeling, advertising and promotional materials.  Class II devices also are subject to the General Controls, and most require premarket demonstration of adherence to certain performance standards or other special controls in order to receive marketing clearance from the FDA.  Premarket review and clearance by the FDA for these devices may be accomplished through the 510(k) premarket notification procedure. The process of obtaining a 510(k) clearance typically can take several months to a year or longer. We believe that our medical devices are manufactured and marketed in accordance with these regulations.

In December 2006, Congress passed the Dietary Supplement and Nonprescription Drug Consumer Protection Act (“AER Act”), which amended the FDCA. The AER Act became effective in December 2007. These regulations, among other things, require companies that manufacture, pack or distribute nonprescription drugs or dietary supplements to report serious adverse events allegedly associated with their products to the FDA and institute recordkeeping requirements for all adverse events whether serious or non-serious. We believe that we have the necessary systems in place to comply with these regulations.

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To help ensure compliance with the provisions of the FDCA and FDA’s regulations, the FDA has numerous enforcement tools, including the ability to issue warning letters, initiate product seizures and injunctions and pursue criminal penalties.

In Canada, most of our Nutritional Products are classified as natural health products (“NHPs”). The manufacturing, packaging, labeling, storage, importation, advertising, distribution and sale of NHPs are subject to regulation by Health Canada, the public health agency of Canada, through various agencies including the Natural Health Products Directorate. Health Canada regulates NHPs pursuant to the Canadian Food and Drugs Act, the Canadian Food and Drug Regulations, the Natural Health Product Regulations and various guidance documents and policies related thereto.

Prior to January 1, 2004, NHPs for which therapeutic claims were made were regulated as drugs requiring a Drug Identification Number (“DIN”). Effective January 1, 2004, NHPs in Canada became subject to new requirements under the Natural Health Product Regulations. Under these regulations, sellers of NHPs are required to make application for a product license, and the application must provide specific information including quality of ingredients, use and purpose of the NHPs, and the supporting safety and efficacy data. These regulations also set out a regime for site licensing of buildings in which NHPs are imported, distributed, manufactured, packaged, labeled or stored. One of the prerequisites of a site license is that GMPs be employed. Our facility in Canada obtained a site license in 2006. The regulations also set out requirements for adverse reaction reporting.

As of January 1, 2004, all new products that are NHPs must comply with NHP Regulations. For products already marketed in Canada as of that date, transition periods from January 1, 2004 for compliance with the requirements are provided, including six years for the product license requirement for NHPs with a DIN. All NHP’s must comply with all the regulations by January 1, 2010. We have adopted a phased-in compliance strategy in accordance with the prescribed transition periods. Health Canada can suspend or revoke licenses for lack of compliance or if it perceives a product to present an unacceptable level of risk.

In some international markets, there has been adverse publicity concerning products that contain substances generally referred to as genetically modified organisms (“GMOs”). In some markets, the possibility of health risks or perceived consumer preference thought to be associated with GMOs has prompted proposed or actual governmental regulation. We are also aware of regulations in some international markets affecting the use of irradiated raw ingredients or the labeling of products containing irradiated raw ingredients. We cannot anticipate the extent to which future regulations will restrict the use of GMOs or irradiated raw materials in our products or the impact any such regulations may have on our business. In response to any applicable regulations, we would, where practicable, attempt to reformulate and/or re-label our products to satisfy the regulations. We believe, based upon currently available information, that compliance with regulatory requirements in these areas should not have a material adverse effect on us or our business. However, because these are relatively new and evolving areas of regulation, there can be no assurance in this regard.

Advertising of products in the United States is subject to regulation by the FTC under the FTC Act. The FTC Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce.  The FTC Act also provides that the dissemination of any false advertisement pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice.  Under the FTC’s substantiation doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made.  Failure to adequately substantiate claims may be considered either deceptive or unfair practices.  We believe that we have the necessary documentation to support our advertising and promotional practices. The FTC may enforce compliance with the law in a variety of ways, which enforcement can result in orders requiring limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts and such other relief as the agency deems necessary to protect the public.

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We cannot predict the nature of any future laws, regulations, interpretations or applications that may be administered by any federal, state or foreign regulatory authority, nor can we determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. They could include, however, requirements for the reformulation of certain products to meet new standards, the recall or discontinuation of certain products that cannot be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and additional scientific substantiation.  Any or all of these requirements could have a material adverse effect on our business, financial condition and results of operations.

Network Marketing.Laws and regulations in each country in which we operate prevent the use of deceptive or fraudulent practices that have sometimes been inappropriately associated with legitimate direct selling and network marketing activities. These laws include anti-pyramiding, securities, lottery, referral selling, anti-fraud and business opportunity statutes, regulations and court cases. Illegal schemes, typically referred to as “pyramid,” “chain distribution” or “endless chain” schemes, compensate participants primarily or solely for the introduction or enrollment of additional participants into the scheme.  Often these schemes are characterized by large up-front entry or sign-up fees, over-priced products of low value, little or no emphasis on the sale or use of products, high-pressure recruiting tactics and claims of huge and quick financial rewards requiring little or no effort.  Generally these laws are directed at ensuring that product sales ultimately are made to consumers and that advancement within sales organizations is based on sales of the enterprise’s products, rather than investments in the organizations or other non-retail sales related criteria or activity.  In addition to federal regulation by the FTC in the United States, each state has enacted its own “Little FTC Act” to regulate sales and advertising. We actively strive to comply with all applicable state, federal and foreign laws and regulations affecting this distribution channel. We believe that our network marketing system satisfies the standards and case law defining a legal marketing system.

On April 12, 2006, the FTC released a proposed New Business Opportunity Rule. The proposed rule, if enacted in its current form, would likely cause us, as well as most other direct sellers, to be regulated as a seller of business opportunities in the United States. The proposed rule would require, among other things, all sellers of business opportunities to deliver substantial written information to a prospective purchaser seven days prior to the time the prospective purchaser could sign any agreement or make any payment in connection with the business opportunity. The New Business Opportunity Rule is currently only a proposed rule. If implemented at all, the rule ultimately may not be implemented in a form that applies to network marketing companies, or it may change significantly before it is implemented. If the proposed rule were adopted as proposed, it will require us to change some of our current practices regarding pre-sale disclosures.

We cannot predict the nature of any future law, regulation, interpretation or application, nor can we predict what effect additional governmental legislation or regulations, judicial decisions or administrative orders, when and if promulgated, would have on our business in the future.  It is possible that future developments may require that we revise our network marketing program.  Any or all of these requirements could have a material adverse effect on our business, results of operations and financial condition.

Transfer Pricing.In the United States and other countries, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned by our U.S. or local entities and are taxed accordingly. In addition, our operations are subject to regulations designed to ensure that appropriate levels of customs duties are assessed on the importation of our products. We have adopted transfer pricing arrangements with our subsidiaries that we believe are in compliance with all applicable transfer pricing laws. If the United States Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge these arrangements or require changes in our transfer pricing practices, we could be required to pay higher taxes and our earnings would be adversely affected if our foreign tax credit was limited on our U.S. return. There can be no assurance that we will continue to be found to be operating in compliance with transfer pricing laws, or that those laws will not be modified, which, as a result, may require changes in our operating procedures.

Employees

As of December 31, 2007 and 2006, we had 77 and 70 employees, respectively. We do not foresee a significant change in the number of our employees during 2008.

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Additional Available Information

We are subject to the informational requirements of the Securities Exchange Act of 1934, and, accordingly, file reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). We make available free of charge through our website, as soon as reasonably practicable after such material is electronically filed with the SEC, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. This information may also be obtained from the SEC’s on-line database located at www.sec.gov, which contains material regarding issuers that file electronically with the SEC. You may also obtain copies of any of our reports filed with, or furnished to, the SEC, free of charge, at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Item 1A. Risk Factors.

If we continue to lose existing Associates more rapidly than we recruit new Associates, net sales from our Associate network will continue to decrease.

In 2007, 2006 and 2005 net sales from our Associates contributed 25%, 40% and 49%, respectively, of our consolidated net sales. In this channel, we distribute all of our products through independent Associates and we depend on them to generate all of our net sales. Our Associates may terminate their services at any time, and, like most network marketing companies, we experience high turnover among Associates from year to year. As a result, in order to maintain sales in the future, we need to retain existing Associates and recruit additional Associates. To increase net sales, we must increase the number of and/or the productivity of our Associates.

Net sales from our Associate network declined 19%, 10% and 7% in 2007, 2006 and 2005, respectively, mainly as a result of a decline in the number of Associates. While we take many steps to help train, motivate and retain Associates, we cannot accurately predict how the number and productivity of Associates may fluctuate because we rely primarily upon our Associates to recruit, train and motivate new Associates. Operating results could be adversely affected if our existing and new business opportunities and products do not generate sufficient economic incentive or interest to retain existing Associates and to attract new Associates. Several factors affect our ability to attract and retain Associates, including:

• on-going motivation of our Associates;

• general business and economic conditions;

• significant changes in the amount of commissions paid;

• public perception and acceptance of the nutritional supplement industry;

• public perception and acceptance of network marketing;

• public perception and acceptance of RBC and our products;

• the limited number of people interested in pursuing network marketing as a business;

• our ability to provide products that satisfy market demands; and

• competition in recruiting and retaining active Associates

Two of our customers constitute a significant portion of our sales.

In 2007, two of our customers accounted for approximately 65% of consolidated net sales. One customer, CCI, a licensee that distributes Nutritional Products primarily in the former Soviet Union, accounted for over 55% of consolidated sales in 2007. The other customer, a medical/surgical dealer that distributes Medical Products to the long-term care market, accounted for over 9% of consolidated sales in 2007. Accordingly, a loss of significant business from, or adverse performance by, either of these customers would be harmful to our business, results of operations and financial condition. Factors that could adversely affect our sales to these customers include, but are not limited to, changes in market conditions in the markets serviced by these customers, changes in government regulations that affect sales in markets serviced by these customers, competition from other entities that sell products in markets serviced by these customers or an unfavorable change in our business relationship with these customers. CCI beneficially holds approximately 20% of our outstanding common stock.

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Two of our products constitute a significant portion of our net sales.

Microhydrin and Microhydrin Plus constitute a significant portion of our sales, accounting for approximately 16%, 22% and 26% of net sales in 2007, 2006 and 2005, respectively. If the demand for these products decreases significantly, government regulation restricts the sale of these products, we are unable to adequately source or deliver these products or we cease offering these products for any reason without a suitable replacement, then our financial condition and operating results would be harmed.

Net sales of our Nutritional Products are dependent upon an independent sales force and third-party licensees, and we do not have direct control over the marketing of our products. 

We rely on non-employee, independent Associates and third-party licensees to purchase, market and sell our products. Associates are independent contractors who purchase products directly for their own use or for resale. Associates typically engage in the distribution of our products on a part-time basis and may and likely will engage in other business activities, some of which may compete with us. We have a large number of Associates in relation to the size of our corporate staff to implement our marketing programs and to provide motivational support to our Associates. We undertake minimal effort to provide individual training to Associates. Accordingly, there can be no assurance that our distributors will participate in our marketing strategies or plans or accept our introduction of new products. Associates may voluntarily terminate their agreements with us at any time and there is typically significant turnover in Associates from year to year. Because of this high turnover, we must continually recruit new Associates. Associate net sales are directly dependent upon the efforts of these non-employee, independent Associates and future sales volume will depend in large part upon our success in maintaining or increasing the number of new Associates and improving the productivity of the Associates.

Licensees, which accounted for 58%, 43% and 36% of our consolidated net sales in 2007, 2006 and 2005, respectively, are third parties that have entered into license agreements with us pursuant to which they purchase products for distribution in the licensed territories. License agreements generally require licensees to market our products using the RBC brand and impose minimum sales requirements throughout the term that the licensee must meet to retain the distribution rights conveyed by the license agreements. Licensees are responsible for satisfying all regulatory requirements in the licensed territories related to the importation, labeling, storage, distribution and sale of our products. Licensees are also responsible for all marketing and sales activities in the licensed territories. Accordingly, net sales to licensees are directly dependent upon the efforts of the licensees and future sales volume will depend in large part upon their success in the importation, marketing and distribution of our products in the licensed territories.

Our Associate network business is subject to the effects of adverse publicity and negative public perception.

Our ability to attract and retain Associates and to sustain and enhance sales through our Associates may be affected by adverse publicity or public perception regarding our industry, our competition or our business generally. This adverse public perception may include publicity regarding the legality of network marketing despite the fact that U.S. courts have established standards defining a legal network marketing system. This adverse public perception may also include publicity regarding the quality or efficacy of nutritional supplement products or ingredients in general or our products or ingredients specifically, and regulatory investigations, regardless of whether those investigations involve us or our Associates or the business practices or products of our competitors or other network marketing companies. There can be no assurance that we will not be subject to adverse publicity or negative public perception in the future or that such adverse publicity will not have a material adverse effect on our business, financial condition and results of operations.

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Changes in customer preferences and demand could negatively impact our operating results.

Our business is subject to changing customer preferences and demand. The industries in which we operate are characterized by changes in demand for existing products and demand for new products and enhancements. Our success depends in part on our ability to anticipate and respond to these changes. Our failure to accurately predict these trends could negatively impact customer opinion of our products, which in turn could harm our customer relationships and cause the loss of sales. The success of our new product offerings and enhancements depends upon a number of factors, including our ability to:

• accurately anticipate customer needs;

• innovate and develop new products or product enhancements that meet these needs;

• successfully commercialize new products or product enhancements in a timely manner;

• price our products competitively;

• manufacture and deliver our products in sufficient volumes and in a timely manner;

• differentiate our product offerings from those of our competitors; and

• Satisfy applicable government regulations related to the manufacture, labeling, sale and distribution of the products

If we do not introduce new products or make enhancements to meet the changing needs of our customers in a timely manner, some of our products could be rendered obsolete, which could negatively impact our business, financial condition and operating results.

Demand for our products could also be adversely affected by changes in general economic conditions, demographic trends, customer confidence in the economy, changes in government regulations or policies and, particularly with regard to Nutritional Products, changes in disposable consumer income.

We may have to obtain regulatory approvals before we market and sell certain new Medical Products.

Most of our Medical Products are classified as medical devices under FDA regulations. Before certain medical devices can be sold, they require premarket review and clearance by the FDA, which is generally accomplished through the 510(k) premarket notification procedure. Clearance through this procedure requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or grandfather status. We presently have no 510(k) submissions pending. However, in the future, should we wish to develop and market a medical device requiring premarket review and clearance, there is no assurance that the FDA will act favorably or quickly in its review of our 510(k), or that we will not encounter significant difficulties and costs in our efforts to obtain FDA clearance or approval, all of which could delay or preclude the sale of new products in the United States. Any delays or failure to obtain FDA clearance or approvals of new products we develop, or the costs of obtaining FDA clearance or approvals, could have an adverse effect on our business, financial condition and results of operations.

Growth of Medical Products sales depends in part upon the availability of adequate third-party reimbursement.

The continued growth of our Medical Products segment will depend in part on the availability of adequate reimbursement to health care providers who use our products from third-party health care payers, such as Medicare, Medicaid, private insurance plans and managed care organizations. Third-party payers increasingly are challenging the pricing of medical products and services. Reimbursement may not be at, or remain at, price levels adequate to allow health care providers to realize an appropriate return on the purchase of our products. In addition, third-party payers may not cover all or a portion of the cost of our products and related services, or they may place significant restrictions on the circumstances in which coverage will be available. Should adequate reimbursement from third-party payers become restricted or unavailable, our business, financial condition and results of operations could be adversely affected.

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We must rely on independent third parties for the supply of our products.

We depend on outside suppliers to supply certain raw materials used in the manufacture of our products. In addition, all of our finished products are manufactured by independent third parties. There is no assurance that our current suppliers and manufacturers will continue to reliably supply products to us at the level of quality or quantity we require. In the event any of our third-party suppliers and manufacturers become unable or unwilling to continue to provide the products in required volumes and quality levels at acceptable prices, we will be required to identify and obtain acceptable replacement suppliers and manufacturing sources. Although we believe that we could establish alternate sources for most of our products, any delay in locating and establishing relationships with other sources could result in product shortages and back orders for the products, with a resulting loss of net sales. In addition, any actual or perceived degradation of product quality as a result of our reliance on third-party manufacturers may have an adverse effect on net sales or result in increased product returns.

As a product manufacturer and distributor we may be subject to product liability claims.

As a manufacturer of ingredients used in and a distributor of products produced for human consumption and topical application, we could become exposed to product liability claims and litigation to prosecute such claims. Additionally, the distribution of these products involves the risk of injury to consumers as a result of tampering by unauthorized third parties or product contamination. To date, we have had a very limited product claims history, and such matters have not materially affected our business, financial condition or results of operations. We are aware of no instance in which any of our products are or have been defective in any way that could give rise to material losses or expenditures related to product liability claims. Although we maintain product liability insurance, which we believe to be adequate for our needs, there can be no assurance that we will not be subject to claims in the future or that our insurance coverage will be adequate or that we will be able to maintain adequate insurance coverage.

A violation of marketing or advertising laws by Associates in connection with the sale of our products or the promotion of our Associate compensation plan could adversely affect our business.

New Associates sign a written contract and agree to adhere to our Associate policies and procedures. Although these policies and procedures prohibit Associates from making certain claims regarding products or income potential from the distribution of the products, Associates may from time to time, without our knowledge and in violation of our policies, create promotional materials or otherwise provide information that does not accurately describe our marketing program. They also may make statements regarding potential earnings, product claims or other matters in violation of our policies or applicable laws and regulations concerning these matters. These violations may result in legal action against us by regulatory agencies or state attorneys general. We take what we believe to be commercially reasonable steps to monitor Associate activities to guard against misrepresentation and other illegal or unethical conduct by Associates. There can be no assurance, however, that our efforts in this regard will be sufficient to accomplish this objective. Publicity resulting from these Associate activities can also make it more difficult for us to attract and retain Associates and may have an adverse effect on our business, financial condition and results of operations.

Laws and regulations may prohibit or severely restrict our sales efforts and could adversely affect our ability to do business. 

The formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products are subject to extensive regulation by various federal agencies, including the FDA, the FTC, the Consumer Product Safety Commission, the U.S. Department of Agriculture and the Environmental Protection Agency and by various agencies of the states, localities and foreign countries in which our products are manufactured, distributed and sold. Failure by us to comply with those regulations could lead to the imposition of significant penalties or claims and could materially and adversely affect our business. In addition, the adoption of new regulations or changes in the interpretation of existing regulations may result in significant compliance costs or discontinuation of product sales and may adversely affect the marketing of our products, resulting in a significant loss of net sales.

The FDA has adopted new GMPs relating to the manufacture, packaging and holding of dietary supplements. The new GMPs establish standards to ensure that dietary supplements and dietary ingredients are not adulterated with contaminants or impurities and are labeled to accurately reflect the active ingredients and other ingredients in the products. These GMPs also include requirements for designing and constructing physical plants, establishing quality control procedures, and testing manufactured dietary ingredients and dietary supplements, as well as requirements for maintaining records and for handling consumer complaints related to GMPs. There is no assurance that all of our current suppliers will be able to comply with these GMPs. To the extent any current supplier is unable to comply, we will be required to find an alternate source of supply. As suppliers comply with these new regulations they may incur additional compliance costs that will be passed on to us, which could affect our business, financial condition and results of operations.

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Network marketing systems such as ours are subject to laws and regulations directed at ensuring that product sales are made to consumers of the products and that compensation, recognition and advancement within the marketing organization are based on the sale of products rather than investment in the sponsoring company. We are subject to the risk that, in one or more of our present or future markets, our marketing system could be found not to comply with these laws and regulations or may be prohibited. Failure to comply with these laws and regulations or such a prohibition could have a material adverse effect on our business, financial condition and results of operations.

On April 12, 2006, the FTC released a proposed New Business Opportunity Rule. The proposed rule, if enacted in its current form, would likely cause us, as well as most other direct sellers, to be regulated as a seller of business opportunities in the United States. The proposed rule would require, among other things, all sellers of business opportunities to deliver substantial written information to a prospective purchaser seven days prior to the time the prospective purchaser could sign any agreement or make any payment in connection with the business opportunity. The New Business Opportunity Rule is currently only a proposed rule. If implemented at all, the rule ultimately may not be implemented in a form that applies to network marketing companies, or it may change significantly before it is implemented. If the proposed rule were adopted as proposed, it could negatively impact our business and result in a decrease in our ability to attract new distributors in the United States.

Our business is subject to the risks associated with intense competition from larger, wealthier and more established competitors.

We face intense competition in the business of distributing and marketing Nutritional Products and Medical Products. Numerous competitors compete actively for customers and, in the case of other network marketing companies, for Associates. Many of our competitors have longer operating histories, significantly greater financial, technical, product development, marketing and sales resources, greater name recognition, larger established customer bases and better-developed distribution channels than we do. We currently do not have significant patent or other proprietary protection, and our competitors may introduce products with the same or similar ingredients that we use in our products. There can be no assurance that we will be able to compete in this intensely competitive environment.

We are also subject to significant competition from other network marketing organizations for the time, attention and commitment of new and existing Associates. Because the network marketing industry is not particularly capital-intensive or otherwise subject to high barriers to entry, it is relatively easy for new competitors to emerge who compete with us for our Associates. In addition, the fact that our Associates may easily enter and exit our network marketing program contributes to the level of competition that we face. The pool of individuals interested in the business opportunities presented by network marketing tends to be limited in each market, and it is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Although we believe we offer an attractive opportunity for Associates, there can be no assurance that other network marketing companies will not be able to recruit our existing Associates or deplete the pool of potential Associates in a given market.

Our business is subject to intellectual property risks.

Patent protection for Nutritional Supplements and our Medical Products generally is impractical given the large number of manufacturers who produce similar products having many ingredients in common. To the extent we deem commercially reasonable, we endeavor to seek trade dress protection for our products, which protection has been sought in the United States, Canada and certain other countries in which we are either presently operating or may operate in the future. Notwithstanding these efforts, there can be no assurance that our efforts to protect our trade secrets and trademarks will be successful. Nor can there be any assurance that third parties will not assert claims against us for infringement of the proprietary rights of others. Litigation with respect to protection of our intellectual property or claims of others against us could result in substantial costs and diversion of management and other resources and could have a material adverse effect on our business, financial condition and operating results.

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During 2002, we developed proprietary formulations and manufacturing processes to produce certain raw materials, which are principal ingredients in our leading products. We have not filed for patent protection related to our proprietary formulations or manufacturing processes. Therefore, there can be no assurance that another company will not replicate one or more of our products and thereby adversely affect our business, results of operating results or financial condition.

We rely on and are subject to risks associated with our reliance upon information technology systems.

Our success is dependent in part on the accuracy, reliability and proper use of sophisticated and dependable information processing systems and management information technology. Our information technology systems are designed and selected in order to facilitate order entry and customer billing, maintain customer records, accurately track purchases and incentive payments, manage accounting, finance and manufacturing operations, generate reports and provide customer service and technical support. We have encountered, and may encounter in the future, errors in our software or our enterprise network, or inadequacies in the software and services supplied by our vendors, although to date none of these errors or inadequacies has had a meaningful negative impact on our business. Any such errors or inadequacies that we may encounter in the future may result in interruptions to our services and may damage our relationships with, or cause us to lose, our Associates, licensees or customers, which would harm our financial condition and operating results. Such errors may be expensive or difficult to correct in a timely manner, and we may have little or no control over whether any inadequacies in software or services supplied to us by third parties are corrected, if at all. Despite our precautions, the occurrence of a natural disaster or other unanticipated problems could result in interruptions in services and reduce our net sales and profits. Any interruption in these systems could have a material adverse effect on our business, financial condition and results of operations.

Our future financial results could be adversely impacted by asset impairments.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets,we test our goodwill, which is related to the Nutritional Products segment, for impairment at the end of each year, or on an interim basis if certain events occur or circumstances change that might indicate a reduction of the fair value of the reporting unit below its carrying value. No impairment losses have been recognized as a result of this testing; however, no assurance can be given that an impairment charge will not be required in future periods. The amount of any such annual or interim impairment charge could be significant, and could have a material adverse effect on reported financial results for the period in which the charge is taken.

Changes in conditions in foreign territories and exchange rate fluctuations affect our foreign operations and could reduce our net sales and earnings.

In 2007, approximately 63% of consolidated net sales came from foreign territories. Of this 63%, 5% came from our Canadian operation, while the remainder came from foreign territories currently covered by licensee agreements. We intend to continue to expand foreign sales of our products, exposing us to risks of changes in social, political and economic conditions in foreign countries, including changes in the laws, regulations and policies that govern the importation, distribution and sale of foreign-made products. While transactions with our licensees are denominated in U.S. dollars, exchange rate fluctuations can have a significant impact on the ability of our licensees to conduct successful businesses in the licensed territories.  Given our inability to predict the degree of exchange rate fluctuations, we cannot estimate the effect these fluctuations may have upon future reported results, product pricing or overall financial condition.

Taxation and transfer pricing considerations affect our international operations.

Our principal domicile is the United States. Under tax treaties, we are eligible to receive foreign tax credits in the United States for taxes actually paid abroad. Because we have foreign operations, taxes paid to foreign taxing authorities may exceed amounts of the credits available to us, resulting in the payment of a higher overall effective tax rate on our worldwide operations. We have adopted transfer pricing arrangements with our subsidiaries to regulate intercompany transfers, which arrangements are subject to transfer pricing laws that regulate the flow of funds between the subsidiaries and the parent corporation for product purchases, management services and contractual obligations, such as the payment of Associate incentives. If the United States Internal Revenue Service or the taxing authorities of any other jurisdiction were to successfully challenge these arrangements or require changes in our transfer pricing practices, we could be required to pay higher taxes and our earnings would be adversely affected. We believe that we operate in compliance with all applicable transfer pricing laws. However, there can be no assurance that we will continue to be found to be operating in compliance with transfer pricing laws, or that those laws will not be modified, which, as a result, may require changes in our operating procedures.

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We may be held responsible for certain taxes relating to our distributors.

Our Associates are subject to taxation, and in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as sales taxes or value added taxes, and to maintain appropriate records. In addition, under current law, our Associates in the United States and Canada are treated for income tax purposes as independent contractors and compensation paid to them is not subject to withholding by us. The definition of independent contractor has been challenged in the past and any changes to the definition of an independent contractor could possibly jeopardize the exempt status enjoyed by direct sellers and impose on us the responsibility for social security and similar taxes. There is no assurance that future legislation at the federal or state level, or in countries other than the United States, affecting direct sellers will not be enacted, which could harm our financial condition and results of operations.

Our stock price has been volatile and subject to various market conditions.

The trading price of our common stock has been subject to wide fluctuations. The price of the common stock may fluctuate in the future in response to quarter-to-quarter variations in operating results, material announcements by us or our competitors, scientific discoveries or technological innovations, governmental regulatory action, conditions in the industry segments in which we operate or other events or factors. The price of our common stock could fluctuate based upon factors that have little or nothing to do with us or that are outside of our control. These fluctuations could cause our stock price to decline materially.

Our common stock trades on the OTC Bulletin Board and there is a limited public trading market for our common stock. There can be no assurance that an active public trading market for our common stock will be sustained. If for any reason an active public trading market does not continue, purchasers of the shares of our common stock may have difficulty in selling their securities should they desire to do so and the price of our common stock may decline.

The beneficial ownership of a significant percentage of our common stock gives Clinton H. Howard effective control and limits the influence of other shareholders on important policy and management issues.

My Garden, Ltd., a limited partnership controlled by Clinton H. Howard who is the Company’s founder, Chairman of the Board and Chief Executive Officer, owned 45% of our outstanding common stock at December 31, 2007. By virtue of this stock ownership, Mr. Howard is able to exert significant influence over the election of the members of our Board of Directors and our business affairs. This concentration of ownership could also have the effect of delaying, deterring or preventing a change in control that might otherwise be beneficial to shareholders. Since Mr. Howard currently serves on the Board of Directors, there can be no assurance that conflicts of interest will not arise with respect to this directorship or that conflicts will be resolved in a manner favorable to other shareholders of the Company.

If our shareholders sell a substantial number of shares of our common stock in the public market, the market price of our common stock could fall.

Two of our principal shareholders hold a large number of shares of our outstanding common stock. Any decision by either of our principal shareholders to aggressively sell their shares could depress the market price of our common stock.

We depend on our key personnel, and the loss of the services provided by any of our executive officers or other key employees could harm our business and results of operations.

Our success depends to a significant degree upon the continued contributions of our senior management, many of whom would be difficult to replace. These employees may voluntarily terminate their employment with us at any time. We may not be able to successfully retain existing personnel or identify, hire and integrate new personnel. We do not carry key person insurance for any of our personnel except the Chief Executive Officer. If we lose the services of our executive officers or key employees for any reason, our business, financial condition and results of operations could be harmed.

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We own an approximately 119,000 square foot facility that houses our executive offices, manufacturing operations and United States warehousing and distribution operations. This facility is located in Irving, Texas, and is subject to a deed of trust as collateral on a term loan with a balance of approximately $2.3 million as of December 31, 2007. We lease distribution facilities in Burnaby, British Columbia to support distribution operations in Canada at an annual rental of approximately $94,000. We believe these facilities are suitable and adequate in relation to our present and immediate future needs.

Item 3. Legal Proceedings.

None.

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

None.

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PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the OTC Bulletin Board. The following reflects the range of high and low bid quotes for each calendar quarter during each of the past two years:

QUARTER ENDED	3/31/07		6/30/07		9/30/07		12/31/07
HIGH	$	0.47	$	0.78	$	0.86	$	1.10
LOW		0.21		0.36		0.60		0.71

QUARTER ENDED	3/31/06		6/30/06		9/30/06		12/31/06
HIGH	$	1.10	$	0.65	$	0.55	$	0.44
LOW		0.50		0.45		0.30		0.21

As of March 12, 2008 there were approximately 567 holders of our common stock. Since our inception, we have paid no dividends on our stock. We do not anticipate that we will pay dividends in the foreseeable future.

For information concerning securities authorized for issuance under our equity compensation plans, refer to Part III, Item 12.

Sales of Unregistered Securities

None.

Repurchases of Equity Securities

None.

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Item 6. Selected Financial Data.

The financial data included in the table shown below has been selected by us and has been derived from the financial statements for the periods indicated. The following financial data should be read together with the information in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and our consolidated financial statements, including the notes thereto.

	Years Ended December 31,
	2007		2006		2005		2004		2003
	(In thousands, except per share data)
Statement of Operations Data:
Net sales	$	27,029	$	21,697	$	19,361	$	18,266	$	18,140
Earnings (loss) from continuing operations		1,692		436		592		537		(180	)
Earnings (loss) from continuing operations per common share - diluted		0.08		0.02		0.03		0.03		(0.01	)
Net earnings (loss)		1,692		436		592		537		(105	)
Balance Sheet Data:
Cash and cash equivalents		6,369		3,220		1,698		1,052		502
Working capital (deficit)		3,539		1,935		1,140		123		(814	)
Total assets		19,158		13,639		12,811		11,264		10,723
Long-term obligations		2,332		2,924		3,106		3,152		3,470
Shareholders’ equity		7,578		5,607		5,021		4,428		3,824

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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this report.

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) fitness products and (iii) skin care products. Products include herbal formulas, vitamins, minerals, antioxidants and personal care products. In certain markets, principally in the United States and Canada, we distribute Nutritional Products directly through a network of independent Associates. In certain international markets, 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 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. Medical Products are used to prevent and treat wounds, and manage pain associated with wounds, in the acute care, long-term care, oncology and podiatry markets.

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

	Years Ended December 31,
	2007				2006				2005
	(U.S. dollars in 000’s)
Nutritional Products:
Associate network	$	6,891	25	%	$	8,538	40	%	$	9,505	49	%
Licensees		15,632	58	%		9,399	43	%		7,022	36	%
		22,523	83	%		17,937	83	%		16,527	85	%
Medical Products		4,506	17	%		3,760	17	%		2,834	15	%
	$	27,029	100	%	$	21,697	100	%	$	19,361	100	%

Associate network.We sell Nutritional Products to Associates who purchase products for personal consumption or for resale to retail customers; Associates also sponsor new Associates who also engage in these activities. Consequently, sales in this distribution channel are dependent upon the number and productivity of our Associates. Associates pay for product purchases prior to shipment, mainly through the use of credit cards, and we recognize sales when we ship products to the Associates. We compensate Associates for their sales activities through our Associate compensation plan. This plan allows Associates to earn higher commissions as their sales and the sales of their downline Associates increase.

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

	Years Ended December 31,
	2007			2006			2005
United States		80	%		74	%		79	%
Canada		20			19			21
South Korea		—			7			—
		100	%		100	%		100	%

In February 2006, we began distributing Nutritional Products through an Associate network in South Korea. Effective October 31, 2006, we restructured our South Korean operations through the sale of these operations and concurrent entry into an exclusive license agreement with the purchaser. However, we subsequently wrote off the $516,000 balance of the note receivable received in connection with the sale and terminated this license agreement because the licensee failed to fulfill its obligations under the agreement.

Net sales through the Associate network channel have declined 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 – 2007 Compared with 2006 – Net sales.”

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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 their territories through network marketing. We do not maintain inventory to fulfill licensee orders; 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. In general, licensees also pay us a monthly royalty based on sales in their territories. We record these royalties as sales. Our net sales in this distribution channel are dependent upon the licensee’s success in building the market for our products in the licensed territory. Gross profit on net 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 marketing or distribution in the licensed territory.

Our principal licensee is CCI. In July 2004, we entered into a ten-year exclusive license agreement, which replaced the expiring five-year license agreement, giving CCI distribution rights in 31 countries, including primarily countries of the former Soviet Union and Eastern Europe. CCI accounted for 96%, 92% and 95% of licensee net sales in 2007, 2006 and 2005, respectively. The President of CCI is a former member of our Board of Directors and beneficially owns approximately 20% of our outstanding common stock.

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 60 days. We recognize sales when products are shipped. Manufacturer representatives receive a percentage of sales as compensation, which percentage varies by product.

Since 2004, a medical/surgical dealer, which distributes our products in the long-term care market, has significantly expanded its business and, as a result, increased its purchases of our Medical Products. This dealer accounted for 57%, 55% and 47% of Medical Products net sales in 2007, 2006 and 2005, respectively.

Cost of Sales.Cost of sales primarily consists of costs related to (i) raw materials, labor and overhead directly associated with in-house production activities, (ii) product components, products and sales materials purchased from third-party manufacturers and suppliers, (iii) import duties, (iv) freight and (v) provisions for slow moving or obsolete inventory. Cost of sales and gross profit vary based on the sales mix of products sold within a distribution channel as well as the mix of product sales among distribution channels.

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 average approximately 33% to 34% of net sales in this distribution channel. 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 net sales.

We account for payments made to our Associates 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). 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.

General and Administrative. General and administrative expenses include wages and benefits, rents and utilities, travel, professional fees, promotion and advertising, along with other marketing and administrative expenses.  Wages and benefits represent the largest component of selling, general and administrative expenses.

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Critical Accounting Polices and Estimates

Our consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Our significant accounting policies are described in Note B to the consolidated financial statements included under Part IV of this report. The preparation of financial statements in accordance with US GAAP 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. 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 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.

Income Taxes.We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. Based on our estimates of the expected future tax consequences related to these differences, we record deferred tax assets and liabilities in our consolidated balance sheet. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance against the deferred tax asset.

Effective January 1, 2007, we adopted the provisions of Financial Accounting Standards Board (“FASB”), Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109(“FIN 48”), which clarifies the accounting for income tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.

Actual income taxes could differ significantly from these estimates due to future changes in income tax law or changes or adjustments resulting from final review of our tax returns by taxing authorities. These differences could have an impact on the income tax provision and operating results in the period in which such determination is made.

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Share-based Payments.We adopted SFAS No. 123 (Revised 2004),Share-Based Payment,(“SFAS 123R”) on January 1, 2006 using the modified-prospective transition method and began accounting for stock-based compensation using a fair value based recognition method. Under the fair value recognition requirements of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period of the award. Prior to the adoption of SFAS 123R, we followed the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 to account for our employee stock options. Historically, all stock options have been granted with an exercise price equal to or above the fair market value of the common stock on the date of grant. Accordingly, prior to the adoption of SFAS 123R, no compensation expense was recognized for employee stock option grants.

We use the Black-Scholes option-pricing model to estimate the fair value of share-based awards. Option valuation models require the input of assumptions, including the expected life of the share-based awards, the expected stock price volatility, the risk-free interest rate and the expected dividend yield. The expected life is based on the term of the award. The expected volatility is based on historical volatility rates. The risk-free interest rate is based on U.S. Treasury issues whose term is consistent with the expected life of the share-based award. Expected dividend yield is 0.0% since we do not pay dividends and have no current plans to do so in the future. In accordance with SFAS 123R, we recognized stock-based compensation expense of approximately $72,000 for the year ended December 31, 2007.

Results of Operations

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

	Years Ended December 31,
	2007			2006			2005
Net sales		100.0	%		100.0	%		100.0	%
Cost of sales		44.9			39.5			38.6
Gross profit		55.1			60.5			61.4
Operating expenses:
General and administrative		33.8			39.5			37.3
Distributor commissions		9.3			13.7			16.6
Depreciation and amortization		1.3			2.8			3.0
Total operating expenses		44.4			56.0			56.9
Operating profit		10.7			4.5			4.5
Interest expense		0.7			1.2			1.3
Earnings before income taxes		10.0			3.3			3.2
Income tax expense		3.7			1.3			0.1
Net earnings		6.3	%		2.0	%		3.1	%

2007 Compared with 2006

Net sales.Net sales for the year ended December 31, 2007 were $27,029,000 compared with net sales for the prior year of $21,697,000, an increase of $5,332,000 or 25%. This increase was due to a $4,586,000 increase and a $746,000 increase in net sales of Nutritional Products and Medical Products, respectively. While net sales of Nutritional Products to our licensees increased $6,233,000, net sales of Nutritional Products to our Associate network declined $1,647,000.

We began distribution of our Nutritional Products in South Korea through an Associate network in February 2006 and recorded net sales of $587,000 during 2006. As described above under the caption “Overview – Net Sales – Associate Network,” we sold the South Korean operations on October 31, 2006.

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Associate network net sales, excluding South Korea, declined approximately $1,060,000 during 2007. We attribute this decline to a decline in the number of active Associates. We consider an Associate active if he or she has placed an order during the previous 12 months. The decline in the number of active Associates results primarily from low levels of sponsorship of new Associates by the current Associate network. While we develop marketing and sales materials for use by our Associates, and sponsor corporate events that Associates can use to introduce prospective Associates to RBC, Associates are primarily responsible for recruiting new Associates to join RBC. Our experience in this industry indicates that once an Associate loses motivation and confidence in a company and/or its products, it is extremely difficult to re-motivate that individual to engage in sponsoring activities.

During the past few years, we have taken a number of actions in an attempt to overcome the reduced sponsorship activity among our Associate network:

• Marketing message – We modified our marketing message to focus on new products and their benefits, and the business opportunity and desirable lifestyle available to a successful Associate. In addition, we developed, introduced and promoted new sponsoring systems that were simple and easy to explain to prospective Associates.

• 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. We continue to develop and introduce new products to support sales in each product category.

• Marketing materials – We have developed and introduced and are continuing to develop and introduce, new marketing tools that make it easy and simple for Associates to expose our products and business to prospective new Associates.

• Associate compensation plan – We have introduced changes to our Associate compensation plan to make it financially rewarding at all levels 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. We also undertook various advertising and direct mail initiatives to attract new prospects and increase communication with existing Associates.

Although we believe the actions that we have taken and continue to take will ultimately increase the sponsorship of new Associates, we can give no assurance that the decline of active Associates will not continue.

The growth in net sales to our licensees relates primarily to the growth of CCI. Net sales to CCI increased $6,306,000 in 2007. CCI’s sales growth is attributed to the continued expansion of the independent distributor network in CCI’s territory.

Since 2004, a medical/surgical dealer, which distributes our products in the long-term care market, has significantly expanded its business and, as a result, increased its purchases of our Medical Products. The increase in sales to this dealer in 2007 accounted for approximately 67% of the total net sales increase in the Medical Products segment.

Cost of sales.Cost of sales for the year ended December 31, 2007 was $12,130,000 compared with cost of sales in the prior year of $8,578,000, an increase of $3,552,000 or 41%. As a percentage of net sales, cost of sales was 45% in 2007 and 40% in 2006. As a percentage of net sales, gross margin declined 5% in 2007 mainly because of the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees. The gross margin for products sold to licensees is lower than the gross margin 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 marketing and distribution in the licensed territory.

General and administrative.General and administrative expenses for the year ended December 31, 2007, were $9,143,000 compared with 2006 expenses of $8,564,000, an increase of $579,000 or 7%. As a percentage of net sales, general and administrative expenses were 34% in 2007 compared with 40% in 2006. General and administrative expenses in 2006 included approximately $1,200,000 of expenses associated with operations in South Korea, which operations were sold in October 2006. Excluding these expenses, general and administrative expenses increased approximately $1,779,000 in 2007 compared with 2006. Of this increase, approximately $1,259,000 was associated with the Nutritional Products segment and $520,000 with the Medical Products segment. The increase in Nutritional Products general and administrative expenses was the result of (i) a $430,000 increase in marketing and promotional expenses in the North American market, (ii) a $516,000 charge related to the write off of the note receivable we received in connection with the sale of our South Korean operations and (iii) a $313,000 increase in other operational and administrative expenses, mainly to support sales growth. We wrote off the South Korean note receivable after concluding it was uncollectible based on an ongoing evaluation of the financial condition of the maker of the note. Increased general and administrative expenses in the Medical Products segment related mainly to increased marketing expenses, particularly wages and benefits, travel and advertising and promotional expenses.

28

Distributor commissions.Distributor commissions for the year ended December 31, 2007 declined as a result of the decline in sales to our Associate network. Distributor commissions for the year ended December 31, 2007 were $2,523,000 compared with distributor commissions in 2006 of $2,978,000, a decrease of $455,000 or 15%. With regard to our Associate network, distributor commissions as a percentage of commissionable sales, exclusive of rebates, which are recorded as a reduction of sales in accordance with EITF 01-9, were 34% in 2007 and 2006. On a consolidated basis, distributor commissions as a percentage of net sales declined to 9% in 2007 compared with 14% in 2006. The percentage decline in relation to consolidated net sales was mainly related to the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees.

Income taxes.We recorded income tax expense of $997,000 in 2007 compared to $278,000 in 2006. Income tax expense in 2007 and 2006 was based on earnings before income taxes reported for the year since we had no U.S. net operating loss carryforwards available to offset taxable income. Our effective income tax rates for 2007 and 2006 were 37.1% and 38.9%, respectively. The decrease in the effective income tax rate was primarily due to a revision in the State of Texas franchise tax law, which became effective for 2007, and the weighted average effect of the adjustments to the statutory federal income tax rate.

Net earnings.Net earnings for the year ended December 31, 2007 were $1,692,000, or $0.08 per share, compared with net earnings in the prior year of $436,000, or $0.02 per share. This increase resulted from the factors described above.

2006 Compared with 2005

Net sales.Net sales for the year ended December 31, 2006 were $21,697,000 compared with net sales for the prior year of $19,361,000, an increase of $2,336,000 or 12%. This increase was due to a $1,410,000 increase and a $926,000 increase in net sales of Nutritional Products and Medical Products, respectively. While net sales of Nutritional Products to our licensees increased $2,377,000, net sales of Nutritional Products to our Associate network declined $967,000.

The decline in net sales to the Associate network relates to a decline in the number of active Associates. We consider an Associate active if he or she has placed an order during the previous 12 months. The decline in the number of active Associates results primarily from low levels of sponsorship of new Associates by the current Associate network. The reasons for these declines and the actions taken are discussed above under the caption “Results of Operations – 2007 Compared with 2006 – Net Sales.”

The growth in net sales to our licensees relates primarily to the growth of CCI. Net sales to CCI increased $1,967,000 in 2006. CCI’s sales growth is attributed to the continued expansion of the independent distributor network in CCI’s territory.

Since 2004, a medical/surgical dealer has significantly expanded its business and, as a result, increased its purchases of our Medical Products. The increase in sales to this dealer in 2006 accounted for approximately 81% of the total net sales increase in the Medical Products segment.

Cost of sales.Cost of sales for the year ended December 31, 2006 was $8,578,000 compared with cost of sales in the prior year of $7,475,000, an increase of $1,103,000 or 15%. As a percentage of net sales, cost of sales was 40% in 2006 and 39% in 2005. As a percentage of net sales, gross margin declined 1% in 2006 mainly because of the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees. The gross margin for products sold to licensees is lower than the gross margin 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 marketing and distribution in the licensed territory.

29

General and administrative.General and administrative expenses for the year ended December 31, 2006, were $8,564,000 compared with 2005 expenses of $7,224,000, an increase of $1,340,000 or 19%. This increase resulted from a $1,084,000 increase in expenses in the Nutritional Products segment and a $256,000 increase in expenses in the Medical Products segment. The increase in expenses in the Nutritional Products segment was the result of approximately $1,030,000 of expenses associated with operations conducted in South Korea and a $170,000 loss recognized on the sale of South Korean operations. We incurred approximately $180,000 of expenses related to South Korea in 2005. 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 40% in 2006 and 37% in 2005.

Distributor commissions.Distributor commissions for the year ended December 31, 2006 declined as a result of the decline in sales to our Associate network. Distributor commissions for the year ended December 31, 2006 were $2,978,000 compared with distributor commissions in 2005 of $3,213,000, a decrease of $235,000 or 7%. With regard to our Associate network, distributor commissions as a percentage of commissionable sales, exclusive of rebates, which are recorded as a reduction of sales in accordance with EITF 01-9, were 34% in 2006 compared with 33% in 2005. On a consolidated basis, distributor commissions as a percentage of net sales declined to 14% in 2006 compared with 17% in 2005. The percentage decline in relation to consolidated net sales was mainly related to the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees.

Income taxes.We recorded income tax expense of $278,000 in 2006 compared to $27,000 in 2005. Income tax expense in 2006 is based on earnings before income taxes reported for the year since we no longer have U.S. net operating loss carryforwards, as determined for financial reporting purposes, available to offset taxable income.

Net earnings.Net earnings for the year ended December 31, 2006 were $436,000, or $0.02 per share, compared with net earnings in the prior year of $592,000, or $0.03 per share. This decline resulted from the increase in income tax expense recorded in 2006 described above.

Liquidity and Capital Resources

Historically, our principal need for funds has been for operating expenses, working capital and capital expenditures. We have funded our cash requirements through equity financing, debt financing and cash flow from operations. We have also used operating leases to finance the use of certain buildings and equipment required for our operations. Working capital needs primarily relate to inventory purchases and, to a lesser extent, accounts receivable balances associated with sales of Medical Products.

Cash and working capital.During the year ended December 31, 2007, we had a net increase in cash of $3,149,000. This compares to a net increase in cash in 2006 of $1,522,000.

At December 31, 2007, we had working capital of $3,539,000, a $1,604,000 improvement from working capital at December 31, 2006 of $1,935,000. This increase in working capital was the result of an increase in current assets of $5,495,000 that was partially offset by an increase in current liabilities of $3,891,000. At December 31, 2006, we had borrowings outstanding against a line of credit in the amount of $100,000. There were no line of credit borrowings outstanding at December 31, 2007.

Operating activities. In 2007, our operating activities provided cash flows of $4,525,000 compared with $2,083,000 in 2006. In 2007, net earnings adjusted for non-cash activities, mainly depreciation and amortization, stock-based compensation, losses on write off of note receivable and disposition of assets and deferred taxes, provided cash flows of $2,558,000 compared with $1,606,000 in 2006.

30

Operating activities include the management of working capital accounts such as accounts receivable, inventories, prepaid expenses, accounts payable, accrued operating expenses and deferred revenues. 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 license 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. Deposits we make with our suppliers are recorded as prepaid expenses. During 2007, cash used by the increase in inventory of $2,056,000, and cash provided by the increase in deferred revenue of $1,820,000 and the decrease in prepaid expenses of $195,000, were mainly related to transactions associated with our license agreements. The $2,056,000 of cash used by increased inventory was primarily related to increased inventory held for CCI.

Also affecting cash provided by operating activities was an increase in accrued liabilities of $1,291,000. In accordance with Internal Revenue Service regulations regarding the timing of estimated tax payments, we were not required to make any significant estimated tax payments related to our 2007 income tax liability until the first quarter of 2008. Accordingly, accrued income taxes increased $1,053,000 during 2007. We will be required to make quarterly income tax payments related to 2008 earnings during 2008.

Investing activities.During 2007, we used cash of $828,000 to purchase property and equipment. Of this amount, approximately $540,000 represented capital improvements to our headquarters building drainage system. We expect to complete this drainage system improvement project in the first quarter of 2008 at an anticipated cost of $150,000 to $200,000.

Financing activities. During 2007, we used net cash in financing activities of $568,000, mainly related to the repayment of long-term debt. Repayment of debt during 2007 included the payoff of a line of credit borrowing, a term note to a bank and convertible notes, the balances of which at December 31, 2006 were $100,000, $340,000 and $122,000, respectively.

General liquidity and cash flows. We believe that our working capital requirements can be met through available cash, our existing line of credit 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.

Other than those described above, we have no plans or requirements for any significant capital expenditures during the next 12 months.

Contractual Cash Obligations

The table below summarizes our contractual obligations outstanding as of December 31, 2007:

	Payments Due by Period (000’s)
Contractual									2013 and
Obligations	Total		2008		2009 - 2010		2011 - 2012		Beyond
Long-term debt	$	2,330	$	134	$	300	$	351	$	1,545
Capital leases		2		2		—		—		—
Operating leases		495		197		281		17		—
Purchase obligations		2,706		2,706		—		—		—
Employment agreements		4,210		1,555		1,845		637		173

31

Off-Balance Sheet Arrangements

As of December 31, 2007, we had no material off-balance sheet arrangements, other than the operating leases and certain purchase commitments described above.

Inflation

We do not believe that inflation has had a material impact on our operating results. Substantial increases in costs, however, could have an impact on us and the industries in which we operate. We believe that, to the extent inflation affects our costs in the future, we could generally offset inflation by increasing prices if competitive conditions permit.

Recent Accounting Pronouncements

Fair Value Measurements.In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. On November 14, 2007, the FASB agreed to partially defer the effective date of the standard for certain nonfinancial assets and liabilities. We are currently evaluating the impact of SFAS 157, but do not expect the adoption of SFAS 157 to have a material effect on our consolidated financial position, results of operations or cash flows.

Fair Value Option for Financial Assets and Financial Liabilities.In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS 159”). SFAS 159 allows companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option and establishes presentation and disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, that SFAS 159 would have on its consolidated financial position, results of operations or cash flows.

Business Combinations.In December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations, (“SFAS 141R”). SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. SFAS 141R also requires the expensing of acquisition-related costs as incurred. In addition, this standard requires additional disclosure of information surrounding a business combination. SFAS 141R becomes effective for fiscal periods beginning after December 15, 2008. The Company is currently evaluating the impact, if any, that SFAS 141R would have on its consolidated financial position, results of operations or cash flows.

Noncontrolling Interests in Consolidated Financial Statements.In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51, (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The standard also requires disclosure on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. In addition this standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 becomes effective for fiscal periods beginning after December 15, 2008. The Company is currently evaluating the impact, if any, that SFAS 160 would have on its consolidated financial position, results of operations or cash flows.

32

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

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

Foreign exchange.We have foreign-based operations in Canada which accounted for 5% of 2007 net sales. From time to time, we make advances to our Canadian subsidiary denominated in U.S. dollars, exposing the Canadian subsidiary to the effect of changes in spot exchange rates of the local currency 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 to our Canadian subsidiary of approximately $36,000 at December 31, 2007, a 10% adverse change in the currency rate would reduce earnings before tax by approximately $3,600.

Interest rates.Our line of credit arrangement may expose us to fluctuations in interest rates. At December 31, 2007, we maintained a $500,000 line of credit arrangement that provides 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. We had no borrowings outstanding against this line at December 31, 2007.

Item 8. Financial Statements and Supplementary Data.

The financial statements and supplementary data are listed in the Index to Financial Statements appearing on Page F-1 of this report.

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

None.

Item 9A(T). Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure 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 December 31, 2007, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of December 31, 2007, 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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) and Rules 15d-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles. 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.

33

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There has been no change in internal controls over financial reporting that occurred during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

34

PART III

Certain information required by Part III is omitted from this report as we will file a definitive proxy statement for the Annual Meeting of Shareholders to be held on June 4, 2008, pursuant to Regulation 14A under the Exchange Act (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this report, and certain information included in the Proxy Statement is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference.

Item 10. Directors, Executive Officers and Corporate Governance.

The information for this Item is incorporated herein by reference to the Proxy Statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

Item 11. Executive Compensation.

The information for this Item is incorporated herein by reference to the Proxy Statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information for this Item is incorporated herein by reference to the Proxy Statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information for this Item is incorporated herein by reference to the Proxy Statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

Item 14. Principal Accounting Fees and Services.

The information for this Item is incorporated herein by reference to the Proxy Statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this report.

35

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)(1)  Financial Statements.The following financial statements and related documents are filed as part of this report:

	Report of Independent Registered Public Accounting Firm – Lane Gorman Trubitt, L.L.P.
	Consolidated Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statements of Shareholders’ Equity
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
(a)(2)	Financial Statement Schedules. None.
(a)(3)	Exhibits.The following exhibits are filed as part of this report:

Ex. No.	Description
3.1	Articles of Incorporation (2)
3.2	Bylaws (2)
3.3	Amendment No. 1 to Bylaws (6)
4.1	Specimen copy of Certificate for Common Stock (2)
4.2	The 2003 Stock Incentive Plan (4)
4.3	The 2006 Stock Incentive Plan(11)
10.1	Form of Member Agreement and Policies with Distributors (1)
10.2	Form of Indemnification Agreement (2)
10.3	Lease Agreement dated August 23, 1994, by and between Royal BodyCare Canada, Inc. (f/k/a Pure Life International Products, Inc.) and Mott Electric Motor Repair Ltd.(10)
10.4	Purchase and Sale Agreement, dated as of August 21, 2000, between CIIF Associates II Limited Partnership and Royal BodyCare, Inc.(3)
10.5	Employment Agreement, dated November 20, 2003, between Royal BodyCare, Inc. and Clinton H. Howard (7)
10.6	Exclusive Distributorship Agreement, dated as of July 14, 2004, between Royal BodyCare, Inc. and Coral Club International, Inc.(9)
10.7	Agreement to Renew Lease dated May 26, 2005, by and between Royal BodyCare Canada, Inc. and Mott Electric Motor Repair Ltd.(10)
10.8	Agreement to Buy and Sell RBC Life Sciences Korea, dated October 31, 2006, between RBC Life Sciences USA and Merry Key(12)
10.9	Exclusive Distributorship Agreement, dated November 1, 2006, between RBC Life Sciences USA, Inc. and Merry Key(12)
10.10	Line of Credit Promissory Note, dated December 29, 2006, in the principal amount of $900,000, executed by RBC Life Sciences, Inc. in favor of The Frost National Bank(13)

36

Ex. No.	Description
10.11	Business Loan Agreement, dated December 29, 2006, between RBC Life Sciences, Inc. and The Frost National Bank, associated with $900,000 Line of Credit Promissory Note(13)
10.12	Line of Credit Promissory Note, dated November 1, 2007, in the principal amount of $500,000, executed by RBC Life Sciences, Inc. in favor of Independent Bank of Texas *
10.13	Business Loan Agreement, dated November 1, 2007, between RBC Life Sciences, Inc. and Independent Bank of Texas, associated with $500,000 Line of Credit Promissory Note *
10.14	Employment Agreement, executed December 7, 2007, between RBC Life Sciences, Inc. and John W. Price(14)
10.15	Employment Agreement, executed December 11, 2007 to be effective January 1, 2008, between RBC Life Sciences, Inc. and Kenneth L. Sabot(14)
10.16	Employment Agreement, executed December 11, 2007 to be effective January 1, 2008, between RBC Life Sciences, Inc. and Steven E. Brown(14)
14.1	Code of Ethics(8)
21.1	List of company subsidiaries*
23.1	Consent of Lane Gorman Trubitt, L.L.P., independent registered public accountants to incorporation of report by reference *
23.2	Consent of Gardere Wynne Sewell LLP, legal counsel (5)
24.1	Power of Attorney (5)
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*	Filed herewith
(1)	Incorporated by reference to the Annual Report on Form 10-K/A filed May 7, 1999
(2)	Incorporated by reference to the Annual Report on Form 10-K filed April 26, 2000
(3)	Incorporated by reference to the Quarterly Report on Form 10-Q filed November 13, 2000
(4)	Incorporated by reference to the Current Report on Form 8-K filed September 29, 2003
(5)	Incorporated by reference to the registration statement filed on Form S-8 filed October 15, 2003
(6)	Incorporated by reference to the Quarterly Report on Form 10-Q filed November 14, 2003
(7)	Incorporated by reference to the Current Report on Form 8-K filed December 3, 2003
(8)	Incorporated by reference to the Annual Report on Form 10-K filed April 14, 2004
(9)	Incorporated by reference to the Current Report on Form 8-K filed July 27, 2004
(10)	Incorporated by reference to the Current Report on Form 8-K filed June 1, 2005
(11)	Incorporated by reference to the registration statement filed on Form S-8 filed December 22, 2006
(12)	Incorporated by reference to the Current Report on Form 8-K filed November 6, 2006
(13)	Incorporated by reference to the Annual Report on Form 10-K filed March 14, 2007
(14)	Incorporated by reference to the Current Report on Form 8-K filed December 13, 2007

37

SIGNATURES

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

	RBC LIFE SCIENCES, INC., a Nevada corporation
Date: March 18, 2008	By:	/s/ Clinton H. Howard
		Clinton H. Howard, Chief Executive Officer

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

Signature	Title	Date
/s/ Clinton H. HowardClinton H. Howard	Chairman of the Board of Directors and Chief Executive Officer (principal executive officer)	March 18, 2008
/s/ Steven E. BrownSteven E. Brown	Director, Vice President-Finance and Chief Financial Officer (principal financial and accounting officer)	March 18, 2008
/s/ John W. PriceJohn W. Price	Director and President	March 18, 2008
/s/ Kenneth L. SabotKenneth L. Sabot	Director and Senior Vice President-Operations	March 18, 2008
/s/ Paul R. MillerPaul R. Miller	Director and President- MPM Medical, Inc.	March 18, 2008
/s/ J. Ike GuestJ. Ike Guest	Director	March 18, 2008
/s/ Joseph. P. PhilippJoseph P. Philipp	Director	March 18, 2008

38

INDEX TO FINANCIAL PAGES

	Page
Report of Independent Registered Public Accounting Firm — Lane Gorman Trubitt, L. L. P.		F-2
Consolidated Financial Statements
Balance Sheets		F-3
Statements of Operations		F-4
Statements of Shareholders’ Equity		F-5
Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
RBC Life Sciences, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of RBC Life Sciences, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RBC Life Sciences, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assertion about the effectiveness of RBC Life Sciences, Inc. and Subsidiaries internal control over financial reporting as of December 31, 2007 included in the accompanying Management’s Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

LANE GORMAN TRUBITT, L.L.P.

Dallas, Texas
March 10, 2008

F-2

RBC Life Sciences, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31,

	2007			2006
ASSETS
Current assets
Cash and cash equivalents	$	6,368,885		$	3,219,503
Accounts receivable, net of allowance for doubtful accounts of $34,169 and $34,739, respectively		687,505			331,834
Inventories		4,725,372			2,651,082
Deferred income taxes		340,395			231,680
Prepaid expenses		305,960			499,267
Total current assets		12,428,117			6,933,366
Property and equipment, net of accumulated depreciation		4,078,035			3,584,415
Goodwill, net of accumulated amortization		2,302,226			2,219,297
Other intangible assets, net of accumulated amortization		151,758			194,173
Other assets		198,306			708,187
	$	19,158,442		$	13,639,438
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable, trade	$	1,932,158		$	850,143
Accrued liabilities		2,498,682			1,165,247
Current maturities of long-term obligations		135,428			379,635
Lines of credit		—			100,000
Deferred revenue		4,323,316			2,503,638
Total current liabilities		8,889,584			4,998,663
Long-term obligations, less current maturities		2,196,468			2,543,964
Deferred income taxes		494,265			489,810
Commitments and contingencies
Shareholders’ equity
Preferred stock, $0.10 par value; authorized 20,000,000 shares; none outstanding		—			—
Common stock, $.001 par value; authorized 50,000,000 shares; 20,863,724 and 20,188,294 shares issued and outstanding in 2007 and 2006, respectively		20,864			20,188
Additional paid-in capital		13,086,182			12,916,035
Accumulated deficit		(5,720,001	)		(7,412,250	)
Accumulated other comprehensive income		191,080			83,028
		7,578,125			5,607,001
	$	19,158,442		$	13,639,438

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

F-3

RBC Life Sciences, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,

	2007		2006		2005
Net sales	$	27,028,529	$	21,696,631	$	19,360,982
Cost of sales		12,129,963		8,578,243		7,474,632
Gross profit		14,898,566		13,118,388		11,886,350
Operating expenses
General and administrative		9,142,624		8,564,448		7,224,260
Distributor commissions		2,522,978		2,978,336		3,212,996
Depreciation and amortization		334,445		609,311		578,871
Total operating expenses		12,000,047		12,152,095		11,016,127
Operating profit		2,898,519		966,293		870,223
Interest expense		209,770		252,175		251,465
Earnings before income taxes		2,688,749		714,118		618,758
Income tax expense		996,500		277,914		26,712
Net earnings	$	1,692,249	$	436,204	$	592,046
Basic earnings per share	$	0.08	$	0.02	$	0.03
Basic weighted average shares outstanding		20,396,420		20,163,544		20,056,294
Diluted earnings per share	$	0.08	$	0.02	$	0.03
Diluted weighted average shares outstanding		22,206,382		22,047,152		21,499,438

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

F-4

RBC Life Sciences, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

					Additional					Accumulated other		Total
	Common stock				paid-in		Accumulated			comprehensive		shareholders’
	Shares		Amount		capital		deficit			income		equity
Balance at January 1, 2005		20,056,294	$	20,056	$	12,789,978	$	(8,440,500	)	$	58,088	$	4,427,622
Other comprehensive income
Net earnings		—		—		—		592,046			—		592,046
Foreign currency translation adjustment		—		—		—		—			1,507		1,507
Total comprehensive income													593,553
Balance at December 31, 2005		20,056,294		20,056		12,789,978		(7,848,454	)		59,595		5,021,175
Other comprehensive income
Net earnings		—		—		—		436,204			—		436,204
Foreign currency translation adjustment		—		—		—		—			23,433		23,433
Total comprehensive income													459,637
Exercise of common stock options		132,000		132		19,008		—			—		19,140
Stock-based compensation		—		—		107,049		—			—		107,049
Balance at December 31, 2006		20,188,294		20,188		12,916,035		(7,412,250	)		83,028		5,607,001
Other comprehensive income
Net earnings		—		—		—		1,692,249			—		1,692,249
Foreign currency translation adjustment		—		—		—		—			108,052		108,052
Total comprehensive income													1,800,301
Exercise of common stock options		675,430		676		97,874		—			—		98,550
Stock-based compensation		—		—		72,273		—			—		72,273
Balance at December 31, 2007		20,863,724	$	20,864	$	13,086,182	$	(5,720,001	)	$	191,080	$	7,578,125

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

F-5

RBC Life Sciences, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

	2007			2006			2005
Cash flows from operating activities
Net earnings	$	1,692,249		$	436,204		$	592,046
Adjustments to reconcile net earnings to net cash provided by operations
Depreciation and amortization		362,809			634,703			593,130
Losses on write off of note receivable and disposition of assets		535,249			169,501			—
Deferred income taxes		(104,260	)		258,130			22,473
Stock-based compensation		72,273			107,049			—
Change in operating assets and liabilities
Accounts receivable		(355,671	)		15,677			82,368
Inventories		(2,055,759	)		730,040			(1,323,135	)
Prepaid expenses		194,775			(122,895	)		(60,293	)
Other assets		(4,591	)		(230,779	)		(93,333	)
Accounts payable, trade		1,076,737			(251,842	)		387,268
Accrued liabilities		1,291,382			57,922			(53,845	)
Deferred revenue		1,819,678			279,297			667,566
Net cash provided by operating activities		4,524,871			2,083,007			814,245
Cash flows from investing activities
Purchase of property and equipment		(827,884	)		(488,345	)		(111,186	)
Proceeds from sale of assets		820			107,457			27,711
Net cash used in investing activities		(827,064	)		(380,888	)		(83,475	)
Cash flows from financing activities
Exercise of common stock options		98,550			19,140			—
Net payments against lines of credit		(100,000	)		(22,249	)		(3,395	)
Proceeds from long-term debt		—			—			400,000
Payments of long-term debt		(566,703	)		(182,169	)		(465,173	)
Net cash used in financing activities		(568,153	)		(185,278	)		(68,568	)
Effect of exchange rate changes on cash flows		19,728			4,696			(15,747	)
Net increase in cash		3,149,382			1,521,537			646,455
Cash and cash equivalents at beginning of year		3,219,503			1,697,966			1,051,511
Cash and cash equivalents at end of year	$	6,368,885		$	3,219,503		$	1,697,966
Supplemental cash flow disclosures
Interest paid	$	212,662		$	253,553		$	238,497
Income taxes paid		45,947			25,056			3,284
Receivable recorded in connection with the sale of South Korea operations		—			520,000			—
Purchase of equipment by capital lease		—			—			18,495

F-6

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE A — NATURE OF OPERATIONS AND ORGANIZATION

RBC Life Sciences, Inc. (along with its subsidiaries, sometimes hereinafter referred to collectively as “RBC” or the “Company”) is principally engaged in the marketing of nutritional supplements and personal care products (collectively “Nutritional Products”) under the RBC Life Sciences brand name. In certain markets, primarily the United States and Canada, the Company markets its products 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 certain international markets 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 these products through an independent distributor network in a 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 North America.

In addition to its Nutritional Products, RBC also markets a line of wound care products (“Medical Products”) throughout the United States under the MPM Medical brand name. Medical Products are distributed to hospitals, nursing homes, clinics and pharmacies through traditional medical/surgical supply dealers and pharmaceutical distributors. Medical Products are used to prevent and treat wounds, and manage pain associated with wounds, in the acute care, long-term care, oncology and podiatry markets.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation- The consolidated financial statements include the accounts of RBC and its wholly owned subsidiaries, RBC Life Sciences USA, Inc., RBC Life Sciences Canada, Inc., RBC Life Sciences Korea Co., Ltd. and MPM Medical, Inc. All significant intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents- The Company holds cash deposits in foreign bank accounts from time to time. At December 31, 2007 and 2006, $19,000 and $170,000 were held in a Canadian bank, respectively. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Accounts Receivable- The Company’s accounts receivable arise in the normal course of business and primarily relate to sales of Medical Products to various businesses and individuals. Accounts receivable are generally due within 30, 45 or 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts.

Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time accounts are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the industry as a whole. The Company charges accounts receivable against the allowance when they become uncollectible, and any payments subsequently received on such accounts are credited to the allowance for doubtful accounts.

F-7

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

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

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

Intangible Assets and Amortization- The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets(“SFAS 142”),issued by the Financial Accounting Standards Board (“FASB”). Under SFAS 142, goodwill and other intangible assets with indefinite useful lives are not amortized, but are reviewed annually for impairment or when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Intangible assets with finite lives are amortized over their useful lives. Accordingly, distribution contracts; copyrights, trademarks, and other registrations; and other intangibles are amortized over average lives of 8, 19 and 11 years, respectively.

The Company has designated year end as the date of its annual goodwill impairment test. In accordance with SFAS 142, the Company tests goodwill for impairment by comparing the carrying value of a reporting unit, including goodwill, to the fair value of the unit. Fair value is determined by estimating the present value of future cash flows. An impairment loss would be recognized if the carrying value of a reporting unit exceeds the implied fair value. To date, the Company has not recognized any impairment losses related to the carrying value of its goodwill.

Impairment of Long-Lived Assets- Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Revenue Recognition and Deferred Revenue- Sales are recorded when products are shipped, which is the point the risks and rewards of ownership pass to the customer. Payments received for unshipped products are recorded as “deferred revenue.” The Company generally requires a cash or credit card payment at the point of sale for Nutritional Products sold to its Associates. With regard to orders received from its third-party licensees, the Company generally requires the licensee to make a cash deposit equal to 50% of the order at the time an order is placed, and to pay the remaining 50% when the Company is ready to ship products in fulfillment of the order.

The Company’s agreements with its third-party licensees generally provide that licensees pay a monthly royalty to the Company, which is calculated as a specified percentage of the licensees’ sales, as defined, in the territories covered by the license agreements. Royalties paid by licensees are recorded as sales and amounted to $2,039,000, $1,424,000 and $1,189,000 in 2007, 2006 and 2005, respectively.

F-8

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Distributor Commissions -Distributor commissions consist primarily of commissions paid to Associates in accordance with the Associate compensation plan. These commissions are calculated based on the total monthly sales by the Associate and his or her downline organization. Most commissions are paid to Associates monthly. The Company accounts for payments made to its Associates 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). In accordance with EITF 01-9, sales incentives paid to Associates that represent rebates are recorded as a reduction of sales rather than a distributor commission expense. Associates earn rebates based on their personal monthly sales and the level at which they qualify under the Associate compensation plan. Associate rebates recorded as a reduction of sales were $619,000, $686,000 and $794,000 in 2007, 2006 and 2005, respectively.

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

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109(“FIN 48”), which clarifies the accounting for income tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, we recognize in our financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. Interest and penalties related to unrecognized tax benefits are recorded as income tax expense. See Note L for further information.

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

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

Financial Instruments- The carrying value of cash, interest-bearing deposits, accounts receivable and payable, accrued liabilities and lines of credit approximate fair value due to the short-term maturities of these assets and liabilities. Fair value of long-term receivables and debt is estimated based on interest rates for the same or similar instruments offered having the same or similar maturities and collateral requirements. At December 31, 2006, fair value of the fixed-rate long term receivable, which the Company received in connection with the sale of RBC Korea as more fully described in Note N, approximated its carrying value of $520,000. This long term receivable was not outstanding at December 31, 2007. At December 31, 2007, fair value of the fixed-rate long-term debt was $2,445,000, which was $115,000 above the carrying value of $2,330,000. At December 31, 2006, fair value of the fixed-rate long-term debt was $2,763,000, which was $31,000 below the carrying value of $2,794,000.

F-9

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

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

Product Return Policy- Up to one year from the date of purchase, Nutritional Products that are unused and resalable may be returned by an Associate for a refund equal to 100% percent of the sales price to the Associate less a ten percent restocking fee and commissions paid. Return of product by an Associate, other than product damaged at the time of receipt, constitutes potential cancellation of the distributorship. Generally, unused Medical Products may be returned up to six months from date of purchase for a refund equal to 100% of the sales price less a 25% restocking fee. Returned products damaged during shipment are replaced by the Company. Nutritional Products purchased by licensees may not be returned to the Company for a refund.

Advertising- Advertising expense is charged to operations when incurred. Advertising expenses were $261,000, $36,000 and $49,000 in 2007, 2006 and 2005, respectively.

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

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

Share-Based Payment- Prior to January 1, 2006, the Company accounted for employee stock options under SFAS No. 123,Accounting for Stock-Based Compensation(“SFAS 123”). As permitted under this standard, compensation cost was recognized using the intrinsic value method described in Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”). In accordance with APB 25, prior to January 1, 2006, no stock-based compensation cost was reflected in net earnings, as all options granted had an exercise price equal to or greater than the quoted market price of the underlying common stock on the date of grant.

On January 1, 2006, the Company adopted SFAS No. 123 (Revised 2004),Share-Based Payment,(“SFAS 123R”) and applied the provisions of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107 using the modified-prospective transition method. In accordance with this method, stock-based compensation expense recognized subsequent to December 31, 2005 includes (i) compensation expense for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (ii) compensation expense for all share-based payments granted on or subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Also in accordance with this method, periods ending prior to January 1, 2006 are not retroactively adjusted. See Note K for further information.

F-10

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

New Accounting Pronouncements -

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. On November 14, 2007, the FASB agreed to partially defer the effective date of the standard for certain nonfinancial assets and liabilities. The Company is currently evaluating the impact of SFAS 157, but does not expect the adoption of SFAS 157 to have a material effect on its consolidated financial position, results of operations or cash flows.

Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS 159”). SFAS 159 allows companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option and establishes presentation and disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, that SFAS 159 would have on its consolidated financial position, results of operations or cash flows.

Business Combinations

In December 2007, the FASB issued SFAS No. 141 (Revised 2007),Business Combinations,(“SFAS 141R”). SFAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. SFAS 141R also requires the expensing of acquisition-related costs as incurred. In addition, this standard requires additional disclosure of information surrounding a business combination. SFAS 141R becomes effective for fiscal periods beginning after December 15, 2008. The Company is currently evaluating the impact, if any, that SFAS 141R would have on its consolidated financial position, results of operations or cash flows.

Noncontrolling Interests in Consolidated Financial Statements

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51,(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The standard also requires disclosure on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. In addition this standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation and requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 becomes effective for fiscal periods beginning after December 15, 2008. The Company is currently evaluating the impact, if any, that SFAS 160 would have on its consolidated financial position, results of operations or cash flows.

F-11

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Reclassifications- Certain amounts in 2006 and 2005 have been reclassified to conform with the 2007 presentation.

NOTE C — ACCOUNTS RECEIVABLE

At December 31, 2007 and 2006, accounts receivable consist of the following:

	2007		2006
Accounts receivable
Trade	$	692,969	$	365,851
Other		28,705		722
Total		721,674		366,573
Less allowance for doubtful accounts		34,169		34,739
Net accounts receivable	$	687,505	$	331,834

Changes in the Company’s allowance for doubtful accounts for the years ended December 31, 2007 and 2006 are as follows:

	2007			2006
Beginning balance	$	34,739		$	32,586
Bad debt provision		4,041			3,020
Accounts written off		(4,611	)		(867	)
Ending balance	$	34,169		$	34,739

NOTE D — INVENTORIES

At December 31, 2007 and 2006, inventories consist of the following:

	2007		2006
Raw materials and bulk products	$	573,625	$	411,880
Packaging materials		509,541		422,063
Finished goods		3,642,206		1,817,139
	$	4,725,372	$	2,651,082

NOTE E — PREPAID EXPENSES

At December 31, 2007 and 2006 prepaid expenses consist of the following:

	2007		2006
Advance payments to suppliers	$	179,844	$	368,536
Prepaid insurance and other		126,116		130,731
Total	$	305,960	$	499,267

F-12

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE F — PROPERTY AND EQUIPMENT

At December 31, 2007 and 2006, property and equipment consist of the following:

	2007		2006
Building and improvements	$	3,314,482	$	2,775,109
Computer software and office equipment		1,567,381		3,050,784
Warehouse equipment		345,030		271,309
Automotive equipment		55,392		55,392
Leasehold improvements		22,120		18,758
		5,304,405		6,171,352
Less accumulated depreciation and amortization		2,367,543		3,728,110
		2,936,862		2,443,242
Land		1,141,173		1,141,173
	$	4,078,035	$	3,584,415

NOTE G — GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with the provisions of SFAS 142,Goodwill and Other Intangible Assets, which became effective beginning in 2002, the Company discontinued the amortization of goodwill on January 1, 2002. The Company measures its goodwill for impairment at the end of each year. No impairment losses have been recognized as a result of this testing.

At December 31, 2007 and 2006, goodwill was as follows:

	December 31, 2007					December 31, 2006
	Gross					Gross
	carrying		Accumulated			carrying		Accumulated
	value		amortization			value		Amortization
Goodwill	$	3,443,512	$	(1,141,286	)	$	3,281,690	$	(1,062,393	)

At December 31, 2007 and 2006, other intangible assets consist of the following:

			December 31, 2007					December 31, 2006
	Average		Gross					Gross
	life		carrying		Accumulated			carrying		Accumulated
	(years)		value		amortization			value		amortization
Distribution contracts		8	$	277,369	$	(211,583	)	$	277,369	$	(178,625	)
Copyrights, trademarks and other registrations		19		99,100		(33,694	)		99,100		(28,409	)
Other		11		47,600		(27,034	)		47,600		(22,862	)
			$	424,069	$	(272,311	)	$	424,069	$	(229,896	)

F-13

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE G — GOODWILL AND OTHER INTANGIBLE ASSETS — continued

Amortization expense related to other intangible assets totaled approximately $42,000 for each of the years ended December 31, 2007 and 2006. The aggregate estimated amortization expense for other intangible assets remaining as of December 31, 2007 is as follows:

2008	$	42,407
2009		24,049
2010		21,626
2011		13,792
2012		5,957
Thereafter		43,927
	$	151,758

NOTE H — ACCRUED LIABILITIES

At December 31, 2007 and 2006 accrued liabilities consist of the following:

	2007		2006
Distributor commissions	$	362,900	$	415,474
Income taxes		1,052,813		—
Salaries and wages		850,855		556,058
Sales and property taxes		57,908		73,060
Interest		15,064		20,312
Other		159,142		100,343
Total	$	2,498,682	$	1,165,247

NOTE I — LINES OF CREDIT

The Company maintains a $500,000 line of credit with a bank. Borrowings under this line of credit bear interest at prime, which was 7.25% at December 31, 2007, and are limited to a borrowing base, as defined. The borrowing base, which was $500,000 at December 31, 2007, is calculated as a specified percentage of eligible collateral up to a maximum of $500,000. This line of credit is collateralized by accounts receivable, inventory and equipment, and is personally guaranteed by the Company’s Chief Executive Officer. There were no borrowings outstanding under this line at December 31, 2007.

During 2007, the Company paid off a $100,000 line of credit borrowing that was outstanding at December 31, 2006. This line of credit arrangement was not renewed.

F-14

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE J — LONG-TERM OBLIGATIONS

At December 31, 2007 and 2006 long-term obligations consist of the following:

	2007		2006
Mortgage note payable bearing interest at 7.75%, payable in monthly installments of $25,797 through April 2019, collateralized by land and building, and personally guaranteed by the Company’s Chief Executive Officer	$	2,330,130	$	2,453,855
Note payable to bank bearing interest at 7.96%		—		339,848
Convertible notes (original amount $730,000) bearing interest at 10%, convertible into common stock based on a per share conversion price of $1.32 (there were no conversions in 2007 or 2006)		—		121,500
Capital lease obligation		1,766		8,396
		2,331,896		2,923,599
Less — current maturities		135,428		379,635
	$	2,196,468	$	2,543,964

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%.

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

December 31,	Debt		Capital lease
2008	$	133,662	$	1,796
2009		144,397		—
2010		155,994		—
2011		168,522		—
2012		182,056		—
Thereafter		1,545,499		—
		2,330,130		1,796
Less amount representing interest		—		30
Less current maturities		133,662		1,766
	$	2,196,468	$	—

F-15

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE K — STOCK-BASED COMPENSATION

Stock incentive plans

On July 1, 1998, the Company’s shareholders adopted the 1998 Stock Option Plan (the “1998 Plan”) and reserved 500,000 shares of common stock for issuance under the 1998 Plan. The 1998 Plan provided for the issuance of both non-qualified stock options and incentive stock options (“ISOs”), and permitted grants to employees, non-employee directors and consultants of the Company. Effective September 4, 2003, the Company’s shareholders adopted an amendment and restatement of the 1998 Plan in the form of the 2003 Stock Incentive Plan (the “2003 Plan”). The purpose of this amendment and restatement was, among other things, to reserve 3,500,000 shares of common stock for issuance under the 2003 Plan, an increase from the 500,000 shares of common stock issuable under the 1998 Plan, and to add restricted stock as available for awards under the 2003 Plan.

On June 1, 2006, the Company’s shareholders adopted the 2006 Stock Incentive Plan (the “2006 Plan”) under which 2,500,000 shares of common stock were reserved for issuance. The 2006 Plan provides for the issuance of non-qualified stock options, ISOs, restricted stock awards and stock appreciation rights, and permits grants to employees, non-employee directors and consultants of the Company.

Generally, stock options granted under these plans vest over a period from four to five years and have a term of nine years. Certain stock options granted under these plans fully vested upon grant and have a term of five years.

Other stock options

The Company has also granted employee stock options outside of the plans described above. Under these arrangements, as of December 31, 2007, the Company had granted non-qualified options to purchase 400,000 shares of common stock.

Stock option accounting

On January 1, 2006, the Company adopted SFAS 123R using the modified-prospective transition method. Under this method, results of operations for prior periods were not restated. Stock-based compensation expense recognized in 2007 and 2006 includes options granted prior to but not vested as of December 31, 2005, and options granted on or after January 1, 2006.

In accordance with SFAS 123R, stock-based compensation expense for 2007 and 2006 was approximately $72,000 and $107,000, respectively, and is classified as a general and administrative expense. Tax benefits related to this expense were immaterial because virtually all stock-based compensation resulted from grants of ISOs. In accordance with SFAS No. 109,Accounting for Income Taxes, no tax benefit is recorded for an ISO unless upon exercise a disqualifying disposition occurs. In accordance with SFAS 123R, the Company will prospectively record any excess tax benefits from the exercise of stock options as cash flows from financing activities. There were no material excess tax benefits in 2007 and 2006.

F-16

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE K — STOCK-BASED COMPENSATION — continued

Fair value

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Year Ended December 31,
	2007			2006			2005(1)
Weighted average expected life (years)		8.7			9.0			—
Risk-free interest rate		4.29	%		4.72	%		—	%
Expected volatility		136.79	%		138.31	%		—	%
Expected dividend yield		0.0	%		0.0	%		—	%

(1) There were no option grants during this period.

The weighted average expected life is based on the option term. The risk-free interest rate is based on U.S. Treasury issues with a term equal to the expected life of the option. Expected volatility is based on historical volatility rates. Expected dividend yield is 0.0% since the Company has no history of paying dividends and currently has no plans to do so.

Stock option activity

A summary of stock option activity for the three years ended December 31, 2007 is as follows:

						Weighted-Average
				Weighted-		Remaining		Aggregate
				Average Exercise		Contractual Term		Intrinsic
	Options			Price per Share		(in years)		Value
Outstanding on January 1, 2005		3,607,000		$	0.22
Granted		—			—
Exercised		—			—
Forfeited/Canceled		(42,000	)		0.77
Outstanding on December 31, 2005		3,565,000			0.21
Granted		524,150			0.41
Exercised		(132,000	)		0.15
Forfeited/Canceled		(200,000	)		0.74
Outstanding on December 31, 2006		3,757,150			0.22
Granted		512,950			0.80
Exercised		(675,430	)		0.15
Forfeited/Canceled		(99,720	)		0.17
Outstanding on December 31, 2007		3,494,950		$	0.32		4.7	$	1,760,779
Exercisable on December 31, 2007		2,628,410		$	0.25		3.9	$	1,499,276

F-17

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE K — STOCK-BASED COMPENSATION — continued

A summary of the status of the Company’s non-vested stock options as of December 31, 2007, and changes during the year then ended, is presented below:

				Weighted Average
				Grant Date Fair
	Shares			Value per Share
Non-vested stock options January 1, 2007		1,109,370		$	0.15
Non-vested stock options granted		483,550			0.77
Vested stock options		(635,330	)		0.14
Forfeited stock options		(91,050	)		0.16
Non-vested stock options at December 31, 2007		866,540			0.50

Additional information related to stock options granted, vested and exercised for the three years ended December 31, 2007 is a follows:

	Year Ended December 31,
	2007		2006		2005
Grant date fair value of stock options granted	$	394,779	$	208,064	$	—
Grant date fair value of stock options vested		112,507		107,049		81,041
Intrinsic value of stock options exercised		481,030		67,980		—

As of December 31, 2007, there was approximately $413,000 of total unrecognized compensation cost related to stock option grants. That cost is expected to be recognized over a weighted average period of 4.6 years.

The following table illustrates the effect on net earnings and earnings per share if, for the year ended December 31, 2005, the Company had applied the fair value recognition provisions, under which compensation expense would be recognized as incurred, of SFAS 123 to stock-based employee compensation:

	Year Ended December 31,
	2005
Net earnings, as reported	$	592,046
Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax expense		(81,041	)
Pro forma net earnings	$	511,005
Earnings per share — basic and diluted
As reported	$	0.03
Pro forma		0.02

F-18

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE L — INCOME TAXES

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

	Year Ended December 31,
	2007			2006			2005
Federal income tax expense at statutory rate	$	914,175		$	242,800		$	210,378
State income taxes, net of federal benefit		(3,309	)		26,636			22,914
Stock-based compensation		21,554			36,221			—
Effect of foreign operations, net of foreign tax credits		(6,775	)		(10,578	)		(3,687	)
Change in valuation allowance		69,284			—			(209,348	)
Other, net		1,571			(17,165	)		6,455
Income tax expense	$	996,500		$	277,914		$	26,712

Deferred tax assets and liabilities at December 31, 2007 and 2006 are comprised of the following:

	December 31,
	2007			2006
Deferred tax assets related to:
Inventories	$	327,765		$	217,413
Accounts receivable and other assets		11,959			12,853
Accrued liabilities		32,646			11,527
Tax loss and tax credit carryforwards		105,046			93,246
Other		3,357			1,150
		480,773			336,189
Valuation allowance		(117,484	)		(48,200	)
Net deferred tax assets		363,289			287,989
Deferred tax liabilities related to:
Property and equipment		(148,792	)		(209,754	)
Intangible assets		(368,367	)		(336,365	)
Deferred tax liabilities		(517,159	)		(546,119	)
Net deferred tax liabilities	$	(153,870	)	$	(258,130	)
Net current deferred tax assets	$	340,395		$	231,680
Net long-term deferred tax liabilities		(494,265	)		(489,810	)
	$	(153,870	)	$	(258,130	)

The Company’s valuation allowance relates to deferred tax assets of its Canadian subsidiary. This valuation allowance was increased approximately $69,000 during 2007 as it was determined more likely than not that the related deferred tax assets will not be realized.

The Company adopted FIN 48 on January 1, 2007. The implementation of FIN 48 did not have a material impact on the Company’s consolidated financial statements, results of operations or cash flows. At the adoption date of January 1, 2007, and also at December 31, 2007, the Company had no unrecognized tax benefits.

F-19

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE L — INCOME TAXES — continued

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

	Year Ended December 31,
	2007			2006			2005
Current
Federal	$	1,100,760		$	19,784		$	4,239
Foreign		—			—			—
Deferred
Federal		(104,260	)		284,528			22,473
Foreign		—			(26,398	)		—
Income tax expense	$	996,500		$	277,914		$	26,712

NOTE M — COMMITMENTS AND CONTINGENCIES

Leases

The Company leases office and warehouse space and certain equipment using operating leases for various periods through 2011. Rental expense under non-cancelable operating leases totaled $198,000, $450,000 and $219,000 in 2007, 2006 and 2005, respectively. Future minimum payments under non-cancelable operating leases are as follows:

December 31,
2008	$	197,064
2009		190,061
2010		91,211
2011		16,788
	$	495,124

Employee Arrangements

In December 2007, the Company entered into employment agreements with five of its key executives for a two-year term ending December 31, 2009. Also in December 2007, the Company entered into an employment agreement with its President for a four-year term ending December 6, 2011. Each of these agreements automatically renew for an additional one-year term unless either party provides notice to the other 30 days prior to the last day of the then current term. These agreements provide for a minimum base salary and additional cash incentive compensation if certain performance measures are attained. In addition, these agreements provide that if employment is terminated as a result of a change of control of the Company, as defined, the Company will be required to pay a severance payment in an amount equal to the greater of the annual base salary or the base salary for the remaining term, in addition to other compensation due under the terms of the agreement. These agreements also provide that if employment is terminated for certain other reasons set forth in the agreement, the Company will be required to pay a severance payment in an amount equal to one-half of the annual base salary, in addition to other compensation due under the terms of the agreement. In connection with the employment of its President in October 2007, the Company granted him a nine-year option to purchase 200,000 shares of the Company’s common stock at $0.77 per share, which was the market price of the common stock on the date of grant. This option vests ratably over a five-year period.

F-20

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE M — COMMITMENTS AND CONTINGENCIES — continued

In November 2003, the Company entered into an employment agreement with Clinton H. Howard to serve as Chief Executive Officer through December 31, 2008. The employment agreement specifies a minimum salary, and provides for salary increases and additional cash incentive compensation if certain earnings targets are achieved. If Mr. Howard’s employment is terminated for certain reasons set forth in the agreement, which reasons include a change of control of the Company, as defined, the Company will be required to pay Mr. Howard a severance payment in an amount equal to two times his annual salary, in addition to other compensation due under the terms of the agreement. Under the terms of the agreement, upon termination of Mr. Howard’s employment, the Company is obligated to pay Mr. Howard a specified percentage of his salary for an additional five-year period for consulting services.

The Company’s employees can participate in an employee benefit plan under Section 401(k) of the Internal Revenue Code offered through its Professional Employer Organization. This plan covers employees in the U. S. who are at least 18 years of age and have been employed by the Company longer than three months. The Company makes discretionary matching contributions equal to ten percent of the employees’ contributions. Total matching contributions made by the Company during 2007, 2006 and 2005 were approximately $17,000, $19,000 and $16,000, respectively.

Litigation

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

NOTE N — SOUTH KOREA OPERATIONS

On October 31, 2006, the Company completed a restructuring of its South Korea operations. On that date, the Company executed an agreement to sell all of the capital stock of its wholly owned subsidiary, RBC Korea, to a private South Korean corporation, Merry Key, which is wholly owned by an individual who was the executive in charge of the Company’s South Korean operations prior to the sale. The closing of the sale occurred on October 31, 2006. Concurrent with the sale of RBC Korea, the Company also entered into a five-year exclusive license agreement with Merry Key. The Company recorded a one-time loss on disposition of assets in the fourth quarter of 2006 of approximately $170,000 in connection with this sale.

In accordance with the terms of the sale agreement, Merry Key paid the Company $100,000 in cash at closing and agreed to pay an additional $685,000 in monthly installments, the amount of each installment being the greater of $5,000 or 10% of previous month net sales. The $685,000 receivable, which was included in “Other assets” in the accompanying consolidated balance sheet as of December 31, 2006, was non-interest bearing and had a fair value of $520,000 at the date of sale based on anticipated cash flows and an imputed interest rate of 10.75%. Based on its ongoing evaluation of the financial condition of Merry Key, the Company concluded that this receivable was uncollectible as of December 31, 2007. Accordingly, the Company recorded an aggregate charge of $516,000 during 2007 in connection with this write off. In addition, the Company terminated its license agreement with Merry Key.

F-21

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE O — 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. Nutritional Products are marketed under the RBC Life Sciences brand name. These products are distributed by a network of independent Associates in certain markets, primarily in the U. S. and Canada, and by licensees operating in certain other international markets. For the most part, licensees also market the Nutritional Products in their respective territories through a network of independent Associates.

The Medical Products segment markets a line of approximately 28 wound care products in the United States under the MPM Medical brand name. The wound care products are distributed to hospitals, nursing homes, home health care agencies, clinics and pharmacies through a network of medical/surgical supply dealers and pharmaceutical distributors. Medical Products are used to prevent and treat wounds, and manage pain associated with wounds, in the acute care, long-term care, oncology and podiatry markets.

The accounting policies of the segments are the same as those described in Note B. 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.

Segment information is as follows (in thousands):

	Nutritional Products		Medical Products		Consolidated
Year ended December 31, 2007
Net sales	$	22,523	$	4,506	$	27,029
Depreciation and amortization		272		91		363
Operating profit		2,645		254		2,899
Capital expenditures		806		22		828
Total assets		17,309		1,849		19,158
Year ended December 31, 2006
Net sales	$	17,937	$	3,760	$	21,697
Depreciation and amortization		581		54		635
Operating profit		422		544		966
Capital expenditures		486		2		488
Total assets		12,543		1,096		13,639
Year ended December 31, 2005
Net sales	$	16,527	$	2,834	$	19,361
Depreciation and amortization		552		41		593
Operating profit		593		277		870
Capital expenditures		111		—		111
Total assets		11,259		1,552		12,811

F-22

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE O — SEGMENTS AND GEOGRAPHIC AREA — continued

Financial information summarized geographically based on the customer’s ordering location for the years ended December 31, 2007, 2006 and 2005 is listed below (in thousands):

	Net sales		Long-lived assets
Year ended December 31, 2007
Domestic	$	10,011	$	6,133
Former Soviet Union		14,950		—
Canada		1,382		597
South Korea		14		—
All others		672		—
Totals	$	27,029	$	6,730
Year ended December 31, 2006
Domestic	$	10,101	$	6,201
Former Soviet Union		8,644		—
Canada		1,608		505
South Korea		587		—
All others		757		—
Totals	$	21,697	$	6,706
Year ended December 31, 2005
Domestic	$	10,345	$	6,097
Former Soviet Union		6,677		—
Canada		1,987		515
South Korea		—		72
All others		352		—
Totals	$	19,361	$	6,684

Significant Customers

The Company recorded sales to CCI, a licensee of the Company, in the amount of $14,950,000, $8,644,000 and $6,677,000 for the years ended December 31, 2007, 2006 and 2005, respectively. These sales accounted for more than ten percent of net sales in these years. In no other case did a customer of the Company account for more than ten percent of net sales for the years ended December 31, 2007, 2006 or 2005.

F-23

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE P — EARNINGS PER SHARE

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

	Net Earnings		Shares		Per Share
Year ended December 31, 2007
Basic earnings per common share	$	1,692,249		20,396,420	$	0.08
Effect of dilutive stock options		—		1,809,962
Diluted earnings per common share	$	1,692,249		22,206,382	$	0.08
Year ended December 31, 2006
Basic earnings per common share	$	436,204		20,163,544	$	0.02
Effect of dilutive stock options		—		1,883,608
Diluted earnings per common share	$	436,204		22,047,152	$	0.02
Year ended December 31, 2005
Basic earnings per common share	$	592,046		20,056,294	$	0.03
Effect of dilutive stock options		—		1,443,144
Diluted earnings per common share	$	592,046		21,499,438	$	0.03

For 2007, 2006 and 2005, 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 and, therefore anti-dilutive, was 812,950, 400,000 and 300,000, respectively.

The assumed conversion of the convertible notes would have an anti-dilutive effect on diluted earnings per common share for 2007, 2006 and 2005 and accordingly were excluded from the computation.

NOTE Q — RELATED PARTY TRANSACTIONS

Debt Guarantees- Mr. Howard has guaranteed a mortgage note of the Company, which note amounted to $2,330,000 at December 31, 2007. Mr. Howard has also guaranteed a $500,000 line of credit of the Company that had no borrowings outstanding at December 31, 2007.

Customer Arrangement -In July 2004, the Company entered into a ten-year exclusive license agreement with CCI, which replaced an expiring five-year exclusive license agreement. In connection therewith, the Company received a license fee of $65,000, which was recorded as deferred revenue and is being recognized as sales over the term of the agreement. The Company recorded sales to CCI in the amount of $14,950,000, $8,644,000 and $6,677,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Pursuant to the license agreement between CCI and the Company, CCI paid royalties to the Company for the years ended December 31, 2007, 2006 and 2005 in the amount of $2,025,000, $1,409,000 and $1,169,000, respectively, which are recorded as sales. The president of CCI beneficially owns approximately 20% of the Company’s outstanding common stock and was a member of the Company’s Board of Directors until June 2004.

F-24

RBC Life Sciences, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007, 2006 and 2005

NOTE R — QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data for the years ended December 31, 2007 and 2006 is summarized as follows:

	Quarter Ended
	March 31			June 30		September 30		December 31
	(Unaudited - In thousands, except per share data)
2007:
Net sales	$	5,392		$	7,148	$	7,857	$	6,632
Gross profit		3,304			3,793		4,156		3,646
Net earnings(1)		325			510		672		185
Basic earnings per share		0.02			0.03		0.03		0.01
Diluted earnings per share		0.02			0.02		0.03		0.01
2006:
Net sales	$	4,809		$	6,203	$	5,405	$	5,280
Gross profit		3,256			3,574		3,103		3,185
Net earnings (loss)		(39	)		293		80		102
Basic earnings (loss) per share		(0.00	)		0.01		0.00		0.01
Diluted earnings (loss) per share		(0.00	)		0.01		0.00		0.00

⁽¹⁾ As described in Note N, the Company recorded an aggregate charge of $516,000, or $335,000 net of tax, during 2007 to write off the note receivable received in connection with the sale of South Korean operations in 2006. Of this charge, $87,000 net of tax and $248,000 net of tax, was recorded in the third quarter and fourth quarter of 2007, respectively.

F-25

Exhibit Index

Exhibit Number	Description
10.12	Line of Credit Promissory Note, dated November 1, 2007, in the principal amount of $500,000, executed by RBC Life Sciences, Inc. in favor of Independent Bank of Texas
10.13	Business Loan Agreement, dated November 1, 2007, between RBC Life Sciences, Inc. and Independent Bank of Texas, associated with $500,000 Line of Credit Promissory Note
21.1	List of company subsidiaries
23.1	Consent of Lane Gorman Trubitt, L.L.P., independent registered public accountants to incorporation of report by reference
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002