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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from              to             

Commission file number: 33-20323

Royal BodyCare, Inc.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Act of 1934 during the past 12 months and (2) has been subject to such filing requirements for the past 90 days.    x  YES    ¨  NO

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

Number of shares of common stock, par value $0.001, outstanding at April 29, 2005:

20,056,294

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Item 1. FINANCIAL STATEMENTS

ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See notes to condensed consolidated financial statements.

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ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to condensed consolidated financial statements.

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ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to condensed consolidated financial statements.

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ROYAL BODYCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Unaudited Condensed Consolidated Financial Statements:

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

In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the Company’s results for the interim periods have been included. The Condensed Consolidated Balance Sheet as of December 31, 2004 was derived from the Company’s audited financial statements included in the Company’s Form 10-K for the year ended December 31, 2004. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The Company accounts for payments made to its Associates (as herein after defined) in accordance with Emerging Issues Task Force Issue (“EITF”) No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). As provided by EITF 01-9, sales incentives paid to Associates that represent rebates are recorded as a reduction of sales rather than a distributor commission expense. Accordingly, the Company made the following reclassifications with respect to the quarter ended March 31, 2004, which reclassifications had no effect on operating profit, net earnings or earnings per share.

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Note B – Nature of Operations and Organization:

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

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

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

Note C – Inventories:

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

Note D – Property and Equipment:

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

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Note E – Goodwill and Other Intangible Assets:

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

Other intangible assets consist of the following:

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

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Note F – Accrued Liabilities:

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

Note G – Stock-Based Compensation:

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

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

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

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New Accounting Pronouncement

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

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

Note H – Long Term Obligations:

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

Note I – Segments and Geographic Area:

The Company’s segments are based on the organization structure that is used by management for making operating and investment decisions and for assessing performance. Based on this management approach, the Company has two operating segments: Nutritional Products and Medical Products. The Nutritional Products segment manufactures and distributes a line of over 75 nutritional supplements and personal care products, including herbs, vitamins and minerals, as well as natural

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skin, hair and body care products. These products are marketed under the Royal BodyCare^® trade name and are distributed by a network of independent distributors operating primarily in North America and by licensees operating in certain other countries outside of North America. The Medical Products segment markets a line of approximately 25 wound care and oncology products in the United States under the MPM Medical trade name. The wound care products are distributed directly to hospitals, nursing homes and home health care agencies through medical/surgical supply dealers. The oncology products are distributed to hospitals, cancer treatment clinics and pharmacies through pharmaceutical distributors.

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

Segment information is as follows (in thousands):

Financial information summarized geographically for the quarters ended March 31, 2005 and 2004 is listed below (in thousands):

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Significant Customers

The Company recorded sales to Coral Club International, Inc., a licensee of the Company, in the amount of $999,000 and $823,000 during the quarters ended March 31, 2005 and 2004, respectively. These sales accounted for more than ten percent of net sales in these quarters. In no other case did a customer of the Company account for more than ten percent of net sales during the quarters ended March 31, 2005 or 2004.

Note J – Earnings (Loss) Per Share:

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

The number of stock options that were outstanding but not included in the computation of diluted earnings per common share because their exercise price was greater than the average market price of the common stock, or were otherwise anti-dilutive, was 3,577,000 and 444,000 for the quarters ended March 31, 2005 and 2004.

The assumed conversion of the convertible notes would have an anti-dilutive effect on diluted earnings (loss) per common share for the quarters ended March 31, 2005 and 2004, and accordingly have been excluded from the computation.

Note K – Comprehensive Income (Loss):

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

Note L – Legal Proceedings:

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

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

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

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

FORWARD-LOOKING STATEMENTS

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

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OVERVIEW

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

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

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

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Net sales through the Associate network have declined, primarily, in our view, 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 – 2005 Compared with 2004 – Net sales.” We are considering expansion into new international markets to increase sales through this distribution channel. During the first quarter of 2005, we incurred expenses of approximately $25,000 related to possible expansion of Associate network distribution into South Korea. There is no assurance that we will undertake this expansion and any decision to establish operations in this or any other new market would be contingent upon obtaining outside financing on terms acceptable to us.

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. The licensee is required to distribute our products in its territory 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. Licensees also pay us a monthly royalty based on sales in their territories. We record these royalties as sales. Net sales in this distribution channel are dependent significantly upon the licensee’s success in building an Associate network in the licensed territory. Gross profit on sales to licensees is significantly less than on sales to our Associate network because we do not pay Associate commissions or incur other expenses related to the Associate network in the licensed territory.

Our principal licensee is Coral Club International (“CCI”). CCI, which accounted for 95% and 93% of licensee net sales in the first quarter of 2005 and 2004, respectively, distributes products in a territory comprised mainly of the former Soviet Union and Eastern Europe. The President of CCI is a former member of our Board of Directors and owns approximately 20% of our outstanding common stock.

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

This segment’s largest customer, a medical/surgical dealer, accounted for 38% and 44% of Medical Products net sales in the first quarter of 2005 and 2004, respectively.

Distributor Commissions. Distributor commissions consist primarily of commissions paid to our Associates in accordance with our Associate compensation plan. These commissions are calculated based on the total monthly sales by the Associate and his or her downline organization. Associates

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Intangible Assets. We review the carrying value of our goodwill and other intangible assets at the end of each year and at other times if events and circumstances warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value of our goodwill or other intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the goodwill or intangible assets exceeds its fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could affect the evaluation.

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

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

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RESULTS OF OPERATIONS

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

2005 Compared with 2004

Net sales. Net sales for the quarter ended March 31, 2005 were $4,140,000 compared with net sales for the prior year of $4,241,000, a decrease of $101,000 or 2%. This decrease was due to a $162,000 decrease in net sales of Nutritional Products that was partially offset by a $61,000 increase in net sales of Medical Products. While sales of Nutritional Products to our licensees increased $167,000, sales of Nutritional Products to our Associate network declined $329,000.

The decline in sales to our Associate network significantly relates, in our view, to a decline in the number of active Associates. We consider an Associate active if he or she has purchased during the previous 12 months. The decline in the number of active Associates results, we believe, from low levels of sponsoring of new Associates by the current Associate network, which we largely attribute to the continuation of a trend that began with the breach of a supply agreement by a former supplier, who was also a former member of our Board of Directors. In contravention of the supply agreement in force at the time, in May 2002, this former supplier refused to continue to supply his products to us and instead began to supply a competitor. Since this supplier supplied raw materials used in the production of our key products and was central to our brand, his departure dramatically reduced the confidence of our Associates as well as their motivation to introduce our products and our business to prospective new Associates.

In an attempt to overcome the reduced sponsorship activity among our Associate network, we have taken a number of actions since mid-2002:

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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.

The growth in net sales to our licensees relates to growth of CCI. Sales to CCI increased $176,000 in the first quarter of 2005. CCI’s sales growth is attributed to the continued expansion of the independent distributor network in CCI’s territory.

Cost of sales. Cost of sales for the quarter ended March 31, 2005 was $1,384,000 compared with cost of sales in the prior year of $1,303,000, an increase of $81,000 or 6%. As a percentage of net sales, cost of sales was 33% in 2005 and 31% in 2004. As a percentage of net sales, gross margin declined 2% 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 the Associate network in the licensed territory.

Distributor commissions. Distributor commissions for the quarter ended March 31, 2005 were $827,000 compared with distributor commissions in 2004 of $988,000, a decrease of $161,000 or 16%. With regard to our Associate network, distributor commissions as a percentage of commissionable sales were 34% in the first quarter of 2005 compared with 36% in the first quarter of 2004. The higher percentage in the first quarter of 2004 related mainly to the payment of extra commission incentives to certain Associates who joined us in the first quarter of 2004. On a consolidated basis, distributor commissions as a percentage of net sales declined to 20% in the first quarter of 2005 compared with 23% in 2004. This percentage decline was related to the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees, and the percentage decline in distributor commissions paid to the Associate network.

General and administrative. General and administrative expenses for the quarter ended March 31, 2005, were $1,731,000 compared with 2004 expenses of $1,688,000, an increase of $43,000 or 3%. This increase was the net of a $50,000 increase in expenses in the Medical Products segment that was partially offset by a $7,000 decrease in expenses in the Nutritional Products segment. General and administrative expenses in the Nutritional Products segment included $25,000 related to the possible expansion of Associate network distribution into South Korea described above. General and

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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 42% and 40% in 2005 and 2004, respectively.

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

Net earnings (loss). As a result of the factors described above, the net loss for the quarter ended March 31, 2005 was $9,000, or $.00 per share, compared with a net earnings in the prior year of $80,000 or $.00 per share.

LIQUIDITY AND CAPITAL RESOURCES

Cash and working capital. During the quarter ended March 31, 2005, we had a net increase in cash of $302,000 compared with a net increase in cash of $358,000 in 2004. These cash increases were attributable to cash flows from operating activities.

At March 31, 2005, we had working capital of $153,000, a $30,000 improvement from working capital at December 31, 2004 of $123,000. This increase in working capital was related to an increase in current assets of $702,000 that was partially offset by an increase in current liabilities of $672,000. Our Canadian subsidiary maintains a $125,000 line of credit, all of which was available at March 31, 2005.

Operating activities. In the first quarter of 2005, our operating activities provided cash flows of $402,000 compared with $515,000 in 2004. In the first quarter of 2005, net earnings (loss) adjusted for non-cash activities such as depreciation and amortization, provided cash flows of $140,000 compared with $227,000 in 2004. Cash flows from operating activities were lower in the first quarter of 2005 because of the decline in net earnings (loss).

Operating activities include the management of working capital accounts such as accounts receivable, inventories, prepaid expenses, accounts payable, deferred revenues and accrued operating expenses. One of the most significant factors affecting our working capital accounts is the arrangement we maintain with our licensees, principally CCI. In accordance with our licensee agreements, product orders from licensees are accompanied by a cash deposit equal to 50% of the value of the order. These deposits are used in part to make deposits with our suppliers against orders we place to fulfill licensee product orders. In addition, in accordance with our license agreement with CCI, we segregate and store finished products for CCI in our warehouse and then ship them at a later date based on CCI’s business needs. CCI pays the remaining 50% due on its product orders when goods are segregated in our warehouse for CCI’s account. Cash received as deposits for product orders and as payment for stored products are recorded as deferred revenue, which we include as a component of accrued liabilities. Raw materials and bulk products purchased to fulfill licensee orders, as well as finished goods stored for CCI, are included in our inventory until they are shipped. Deposits we make with our suppliers are recorded as prepaid expenses. During the first quarter of 2005, cash used to increase inventory by $548,000 and cash generated by the increase in accounts payable and accrued liabilities of $670,000 were mainly related to transactions associated with our licensee agreements.

Also, during the first quarter of 2005, we generated cash from operations of $141,000 related to a decrease in accounts receivable. This decrease resulted from collections of accounts receivable associated with sales of Medical Products. We sell Medical Products on terms that generally range from 30 to 45 days.

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Investing activities. During the first quarter of 2005, we used cash of $38,000 related to investing activities. This cash was used to purchase property and equipment.

Financing activities. During the first quarter of 2005, we used cash of $62,000 to repay long-term debt compared with $123,000 in the first quarter of 2004. This decline resulted from lower amounts of debt outstanding during the first quarter of 2005.

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

We have no plans or requirements for any significant capital expenditures during the next twelve months, other than the possible establishment of operations to distribute Nutritional Products through network marketing in a new international market. While we have initiated activities related to the possible opening of an office in South Korea, any decision to establish operations in a new market would be contingent upon obtaining outside financing on terms acceptable to us. We would consider either debt or equity financing, although we can give no assurance that any such financing would be available.

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

CONTRACTUAL CASH OBLIGATIONS

The table below summarizes our contractual obligations outstanding as of March 31, 2005:

INFLATION

We do not believe that inflation has had a material impact on our operating results.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Foreign exchange

We have foreign-based operations in Canada that accounted for 13% of net sales during the first quarter of 2005 and 12% of net sales during fiscal 2004. We make advances to our foreign subsidiary denominated in U.S. dollars, exposing the foreign subsidiary to the effect of changes in spot exchange rates of the Canadian dollar relative to the U.S. dollar. We do not regularly use forward-exchange contracts to hedge these exposures. Based on our foreign currency exchange rate exposure for intercompany advances of approximately $115,000 at March 31, 2005, a 10% adverse change in the currency rate would reduce earnings before tax by approximately $11,500.

Interest rates

Our credit arrangements expose us to fluctuations in interest rates. At March 31, 2005, we had $429,000 outstanding in indebtedness, which provided for interest to be paid monthly based on a variable rate. Thus, interest rate changes would result in a change in the amount of interest to be paid each month. Based upon the interest rates and borrowings at March 31, 2005, a 10% increase in interest rates would adversely affect our financial position, annual results of operations, or cash flows by approximately $3,400.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2005. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and forms.

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

There has been no change in internal controls over financial reporting that occurred during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 2. Changes in Securities.

None

Item 3. Defaults Upon Senior Securities.

None

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

None

Item 5. Other Information.

None

Item 6. Exhibits and Reports on Form 8-K.

The Exhibit Index filed herewith is incorporated herein by reference.

March 29, 2005 – We filed a report on Form 8-K in connection with the issuance of a press release announcing our results for the year ended December 31, 2004.

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SIGNATURES

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

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ROYAL BODYCARE, INC.

Exhibit Index

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