INVENTORIES

Inventories are carried at the lower of cost, first-in, first-out method or market. Inventories at September 30, 2013 and December 31, 2012 consist of:

	2013			2012
Finished goods	$	4,374,150		$	4,224,194
Components, packaging and work in process		1,365,474			1,544,431
Inventory reserve		(121,013	)		(103,585	)
Total	$	5,618,611		$	5,665,040

All inventories are pledged as collateral for bank loans.

Changes to the inventory reserve during 2013 and 2012 are shown below:

	2013			2012
Beginning Balance	$	103,585		$	150,497
Increases to Reserve		134,947			111,910
Write Offs against Reserve		(117,519	)		(158,822	)
Ending Balance	$	121,013		$	103,585

Monthly accruals as a percentage of net sales are made to account for obsolete and excess inventory. Quarterly reviews are also performed at a more detailed level to determine if additional adjustments are needed. The above numbers reflect both the monthly accruals and quarterly adjustments.

The Company will continue its policy of regularly reviewing inventory quantities on hand based on related service levels and functionality. Carrying cost will be reduced to net realizable value for inventories in which their cost exceeds their utility due to changes in marketing and sales strategies, obsolescence, changes in price levels, or other causes. Furthermore, if future demand or market conditions for the Company's products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of certain products or component inventory, the Company may be required to record additional inventory reserves, which would negatively affect its results of operations in the period when the inventory reserve adjustments are recorded. Once established, write downs of inventories are considered permanent adjustments to the cost basis of the obsolete or excess inventories.